View Leo Haviland’s profile
CASH AND CAPITAL CACHES © Leo Haviland, March 6, 2012
Everyone knows that money shifts into, within, and between geographic regions and broad financial sectors (stocks, interest rates, foreign exchange, commodities, real estate) sometimes are substantial or even “dramatic”. Price movements and other statistics indicate this. However, seldom is it underlined how gigantic capital marketplaces are.
Would it matter much if American stocks weakened on a sustained basis around ten percent? Such an US equity decline is a noteworthy absolute sum and large from the GDP and net worth perspective as well. US stock marketplace capitalization at end 2010 was $17.3 trillion. Suppose one uses 2011 US GDP at around $15.1tr (Bureau of Economic Analysis; the 2010 level in the IMF table is $14.5tr). A ten percent equity dive equals about 11.5pc of GDP (1.73/15.1 trillion).
Take another view using Federal Reserve data. According to the Federal Reserve’s “Flow of Funds” (Z.1, Tables B.100.e and B.100; 12/8/11, next release 3/8/12) 2Q11’s equity shares for households (and nonprofit organizations) were about $19.2tr. A ten percent equity dive equals around 12.7pc of GDP (1.92/15.1). End February 2012 US stock valuations probably are roughly around that 2Q11 total. A ten pc slump in stocks (using US equities as the benchmark for all stock holdings by US households) of $1.92tr equals around 12.7pc of 2011 nominal GDP (1.92/15.1), or around 3.2 percent of 2Q11’s household net worth of just under $60 trillion (3Q11 $57.4tr is most recent Z.1 information). US end 3Q11 household net worth still remains beneath end 2007’s over $65.1tr.
With consumers around 70 percent of the US economy, the Fed’s assorted accommodative monetary policies during the ongoing worldwide economic crisis that emerged in 2007 have sought to boost (and sustain rallies in) equity prices.
However, what does the fairly strong TWD in 1Q09 versus its April 2008 trough alongside the absence of any significant increase in the percentage of worldwide US dollar holdings over that time span indicate? It strongly suggests that something more may have been going on in (“behind”) these official reserve patterns than the consequences of US dollar appreciation. A reasonable conjecture is that it reflects a determination by developing/emerging nations in general not to expand their exposure to the US dollar. Given the longer run trend of their declining US dollar claims, they even arguably are trying to reduce their US dollar claims regardless of dollar fluctuations.
Note the recent coincidence in time of a bottoming of yields in the “flight to quality” destination. Compare the 10 year government notes of the United States, Germany, and Japan. Recent UST 10 year note lows were 1.67pc on 9/23/11 and 1.79pc on 1/31/12. The Japanese JGB 10 year low was 1/16/12 at .94pc (compare JGB bottoms at .83pc 10/7/10, .44pc 6/11/03, and .72pc 10/2/98). The German 10 year government note valley at 1.64pc on 9/23/11 was the same day as the UST note one. It made another trough at 1.74pc on 1/13/12 (about the time of Japan’s mid January 2012 low), as well as one at end January (1.78pc on 1/31/12; compare US 10 year).
Suppose there is some inflation, and that low nominal yields result in very low real (or even negative) yields. In the absence of another round of flight to quality concerns, how eager will official and private players be to own (or at least to be substantial net purchasers going forward) of government debt of these nations?
FOLLOW THE LINK BELOW to download this market essay as a PDF file.