Dear A-Letter Reader:
Net Foreign Security Purchases. The name doesn't exactly roll off the tongue but this seemingly arcane monthly report universally known as the TICs (Treasury International Capital System) in the currency market, has been plucked from obscurity to become one of the most important economic statistics released by the United States.
If you were to chart the growth of the US trade deficit over the past 18 months, it would resemble the chart of Microsoft stock from the early 1990's. Unfortunately while the Microsoft chart showed the awesome power of exponential growth in profits, the chart of the US trade deficit demonstrates the stratospheric amount of debt amassed by the US in the past few years. By end of 2006, most analyst anticipate that US will accrue an annual Current Account deficit of one trillion dollars, meaning that US citizens will have bought from the rest of the world approximately one trillion dollars more of goods and services than they were able to sell. A record for the history books for sure, but a most inauspicious one at that.
So why hasn't the US economy collapsed under the weight of all that debt, you may wonder?
This is where the TICs report fits in. For the past six months, the US has been running a monthly trade deficit of approximately minus $60 billion. At the same time foreigners have bought an average of $80 billion worth of US bonds and equities, in effect, sterilizing this massive debt burden. Indeed, for the last year the dollar has rallied against most of the world's major currencies despite the ever growing trade deficits because the TIC inflows have more than offset them. That was true until last month. For the first time since May of 2005, the TICs surpluses did not exceed the monthly trade deficit. In December the trade deficit printed at -$65.5 billion while the TICs data, originally expected to reach $76 Billion recorded only a $56 billion surplus. More than any other factor, this economic surprise stopped the dollar rally cold. Suddenly, all of the US balance sheet issues that plagued the greenback at the end of 2004 when the the euro-dollar pair reached a record of 1.3659 were back with a vengeance.
Was the contraction in TICs just a one time event, or the start of an ominous new trend for dollar bulls?
Currency traders will have a better answer to that question in the next two weeks after the January Trade Balance data is received on March 9th and the TICs data is reported on March 15th. Yet before too much hand wringing takes place we must caution the would-be Cassandra's about calling for a dollar collapse too prematurely. The global economy is like a giant dysfunctional family that must continue to live under the same roof, despite personal animosity and discomfort of individual members. The bottom line is that the Chinese workers will only get paid if the US consumers continue to spend. The US, much like Chrysler in the 1980's, is simply too large to fail. That is why, what many analysts have called "the greatest case of vendor financing in history of mankind," is likely to persist for some time longer.
However, while foreigners may continue to pour capital into US, that investment exceedingly will take place in the form of equity rather than fixed income. Professor Nouriel Roubini from NYU, one of the world's leading experts on world trade, notes: "Increasingly, foreigners are starting to realize that exchanging their goods and services for lousy, low return IOUs of the US government is a most lousy deal for them. Why hold Treasuries that give you a mediocre 4.5% return over 30 years when you can instead buy higher return capital such as US corporations, US factories, ports, real estate and any other asset currently owned by Americans in this great land of ours?"
Politics aside, the Dubai ports deal is simply emblematic of a much larger trend of foreigners owning an increasingly larger portion of US assets. Unlike the 20th century when what was good for General Motors was good for the US, in the 21st century the mantra may change to what is good for Toyota is good for America. We wonder how many American's understand this new dynamic.