SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: GST who wrote (84992)8/14/2007 2:25:55 AM
From: regli  Read Replies (2) of 110194
 
"I am interested in hearing more of your views on this -- do you see a new "regime" taking shape?"

As I see it, the current developments are likely to result in reduced foreign investment in the U.S. over the next few years both from private as well as official sources. I expect that a number of key players (not Japan) will reevaluate their dollar support/recycling strategies.

I am quite convinced that we will hear about significant losses by state sponsored pension funds and central bank reserve investments. Clearly the current uncertainty will extend to agencies and few central bankers with career ambitions will continue to advocate agency or less credit worthy U.S. MBS investments in the next few years. I believe that the “Savings Glut”/dollar recycling was the key enabler of the credit bubble.

With risk increasing in the equity markets, CBs and even their subsidiary “sovereign wealth funds” will be forced to make much more conservative investment decisions forcing those countries with large dollar surpluses into U.S. treasuries. However, the CASH needs of the U.S. treasury to finance the deficit has dropped considerably (the administration expects a deficit of $205 billion for fiscal 2007) in the last few years reducing sharply the supply of treasuries. At the same time trade surpluses of U.S. creditors have ballooned far in excess of that supply forcing many CBs to diversify into U.S. agencies and even equities.

Given this scenario of limited supply of treasuries combined with a lack of confidence in the safety of other U.S. securities (fool me once…), the Bretton Woods 2 symbiosis is bound to be on its last legs. As the primary reason for these large dollar purchases were currency pegs, a forced general rethink by the key CBs (China, Korea, even Japan in part) has to be in the cards.

It seems obvious to me that we will soon observe some rather violent currency swings likely not benefiting the dollar as the pegs will fall by the wayside one by one.

I don’t see a Plaza Accord in the offing at this point and therefore expect some turbulent times before a new “regime” will be determined. I am quite certain though that the dollar as the reserve currency has a much shorter shelf life after this.
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News