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D. Noland: USD, debt and Carry Trade

The following, fascinating numbers from Doug Noland`s latest CBB sheds a completely different light on the Carry Trade.
It looks like foreign CBs keep the USD (AND the US stock market) from falling and not the unwinding of the carry trade:
“Rest of World” (foreign sector) flows have become the most fascinating to follow. During the quarter, Foreign Direct Investment (FDI) increased at an abysmal seasonally-adjusted annualized rate of $2.1 billion (compared to 2000’s $321bn). Meanwhile, Credit Market Instrument holdings surged at a record seasonally-adjusted $1.16 Trillion (compared to 2000’s $226bn). Global dollar balances/“flows” - the residual of runaway U.S. imbalances - have become not only massive but massively distorted.



Foreign sources accumulated U.S. financial assets at a stunning pace during the quarter, expanding a record $423 billion (not annualized!) to $8.43 Trillion (a 21% growth rate). To put this number into perspective, Rest of World (ROF) Financial Assets expanded $628 billion (8.5%) during 2003, $396 billion (5.7%) during 2002, $389 billion (5.9%) during 2001, and $771 billion (13.2%) during the investment boom of 2000. Over six years, ROW holdings have ballooned 73%. And consistent with Bubble Dynamics, these holdings are now “Going Parabolic.”



To make things even more interesting, foreign borrowings in the U.S. have been declining. ROW Liabilities dropped $159 billion during the quarter, or 19% annualized, to $3.255 Trillion. Institutions have likely seen the weak dollar as a good opportunity to reduce dollar liabilities. In fact, since the first quarter of 2003 ROW has reduced U.S. Liabilities by $686 billion, or 17%. And while the paydown of dollar denominated debt has lent support to our currency over the past year, our foreign Creditors’ net long position in U.S. instruments has skyrocketed (not a development one would expect to mark a bear market bottom).



ROW began 1998 with a net exposure to U.S. assets of about $2.1 Trillion (assets of $4.63TN and liabilities of $2.56TN). Foreign holdings of dollar assets - our net foreign liabilities - amounted to 25% of GDP. By the end of 2001, ROW net exposure had increased to almost $3.2 Trillion (assets of $6.75TN and liabilities of $3.57TN) - almost 32% of GDP. But with dollar holdings surging (the accumulation of massive Current Account deficits) and liabilities declining, the ROW net dollar position has mushroomed. At the end of the first quarter, the Net foreign position in U.S. assets had increased to $5.17 Trillion. With asset holdings up $3.8 Trillion (82%) in 25 quarters and Liabilities up $696 billion (27%), the ROW net position in dollar assets has exploded by $3.1 Trillion, or 150%. Our net foreign liabilities have quickly jumped to 45% of GDP.



By asset category, holdings of “corporate bonds” (including ABS) jumped $64.6 billion during the quarter, or 16.7% annualized, to $1.612 Trillion. Security RPs (repurchase agreements) surged $67.7 billion, or 59% annualized. Curiously, ROW holdings of RPs ballooned from $161.5 billion to $528.0 billion over the past year. “Private” holdings of Treasuries increased $74.5 billion to $718.1 billion (also 46% annualized), while Private agency holdings jumped $62.8 billion, or 39% annualized, to $708.9 billion. “Official” (central bank) holdings of Treasuries jumped $95.5 billion during the quarter, or 46% annualized, to $934.6 billion. “Official” holdings of Treasuries and Agencies expanded an unprecedented $170.0 billion during the quarter, or 46% annualized, to $1.653 Trillion. Over the past year, “Official” holdings were up $402.1 billion, or 32.2%.



Bloomberg’s Alex Tanzi has put together a useful schedule of “international reserve assets, excluding holdings of gold, by country.” The data captures the global explosion of largely dollar balances noted above. Over the past year, Worldwide central bank reserves have surged 27% to $3.249 Trillion. Of the stunning $692 billion increase, $545 billion (79%) has been accumulated by the six largest Asian Central Banks. Japan’s reserves have surged $273.4 billion, or 52%, to $797.2 billion. China’s reserve position is up $123.8 billion, or 39%, to $439.8 billion. Taiwan’s reserves are up $53.8 billion, or 31%, to $229 billion. Hong’s Kong’s are up $4.0 billion to $120.1 billion, while India’s reserves are up $36.9 billion, or 48%, to $114.33 billion. Singapore reserves are up $15.33 billion, or 18%, y-o-y to $101.1 billion.



If we assume that foreign central bank dollar reserves have increased in the neighborhood of $650 billion over the past year, then (from the Z.1) the increase in “Official” holdings of Treasuries and Agencies of about $400 billion leaves $250 billion unexplained. And there is the intriguing $366.5 billion increase (to $528) in RPs acquired by the Rest of World over the past year. Could it be that foreign central banks are now aggressively accumulating repo positions - financing the U.S. securities repurchase agreement market?
Well, I have no idea if foreign central banks are becoming major player in the repo market, or whether or not the Federal Reserve Bank of New York is lending securities from its massive $1.22 Trillion portfolio of Treasuries and Agencies held in “custody” for foreign central banks and financial institutions. But we do know, from the New York Fed, that the size of Primary Dealer repurchase agreements has recently increased to a record $2.87 Trillion, up $461 billion (19%) from one year ago.

PS:
und was hat schliesslich überdauert? Gold, Land und Immos.