No. We are not obsessed with US Treasuries though we can understand why some readers might feel so.
Our original title was going to be along the lines of “Is the American free market smarter than the rest of the World?“ We thought that would be seem unduly chauvinistic and so we chose our title after reading a wonderful commentary from David Rosenberg, Chief Economist at Merrill Lynch.
The Financial Times had an article (page 3 of Friday’s paper) titled “Europe Facing Tougher Time Than US”. Even a causal observer can notice that Europe is currently engaged in huge bailouts and nationalization of European Banks.
Mr. Rosenberg asks “how Europe managed to get caught in the quagmire – even more than in the USA? After all, in his words, “outside of the peripheral countries (Ireland, Spain) and the UK, there wasn’t any major consumption bubble, or housing and credit mania in the region. especially in “core” Europe.” He also points out that the problems seem to have also spread to Asia.
Having asked the question, Mr. Rosenberg proceeds to answer it. In his view, “practically everyone from all corners of the world, especially the Europeans, emerged as massive buyers of US Non-Treasury bonds such as Mortgages, Asset-Backed Consumer Paper, Corporate Bonds and the like.”
Mr. Rosenberg provides real data to support his contention. He points out that “From 2000 to 2007, private foreign ownership of US spread product (non-Treasury US Bonds) soared more than four-fold from just over $1 trillion to nearly $4.5 trillion – exceeding a 20% annual rate pickup. That is unprecedented. Global investors added more to their holdings of US agency/mortgage/corporate/muni bonds from 2000 to 2007 than they did in the entire previous 40-year period.”
Today, as this US spread product deteriorates in quality and declines in price, the condition of the buyers in Europe and Asia deteriorates and requires bailout by their respective Central Banks and Governments. This is how the US Credit crunch spread far and wide around the world.
Actually, Europe and Asia have a far bigger problem than America does. America as a country is much larger than any American bank. That is not true in many European and Asian countries. For example, the financial liabilities of Korea’s Banks are estimated to be 2.7 times Korea’s GDP (gross domestic product).
The Financial Times provided a very interesting (or disturbing) table of Banks and the GDP of their countries on September 30 (http://www.ft.com/cms/s/0/61d7e148-8f15-11dd-946c-0000779fd18c.html). The article shows that the assets of :
- UBS are 484% of Switzerland’s GDP,
- ING are 290% of the GDP of Netherlands,
- RBS are 126% of UK’s GDP,
- Banque Paribas are 104% of France’s GDP.
Getting back to US Treasuries, the only entities buying Treasury Securities were the global central banks and of course, smart investors like Warren Buffet and Mort Zuckerman.
So, if we are accused of being obsessed with US Treasuries, we will wear that accusation as a badge of honor. It lets us sleep soundly at night.
Is the American Free Market Smarter than the Rest of the World?
Remember how people all over the world bemoaned the inevitable decline of America because of the ever-rising trade deficit and the unsustainable current account deficit. American TV Anchors like Lou Dobbs accused the Bush Administration of selling out America and America’s freedom to foreigners for access to cheap goods. Even CNBC anchors like Erin Burnett and Maria Bartiromo got into the act. They did shows in which they covered doomsday scenarios about what would happen to US interest rates when foreigners decided to sell US Bonds.
Let us tell you how Mr. Rosenberg thinks the American Free Market financed these huge deficits. In his words, “three-quarters of it (balance of payments gap) was financed through the yield pickup and solid credit ratings offered in the spread products arena – mortgages, asset-backed consumer paper. corporate bonds and the like.”
In other words, the American Market exported its own unique products, mortgages, corporate bonds and the like to Foreign Banks and Mutual Funds, while the American consumer imported goods at low prices for their consumption.
Which society got the better deal? How would the trade deficit look if American exports of mortgages and bonds were included in the trade figures?
Today, even if these foreign buyers wanted to sell their mortgages and bonds, could they? Of course not. They are stuck. There is no market for these bonds and the Foreign Banks, Mutual Funds have to suffer in silence as the value of their holdings goes down every day.
As a final insult, when the American market reopens to buy these mortgages, the Foreign Banks would line up to sell these bonds. If history is any guide, smart distressed debt investors in America would buy back these bonds from Foreign Banks at pennies on the dollar and make gobs of money on the upside. If you doubt it, recall the experience of Japanese Institutions who bought American Real Estate in 1989 at peak prices only to sell it back to American investors several years later at a fraction of their buying price.
It is the freedom and the sheer brutality of America’s free markets that keeps America great. If Vladimir Putin , the German Finance Minister and Nicholas Sarkozy understood this reality, they would focus their energies on improving the depth of their markets rather than vent in public. China and India do understand this. That is why these two countries are determined to build deep and liquid bond markets in their countries.
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