September 19, 2007
Dan Norcini
Dear CIGAs,
With all the excitement surrounding the interest rate reduction by the Fed, it is easy to overlook something else that occurred today that also has further serious implications for the US Dollar. The Treasury International Capital Flows data for the month of July 2007 was released early this AM. The data was not good to be blunt!
When using only the data for long term securities, foreign capital flows into the US hit their lowest level since December of last year. The actual amount was $19.2 billion. The trade deficit for the month of July was -$59.2 billion. In other words, when using only the data including long term securities, flows were insufficient to fund the trade gap.
However, the Treasury is also releasing data including both long term and short term securities. When the short term is included, the number jumped to $103.8 billion, more than enough to cover the trade gap.
Keep in mind that the brunt of the sub-prime fallout occurred in August and continues even now into September. However, it is safe to say that already foreigners were sensing something was wrong with the US financial picture and began moving to shorter-dated securities. This is consistent to what we have been observing with a rush into 3 month paper last month that took those particular rates below 2% at one point.
If you examine the following charts you will also notice that in every major category of securities tracked by the Treasury; bonds and notes, agency debt, corporate debt and US stocks, foreign purchases saw a sharp decline. It is particularly alarming to also note that out of the above categories, the bonds and note category (these are Treasuries) actually went negative, the first time this has occurred since April 2006. The decline back then came as foreigners were net sellers of $3.51 billion. July 2007 on the other hand experienced a stunning drop of $9.37 billion in Treasuries. This jives with what we have been seeing in the Fed custodials where the weekly data is showing severe disgorging of US Treasuries by foreign central banks. I shudder to think what the August and September data is going to look like!
Furthermore, corporate debt witnessed a severe drop although it did not go negative. Let us hope that foreigners do not lose their appetite for our corporate debt here or US business will be in a serious finance crisis.
None of this bodes well for the dollar which is going to get hit hard as the very thing needed to perhaps entice foreigners to move back into US debt, namely higher interest rates in the face of a falling currency, now appear to be a hopeless impossibility since the Fed has caved in to pressure from Wall Street. As Jim has been saying, and others have been echoing, the Fed will burn the dollar down rather than let the US equity market collapse.
Obviously, gold is going to get a strong sea breeze behind it now and attempts to knock the metal lower are going to run into quality buying since the Humpty Dumpty Dollar appears to have been broken beyond the ability of all the King’s men to put it back together again.
I will be up at the Silver Summit Conference in Idaho and will have to scale back some of my charting and commentaries until I return. I will attempt to keep you up to speed as my schedule permits.
Dan
http://www.jsmineset.com/ARhome.asp?VAfg=1&RQ=EDL,1&AR_T=1&GID=&linkid=5186&T_ARID=5244