patrick.net

Here the month that we got net capital inflow in US T
http://www.treas.gov/tic/mfh.txt

Some observations again:

UK's total international reserve is $48B
http://www.imf.org/external/np/sta/ir/gbr/eng/curgbr.pdf

In one year, their holding of US Treasury increased $218B!! Why? Because there is a little thing called Channel Island (BVI equivalent) that got into the statistics reporting of UK. So we can safely assume that most of the buying comes from the Channel Island. I checked with some authority that they said that could be Saudi, oh really?

Let's go down the rabbit hole a bit further. The Channel Island purchase was only up a few $B in the previous months when the oil price was at all time high. Somehow in Sept when oil price crashed and Saudis could only $1.6B, somehow the Saudis in Channel Island was able to buy an extra of $30B, interesting.

Apart from China, the biggest increase is from Carribeans, an increase of $37B, which I can understand because of the deleveraging.

However, this piece of trivia raised my eyebrow. In the last 12 months, our T increased $625B, nice job. The extra buying from Channel Islands and Carribeans ALONE account for $218B, a whopping 35%. I know there are many anonymous tycoons from all over the world that are JUST patriotic to the US, I just didn't realize there are so many of them.

why am I being moderated?

@Denis. Its real just an implied rate. If the CU expects a 5% rate in 13 months but takes off the first year, then their real expectation is 4%. If CUs are getting chunks of money today at 0% and the maring of 3% is the mendoza line, then hey, they aredoing oky.
I also suspect the get a finder's fee rom dealerships, since they can't float money at the mothership any more.
@OO
Interesting.
Are yo saying that since China will spend their $2T that they will have to sell their Treasuries which will make it super hard to auctin new debt against the old debt China will be sending to market.
I guess I would have to fall back on an old analysis, if Asia stopped buying today, the cost of borrowing was thoght to only go up about 1%. So if China dumped $2t with an agregate rate of 5%, in theory we would have to auction new debt at abut 6%. At what rate do we get worried?
It seems pretty clear we are willing to go up to 10%.
So, I think an auction failure next year unlikely. However, I see lots of debt auctions failing elswhere.

Yeesh. This is all ugly.

Duke,

the whole issue is sustainable debt, and everyone in the world knows our debt is unsustainable.

When we had the largest consumer market in the world, people put up with us, because they want to find markets for their excess capacity. Guns are useful in defending a country, but useless in trade, are we going to sail the Kitty Hawk to China so that they will buy more Ts, or buy more Boeing?

Japan shed $18B in the last 12 months, China added $118, when we were sending so much USD their way and they didn't have any internal stimulus needs. In my previous post, the biggest add-on of T in the last year was from Carribeans and Channel Island, accounting for 35% of total new Treasury in the last 12 months. We will see at some point all the new Ts will be accounted for by these two anonymous banking centers where buyer ID is concealed.

Even in the latest Sept Treasury purchase during which there should be a "flight to quality", many countries SHED the T, and the biggest addition apart from China is again, from the Carribeans and Channel Island :-)

Duke,

China didn't have 2T in Treasury, they have a total of $2T foreign reserve, ~$300B in F&F.

I am never worried about the Treasury rates, because we can always find buyers in Caribbeans and Channel Islands, there is an unlimited supply of them.

Convetional theory on repudiating unsustainable debt when you are country the size of the US is:

1. Currency manipulation
2. War.
3. Innovation.

I think 1 will not go very well. 2 is an terrible option. So, we need to come up with something that everyone wants to buy that only we can make.

Possible ideas: Fusion, organs (cloned from donor), cure(s) for cancer, longevity, state of the art weapons, ??

soshal netwurking

If first lives are terrible, the only option is ...

Bernanke's playbook
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

"A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well."

I think our Caribbean and Channel Islands coffer is already stuffed to execute the last step.

Cures for cancer is a horrible innovation

We are already becoming an aging society, and retirees are not dying fast enough so our SS and Medicare burden will be huge on the working population, and you want to prolong their life further?

I am for cure for cancer only if retirees actually have to pay for it out of pocket, or insurance will pay when the cancer patient is still at a working age. Or else, our population pyramid will be so inverted that nobody wants to have kids, and we will be still struggling with depression 3 decades later.

Fed is certainly ahead of me, trader rumors that Fed is already backstopping the 10-yr Treasury note to keep yield down.

http://www.cnbc.com/id/15840232?video=933464201&play=1

Nice, time for everyone to refi again. Looks like the Fed is determined to print enough to keep the yield low for 09-11 ARM reset crowd to refinance at a low rate.

Nice, time for everyone to refi again. Looks like the Fed is determined to print enough to keep the yield low for 09-11 ARM reset crowd to refinance at a low rate

That would have been interesting if economy was going up. People are throwing unemployment numbers in double digits and low rates are not going to fix it.

sa,

that is where the rebate checks and fiscal stimulus program come in to provide employment and cash flow.

You will be surprised at how far the government is willing to go to keep this game going. It is absolutely amazing to watch.

In about 6 weeks we will see how Barrack Hoover Obama is going to start wooing the crowd. More money for sure.

Large volumes of money in the Caribbean are from US citizens who have put their money offshore to avoid US income tax. For example the Caymans is the favorite domicile for hedge funds. I have heard that 70% of all hedge funds are domiciled in Cayman.

Cayman is also a favorite for offshore banks. Secrecy laws are a big advantage. Cayman has more banks than it has residents. It is money fleeing taxation.

The US insurance industry has also been migrating offshore (or into foreign ownership) to reduce or eliminate US income tax as well.

The favorite domicile for US insurance investors seeking to escape US income tax is Bermuda.

Offshore banking is a symptom of excessive taxation and regulation.

Some companies domicile their holding companies in Bermuda (or eslwhere) to escape the more restrictive US regulation of industry. The offshore domiciles have very minimal or streamlined regulation. What do care? the regulated companies are not allowed to sell product in their countries - they are only there for the tax and regulatory advantages.

This enables them to compete in the US market with less tax and fewer rules.

what do they care?

"Offshore banking is a symptom of excessive taxation and regulation."

Yes. But even if you think we need more regulation, we are in a trap because over time our industry will leave the US for the easier rules and lower taxes offshore.

The US has one of the very highest tax rates and heavier regulation in the industrialized world. Why form a company here when you can set up offshore and sell into the US?

But even if you think we need more regulation...

I want more regulations? Me? LOL! :)

I am a big fan of Mellonomics.

Zephyr, I also think tax rate, especially corporate tax rate, is way too high here. There is absolutely no reason why the rate for the highest bracket should exceed 20%.

No, Offshore banking is a symptom of excessive greed and lax regulation.

Zephyr,

do I have to spell it out loud?

I think it is the Fed buying the Treasury under the disguise of these tax-haven islands.

Do you see Buffet and Gates loaded with T purchase? I don't. I wonder who these patriotic ultra rich Americans are.

Nice of you to spell out your conspiracy theory. It could be true.

However, there is no need for it to be true to see what we are seeing. There are plenty of investors with huge portfolios sheltered offshore who are buying the Treasury as a safe haven from the asset declines. This is not a theory.

Forbes' richest persons/families of the world have a combined total wealth of $1.47T.

Not all of them are Americans. Not all of them have it in liquid cash, most of their money is tied in their own company stocks, which they cannot easily cash out. Gates or Buffet's biggest source of wealth is still their holding in their companies.

So let's say out of that $1.47T, 1/3 is completely liquid, that gives us roughly $500B liquid wealth from the richest (remember, the wealth scale falls off very rapidly outside of 100).

So someone tells me that the richest people in the world in the last 12 months, bought $218B Treasury, out of $500B total liquid wealth they have.

Does that even sound reasonable to you?

Many uber-rich people are not on Forbe's list.

Forbe's may underestimate wealth of those who hide their money well.

Besides, the collective wealth of mere multi-millionaires in hedge funds can be vast.

You also have to assume that all these rich people park their money in the tax havens, which is certainly NOT the case for the richest.

They can at most park a SMALL amt there because as the richest and highest profile, they are high on IRS watch list.

It is a misunderstanding that the richest people park ALL their money at the tax havens, no, they only park part of their money there, most of their money are sitting in the US. Most common type of investment for these super riches is actually tax-exempt Munis.

So it is an extremely far stretch for me to believe that these ultra-rich people have an EXTRA $218B parked in tax havens just for the purchase of US Treasury. This argument is not going to fly with me for a sec.

Justme, Offshore banking is a result of a signifcant difference in the tax rates between two locations of domicile. You can base in the US and keep 60% of your profits or base in Cayman and potentially keep 100%. I can assure you that most people have no trouble understanding this math.

I believe Hedge funds from cayman are buying those treasuries. These guys are super rich and i remember vaguely the name of fund started with Ben....

TOB,

I did not think you were joking. But I suppose most people just don't know about these things, and jump to conclusions.

Peter P,

if anything, Forbes always overestimates, not underestimates their wealth. Let's say I know someone who compiles the list and happen to know how it works.

OO,

I never said anything about what portion of peoples' money is in these locations. And you also wrongly assume that its not legal to do so.

The IRS has no jurisdiction over non-US companies. And US citizens can legally invest in them. And non-US companies do not pay US income tax on profits earned outside the US.

A rich person could legally put all of their money offshore and pay no income if the deal is structured properly (in compliance). This does not require smoke and mirrors. All perfectly legal.

OO,

If Forbes overestimates for many then their methodology is either lame, or it is evidence that some of the money has susequently slipped away uncounted.

OO, I trust you.

However, I believe they did underestimate Bloomberg's networth until recently. (Or are they overestimating it now?)

Zephyr,

we will just wait for another 3 months to see how many of these phantom "rich people" from tax havens are going to US Ts.

Japan is certainly not buying, they started shedding a year ago and even offloaded some in the "flight to quality" period of Sept. Chinese simply doesn't have the dough to pay, if they don't cash out, I am already very thankful.

There is already a number circling around saying that our next quarter (!) deficit will hit $500B. I will be watching in amusement how these "tax haven super riches and hedgies" just keep buying our T, no matter the economy goes up or down, they just happen to have unlimited amount of money to buy, very funny.

Just as a reference, all the Asian superriches on the Forbes list suffered huge losses from stock market and a financial weapon of mass destruction called Accumulator. Don't expect these guys to chip in on T. Russian oligarchs are bleeding to death on the tanking oil price. Middle Eastern riches are hurting like hell with oil price more than halved. So there just happen to be a group of really smart rich people whose wealth does not shrink in the deleveraging, and they can afford to buy as many T as they want, not on leverage but dollar for dollar. Very nice.

This offshore game has been going for a very long time. I have no idea when it started (probably with the first income tax). I was in the business of forming and managing offshore companies during the 1980s, and I have set up and run a few offshore companies since then. The companies that I ran elected to be taxed as if they were based in the US. But that is only because our ownership profile did fit the US tax rules to be untaxed.

OO,

You overlook one very important fact in this market decline. All the people who bought stock, real estate and other assets at or near the top bought from someone. For every top of the market buyer there was a seller - selling at the top. Some people sold and went largely to cash, or at least partially to cash.

Many of these people even shorted the markets. Too risky for my taste, but they have made money in the decline. And still have it. Probably in the safest place one can put it - US Treasury bonds.

Zephyr,

no, stocks are priced at the margin.

So not the whole lot was sold, just that the wealth of a family or a person is valued as his total stock holding x the marginal price at which the stock changed hand.

A lot of wealth never existed in the first place, it was on paper. Only the marginal amount that changed hand accounts for the wealth that changed hand, but you never see personal wealth being evaluated that way.

Only a small part of that wealth got transferred at the top. Most of the wealth was never there, it just evaporated.

Are there more people shorting the market making money or are there more people longing the market making money?

My whole point is, I do not believe for a sec that the banking centers that hide identity of buyers are representative of the real demand for US Treasury than many countries combined, and these are not small countries, I am talking about Germany, France, Japan, Canada, Korea, etc. the most industrialized countries in the world.

I am of the firm belief that the Fed has already started raw printing, and I take my actions accordingly.