Trade Surplus/Deficit vs. Foreign Owned Securities

Sources:
Census Foreign Trade (http://www.census.gov/foreign-trade/statistics/historical/)
Treasury International Capital (http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/shlhistdat.txt)

Trade surplus/deficit data from the Census shows a very disturbing trend with the US balance of payments showing a strong trend of increasing deficits. The first thought I had was that an increasing reliance on foreign oil imports was the main driver. However, digging into the details, I found that in 1994, oil accounted for 93% of the cost of imported goods. In 2010, oil accounted for only 29% of the cost of imported goods. The US is still a net exporter of services but it doesn't come close to the amount of goods we import.

My next thought was what happens to all of those dollars sent outside the US? There are two main places they can go. They can be used to buy Treasury securities (bills, notes, bonds) and they can buy US assets (land, companies, corporate bonds and stocks). I tracked down the foreign owned US securities form the Treasury International Capital system and found a steady accumulation of US debt and assets by foreigners recycling their dollars (shocker!).

It's not just US jobs that are moving overseas, it is ownership of the US itself. The growth of foreign held US federal debt is one dimension of concern, but more troubling to me is the increasing ownership of US corporations by foreigners (e.g., Anheiser-Busch bought by Belgium based InBev). The US has denied sales of "strategic" companies to foreign interests (e.g. Union Oil), but eventually those dollars have to come back in the form of either debt or equity ownership. The trend is not our friend.

Update: Here is Real Surplus/Trade (inverted) vs. Real Foreign Owned US Securities as suggested:

Yanis Varoufakis

Yanis Varoufakis is a Greek economist from the University of Athens. His blog is packed with media interviews, articles, papers, and what he calls the "Modest Proposal" for a solution to the Eurozone crisis.

I found his interviews and writing refreshing, entertaining, and deadly accurate. I haven't had time to absorb the sweeping changes in the Modest Proposal, but I agree with the starting point, which is that the Euro currency structure as originally conceived has fatal design flaws that are now manifesting now as systemic threats to the currency union. He claims (and I agree) that the sovereign debt problems are rooted in insolvency and not liquidity, and that the Euro banking system is also insolvent.

I found his web site by a link provided on Calculated Risk by commentator Haralambos.

UCLA Anderson Forecast June 2011

I was fortunate enough to attend the UCLA Anderson Forecast this morning. This was the second Forecast event I have attended. The mood was noticeably more subdued compared to a generally upbeat tone at the previous one.

Professor Leamer kicked things off with a "No Recovery" slide. Most of his charts we comparing not against pre-recession highs but against where trend growth would have put the economy today. We are 11% below trend growth on both GDP and employment and it looks increasing difficult to ever get back to trend. In a normal cycle, all lost jobs are recovered after 2 years. This time, we are two years out and millions of jobs have not returned. Dr. Leamer said that over 5 million jobs are permanent displacements, never to return. Permanently lost jobs by his figures:
Manufacturing - 2.5 million jobs
Construction - 2 million jobs
Retail - 800 thousand jobs

The California economy is doing slightly better than many other states. Most job growth has been in hospitality and health care, while most job losses were in government and construction. The government job loss cycle should peak next year, then stabilize, but will be a drag on the economy for the next couple of years.

The focus of this conference was commercial real estate. In general, AAA properties are hot and within 10% of their 2006 highs. Lesser commercial property is slumping. There is a lot of investment money chasing real estate returns. The economists mentioned that pension funds need 7-9% returns to stay sound and can't get there with Treasury bonds that yield 3%. [comment: that might not end well]. Multi-family is expected to boom the next two years as people move out or are kicked out of single family homes. Office space is expected to be weak for years, until employment recovers.

During the first Q&A, a question was asked about the Greek debt. Professor Leamer and panelists agreed that Greece would default, and probably soon. He went on to say that "Uncle Sam was not much better than Uncle Dmitrious" and that after the market dealt with PIIGS, it might turn attention to the US bond market. [comment: While bad, I don't think the US situation is near as bad as Greece]. Professor Shulman stated that Greece would restructure, and that at some point, the US might need to restructure. [comment: I was surprised to hear these comments from the ivory tower].

Keynote speaker was Sam Zell of Equity Residential. Highlights from Mr. Zell:

Consumer over leveraged. Banks over leveraged. Corporate sector strong but unwilling to spend due to uncertainty.
Called Obamacare destabilizing.
Dodd-Frank worse because it did not create any new rules, only directions to make new rules in the future that are not happening.
Called NRLB action against Boeing in South Caroline "shameful".
Deficits unsustainable and unsolvable without growth.
US dollar on verge of losing reserve currency status.
Lots of zombie owners of office space. Way overbuilt.
Lodging - first to fall, first to recover. Said REVPAR was almost back.
Called Western Europe a demographic time bomb. No growth, bad place for RE investment.
Called Asia a tough place to invest. They don't need money, and locals have advantage.
Best real estate investments in Latin America.
Very bullish on Brazil. Reminds him of America in the 1950s.

This was my first time on the UCLA campus. Very beautiful. A really fun time.

Total Credit Market Debt

Thanks to the magic of economagic.com, I spent some time investigating the Total Credit Market Debt (TCMD) from the Fed Flow of Funds report (Z.1).



The first chart shows the TCMD as a percentage of GDP and also the annual percentage changes in TCMD with recession bars shown. It appears that when the annual change in credit rolls over, perhaps a debt/credit saturation point, the economy goes into recession. This is hardly an original idea.



The second chart highlights the exceptions when the annual change in credit rolled over but did not manifest in an official recession. The exceptions were all relatively minor dips and most did not dip into negative territory. In other words, credit was still growing, just at a slower pace. The 1960s dips did enter negative territory but no recession was called. The 1987 event coincided with a massive stock market crash.

The 2008 financial crisis coincided with debt saturation and the steepest plunge in percentage terms for the change in credit seen since at least 1952. It was nearly a 10 full percentage point drop. Also, the change in credit is still negative. People are still de-levering. Myself included. It is hard to quantify how pervasive this change in attitudes is.

I have completely changed my attitude toward banks and debt. It's not like I had a lot of debt to begin with, but now I am anti-debt other than the very few times it can be used productively. In my opinion, the Fed is encouraging credit destruction by squashing rates to 0%. This reduces interest rates across the curve and on interest bearing accounts. It was 0% interest rates that made me pay off my car loan. Where else could I get an immediate guaranteed 3% return?

The change in credit growth, the shear amount of debt to GDP (still around 350%), and perhaps permanent change in attitudes leads me to believe the recovery will be very slow and take a long time.

Subjective Invective v.5

The Magic of Financial Repression

I'm glad I had not eaten recently when I read these words of wisdom from President Obama:

“Save a little bit out of whatever you’re earning, and the magic of compound interest applies,” Obama said.

Just wow. Because the Fed is artificially sitting on short term rates (0 to 0.25%), the rate on my savings account at the Credit Union is 0.10%. Now that is a really magic number. If I saved $1,000 in that savings account, it would earn a cool $1 per year, or 8.3 cents a month.

But it gets better because I have to pay taxes on that $1. After paying state and federal income taxes, that leaves me about 75 cents at the end of the year for loaning the Credit Union $1,000. I don't know, 75 cents doesn't sound like such a great return.

But it gets better because of inflation. With headline CPI inflation running a little over 3% a year, by saving and using the magic of compound interest, I have lost about $29.25 a year in purchasing power.

I haven't done the math, but my guess is that the numbers don't get better after 10 years unless something truly magical happens.

See: Financial Repression

Apprentice to a Failed Philosopher

I've taken a great interest in George Soros recently, and especially his theories on Reflexivity and the Open Society ideas he adopted from Karl Popper. Soros has had an extraordinary life and reading his bio is interesting and entertaining in itself. I am currently reading The Soros Lectures that he gave at the Central European University.

The title of this post is a reference to Soros' self described failure as a philosopher during a certain period of his life. Part of what Soros writes that resonates with me is that I consider myself something of a philosopher, having done a great deal of studying and reading in college. Whether the subject is programming computers (my ostensible profession), investing, or playing chess, I am more of a strategist than a tactician. I have to work at tactics to enjoy success, while strategy comes more naturally.

Whatever you think of the politics of George Soros, I think he offers a lot of food for thought with both his general philosophy and in its application to investing. If I am diligent, I hope to eventually rise to the rank of failed philosopher.