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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (62250)	5/30/2006 5:24:08 PM
From: ild	Respond to of 110194

<<<Foreigners - probably not - They will buy overpriced US assets>>> What assets? I don't see any assets that commies from China (or Russia) will be allowed to buy.

To: mishedlo who wrote (62250)	5/30/2006 7:07:22 PM
From: Crimson Ghost	Read Replies (1) \| Respond to of 110194

Foreigners may not buy overpriced US assets much longer. Interesting that Treasuries dropped today despite stock market route. VERY BEARISH BOND ACTION FOR SURE. The US asset catch-22 By Max Fraad Wolff Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing. The past four weeks have demonstrated the continued existence of gravity in global financial markets long unfettered by shifting realities in the risk-reward environment. The international market downdraft that began on May 22 signaled the presence of linked fears and risks. Sadly, however, the context is changing but the responses are not. US dollars and markets remain the gold standard. Scared of the precarious nature of global imbalances centered on US consumption and rising interest rates, why would rational investors retreat to the United States? Downdrafts of this variety are not productive. These re-pricing episodes don't signal new thinking or positioning - a crucial point, because the arrival of new thinking and understanding would be required for a long, tempered and transparent unwinding of the current imbalances. Asian central-bank cash, UK area funds and petrodollars still find their way into US assets far more than prudence would suggest. Commodities take a hit and send people running for the safety of their default buys. Emerging markets come in for a round of selling on declining loose money from the US Federal Reserve, the European Central Bank and the Bank of Japan and decade-overdue fears about US weakness. If these factors are the reason money is being scared out of these markets, then what is sending money running to US assets? The United States borrows about 80% of the world's excess savings, so who is most vulnerable to rising rates? This is the catch-22 of asset markets today. Decision makers seem to have taken in the dependence of present asset prices on loose money from leading central banks. When pressed, they found nothing new to buy, so they simply ran to the usual risk exits. This standard reaction is occurring despite changes - still being ignored - in global asset markets. China sits vulnerable to a US consumer slowdown and inflated raw-material prices, but its growth remains robust. India is struggling toward growth despite energy and infrastructural risks worthy of concern. South America is pursuing alternative development paths 20 years into the sorrows of ill-shared and inadequate gains from orthodox economic policy. Asia sits ready as the world's emerging workshop with inadequate domestic demand and a still-heavy export dependence on legions of broke American consumers. Materials and energy exporters have coffers bloated from robust demand and high prices. What exactly, about any of this, justifies running for Treasuries? The truth is, driving this illusory "flight to safety" is little but pure force of habit, and continued neglect of structural shifts in the global economy. Global investors will not move forward until they question past practice in the light of new information. New realities suggest that Treasuries are not the flight to safety they once were. Aging demographics in the developed world push serious money into "safer" long-maturity sovereign debt. US interest rates are higher than EU area and Japanese debt. None of this explains rapid shifts or flight money, only a slow, steady market based on fixed-income reallocation. US debt prices are high and rates fairly low, particularly if one factors in the possibility of serious attempts to defend the dollar. Yet we see retreat to these assets during stress periods, despite known risks and clear overweighting in them. For the legions of offshore buyers this is compounded by the prospects of further losses for the dollar. The US scene is defined by overdue cooling in profit growth, a need to raise rates into a fragile housing market, and a mutually exclusive impulse to defend overvalued and overheld greenbacks. S&P 500 profit growth has been stellar - roundly double-digit - for three years. Even if this remains true through 2006, it is unlikely to last for much longer. These earnings are based on international as well as domestic earnings, and are a dismal proxy for US macroeconomic health. The comparisons are getting harder and the consumer binge is audibly wheezing as housing cools. The slashed 2006 forecast of top luxury-home builder Toll Brothers speaks volumes to this emerging reality, independent of April's strong housing numbers. Consumer spending simply cannot grow much more. Personal consumption spending again outpaced income in March and April, with savings rates of minus-1.4% in March and minus-1.6% in April. Even if rates are done rising, the process of adjustment and the filtering through of past rate hikes will weigh on borrowers with no budget slack. This is the catch-22 in US economic policy. How can the US defend an overvalued dollar while holding down spiraling trade shortfalls and prevent housing from a long-overdue reversion to trend - negative growth? What conceivable policy will allow the dollar to stay strong, imports to be reduced, exports to grow and interest rates to stay low? The quick and dirty answer is that at least one of the above goals will prove beyond reach. Many years of consumption that exceed earnings and an upward redistribution of wealth form the foundation of America's position in a world of imbalance. Congressional Budget Office data suggest that real after-tax income growth from 1979-2003 averaged just over 10% for the bottom three quintiles, or 60%, of the American public. For the top quintile, growth stood at 54%; for the top 1%, it averaged 129%. From 1980-2005, real personal consumption outgrew gross domestic product growth and wage growth in the United States. Rising asset incomes and values, falling savings and ballooning debt generate those GDP and profit numbers that generate endless positive buzz. Consumption's share of US GDP has marched upward as consumption-related employment growth moved up to account for more than 60% of employment growth. Federal Reserve statistics reveal a 723% growth in household debt 1980-2005. Growth around the world has much to do with US consumption. All this is funded with massive capital importation, which supports dollars and asset prices. The US and the broader world economy have become dependent on this unsustainable dynamic, and the bubbles that arise from increasingly desperate loose-money efforts to extend it. When spooked by recognition of such risks, why should investors run to the safety of dollar debt? The US has become a leveraged eating machine consuming imported goods and capital with reckless abandon. The world has put its stock in the US to cash in and support the splurge that debt and redistribution built. Hence a reallocation to US assets is only a temporary shelter offered by flight into the eye of the hurricane. Until there is a sea change in perspective, retrenchments will prove short-lived. The catch-22 facing the world involves exposure to the United States' debt-driven consumption and dollar-denominated assets. This so-called flight to safety is dangerous, exacerbating the very structural problems that generate it. The present arrangement is rendered more precarious by the increasingly bellicose, unilateralist and protectionist bent of US politics. No one sane and independent wants the present conditions to persist. However, no one can conceive of an adequate replacement structure. That is the central catch-22, and what leaves us weary of short and shallow downdrafts seen as restructurings. Knee-jerk responses that deny massive flaws in the current system offer false comfort. Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst and managing director of GlobalMacroScope. This work was written for www.GlobalMacroScope.com.

To: mishedlo who wrote (62250)	5/30/2006 7:34:08 PM
From: Claude Cormier	Read Replies (4) \| Respond to of 110194

- Foreigners - probably not - They will buy overpriced US assets So assets of all sort will get even more overpriced. Foreigners get of dollars into hard assets. - US - To a degree yes - They will be forced to by the bankruptcy reform act and the inability to sell their house when they are underwater on it The question is how many households are really in trouble because they got caught in the housing bubble with no exit door or backup.... abd how many have maintained healthy balance sheet. I think their are many gentleman like the one who posted today here asking for advice on how to move his wife $100K nest egg into foreign currencies. That is the flight from the USD into stuff and other currencies (including gold).