http://contraryinvestor.com/mo.htmMay 2008
"Slowly I Turned, Step By Step, Inch By Inch...It has been quite some time since we've had a little check in on foreign sector buying of US financial assets. We have a fair number of charts here that will kick things off and do most of the talking, so we'll try to keep discussion commentary relatively brief...We know the foreign community has been large buyers of US Treasury securities for many, many years now. What has changed over time is the complexion of the ownership base. As we've documented to you in the past, in recent years both China and petro money have been the most meaningful buyers at the margin. From near $50 billion in 2000, China is now the proud owner of just shy of $500 billion in UST's. As you can see below, on a twelve month rate of change basis, foreign buying of Treasuries has been in slow decline for some time now. Over the last few years this really has not been an issue for the Treasury market as a slowing US economy has created an environment where there has been plenty of domestic sponsorship for Treasuries as an asset class holding for sheer performance reasons. As you already know, this has accelerated meaningfully since the summer of last year as broader US credit market troubles have witnessed an anomalistic move into Treasuries simply for the reason of capital preservation, the most primary investment rationale of them all.
But what has also happened as of late, as credit market turmoil continues to boil, is that Treasury auctions of the last month or so have experienced a paucity of foreign buyers show up to bid. Let's put it this way, if this trend of lackluster response to Treasury auctions on the part of the foreign community were to continue near term for whatever reason, we could indeed be looking at a serious issue for Treasury yields (meaning they have fallen too far to the downside to attract foreign interest). We'll just have to see what happens...
Okay, let's wrap this up with one final composite view of life that, at least to us, sure as heck appears to be sending one very strong message. If we sum up the foreign sector purchases of all Treasuries, agencies, corporate bonds and US equities, we arrive with exactly what you see below - the total composite of foreign sector purchasing of all US financial asset over time. Again, although it's our interpretation, the message appears crystal clear - a growing lack of confidence. Perhaps a very meaningful diminution of confidence in the US on the part of the foreign community. But quite importantly, to be a bit more specific, what we see below is showing us a growing lack of confidence in US credit markets. That is what is really being displayed below as foreign buying of US equities really has not fallen off all that much as of late...
Whether it's due to the underlying character of the asset classes themselves, the integrity of the US financial system in general, the southern trajectory of the US economy in terms of its ability to support these asset classes as investments, or a little bit of all of the above, this loss of confidence is a critical undermining feature of both current and forward support of US financial assets. We really do not know why this has not garnered much more attention in the mainstream financial community. You already know by what has happened in recent months stateside that confidence is probably THE most critical support to the investment process and US financial asset prices broadly. We simply cannot emphasize this enough. Although we have not covered the international capital flow data for some time now, you can trust we'll be checking in regularly from now on and briefly updating you. This change in foreign community sentiment is not to be ignored nor dismissed as unimportant. Without sounding the melodramatic alarm bells, we need to remember that the US economy remains meaningfully dependent on foreign credit and capital availability. In one sense, just like the Carlyle Partnership, Thornburg REIT and Bear Stearns remained very heavily dependent on the ongoing ability of these firms to access liquidity at any time...until, of course, it really didn't matter anymore at all."
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