The US rate cut rally doesn’t seem to have lasted long. And why would it? Artificial highs never do.
Debt is the underlying, chronic, corrosive, and disastrous core of America’s problem. Creating more of it is not a solution. The morons on CNBC have told us that the rate cut will fuel growth in the American economy and is therefore bullish for stocks.
Are these people complete idiots, or do they just play them on TV?
Maybe they did not take a close look at the net foreign purchases/sales of long-term US securities in July. This obscure information is published monthly in the statement of Treasury International Capital flows (TIC) by the US Department of Treasury. Aside from being unsuitable for use in a pick up-line at the pub, it DOES tell you who’s buying and selling long-term, US dollar-denominated assets. And that can be useful if you’re trying to figure out how far and how fast the US dollar is becoming a third-world currency.
Remember, this data is from July, prior to the chaos in August. In July, people around the world bought US$22 billion US stocks as the Dow closed at an all-time high of 14,000 on July 19th. But behind the scenes - and perhaps in anticipation of August - Asia, Europe, and hedge funds based in the Cayman Islands all sold US Treasury bonds, and most sold corporate bonds too. Central banks sold Treasuries as well.
Norway—the world’s tenth largest oil producer and third biggest next exporter—was a net seller of US Treasury bonds in July by US$13 billion. Mexico—another key oil exporter for America, was a net seller by US$4.8 billion.
Imagine that, oil exporters choosing not to recycle petro dollars back into assets denominated in a declining currency. The hedge funds in the Caymans got on board, too. They were net sellers of US$22 billion in US Treasury bonds.
Memo to CNBC: you don’t make money buying assets denominated in a collapsing currency. We suspect the August data will show more international selling of US bonds, both corporate and government. The big question is if international investors will become massive sellers of US stocks as the dollar depreciates. We’ll see. But you can guess what we think.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Coffee Addict on 21 September 2007:
Dan
Good analysis
I should NOT be shocked that the majority of investors and institutions get their advice from CNBC and similar media channels. But I am!
Pingback by Investing » US Market Rally Short Lived, Sell Off in Treasury Bonds Continues on 22 September 2007:
[...] Beth Gaston Moon wrote an interesting post today onHere’s a quick excerptBut behind the scenes - and perhaps in anticipation of August - Asia, Europe, and hedge funds based in the Cayman Islands all sold US Treasury bonds, and most sold corporate bonds too. Central banks sold Treasuries as well. … [...]