Randall Forsyth had an interesting post yesterday talking about Russia, China and Japan looking to diversify their reserves out of some portion of US treasuries they own in favor of more diverse investments funds similarly, as Randall notes, to how Norway and college endowments do, among others.The potential dollars is colossal; many billions. Randall does not infer, and I wouldn't assume that China is going to sell out all $800 billion or so of the treasuries it owns (I believe that China's total reserve is about $1.1 trillion with $800 billion in US paper); that would hurt China almost as much as it would hurt us.
Assuming prudent amounts by all three countries it is still a lot of buying power coming into the market. But which market? The article thinks that emerging markets stand to see some of this capital along with US equities. There was also supposition that some of these countries would invest in commodity markets although I think Russia would be less inclined toward that market.
This is a big demand story because after the initial allocation, whatever that might be, there will be ongoing demand as all three of these countries have large current account surpluses, Japan just reported their surplus this week which was way ahead of expectations.
To the extent that it is possible to follow this investment flow it stands to reason that this coming diversification will put some wind in a lot of different sails.
I can see where this playing could create a boost for some frontier markets too.
The risk comes a few years down the line. A flood of new capital that alters the supply and demand characteristics becomes a big threat at some point. Too much liquidity is what creates manias and bubbles. While I am hard pressed to think the SPX will cut in half so soon after doing so at the start of this decade but investors can get hurt in manias.
Poor decisions after a normal bear market decline, a bear market that could start after several years of too many assets chasing too little supply, could set an investor back four or five years which could, depending on the timing, reduce the chance of retirement success.
For now this is not actionable. The lift this could cause and then the fallout that comes next will look like other manias (this is not an Armageddon-like scenario I am spelling out). If you are lucky to make money from this you should be cognizant that the music will stop at some point.
4 comments:
"If you are lucky to make money from this you should be cognizant that the music will stop at some point."
Roger, I've been reading this sentiment by you for almost one year, and I never never tire of it. This has got to be the only blog that has cutting edge info, personality and good hygiene. It's the last attribute that is unique in the combination. This is where I stop to get a grip on reality.
And, yes Edwards is repugnant and a apparently a prosperous investor.
My wife tells me a third party:cut/paste:
To begin busting up the dumb system we have for selecting presidents, a bipartisan group will open shop this week at Unity08.com. This Internet-based third party is spearheaded by three veterans of the antique 1976 campaign: Democrats Hamilton Jordan and Gerald Rafshoon helped get Jimmy Carter elected; Republican Doug Bailey did media for Gerald Ford before launching the political TIP SHEET Hotline. They are joined by the independent former governor of Maine, Angus King, and a collection of idealistic young people who are also tired of a nominating process that pulls the major party candidates to the extremes. Their hope: to get even a fraction of the 50 million who voted for the next American Idol to nominate a third-party candidate for president online and use this new army to get him or her on the ballot in all 50 states.
This currency reserve is an interesting thing. Now maybe this will sound like a stupid comment for my grasp on these issues is tenuous at best but.....wouldn't these "reserves" decline in value if (and these are not meant to be discrete events)
1. Yuan were to appreciate against the dollar;
2. US interest rates were to increase (their USD bond prices would drop);
3. American consumer exhausts itself volunatrily or involuntarily through called notes or greater taxes.
It will also be interesting to see this money go into consortiums to snap up assets worldwide--and there may be some sensitive assets. What would happen if such a cartel were to buy a controlling interest in Boeing or Lockheed or ARmor HOldings?
thank you anon.
Leisa,
This would have to be something that would have to be managed slowly.
Perhaps they look at it this way, give a little now for a lot later?
Since central banks are not simply investors attempting to maximize gain but, in various ways, express national economic and political will through their actions my guess would be they would attempt to strengthen regional partnerships and, not coincidentally, gain more control over regional partners; e.g., Korea would be of interest to both Japan and China from that perspective.
Post a Comment