TIC Data TIC Data: Attention! Deficit Disorder
by Dan Denning
The Rude Awakening
Wall Street, New York
Tuesday, February 14, 2006 Dan Denning discusses the upcoming release of the quarterly TIC Data. ------------------------- - The old "us" vs. "them" – who owns what and why does
it matter to you?
- The one vital rule a successful economy must abide
by, however large or small and,
- The Winter Olympics hits Central Park...well,
almost...
------------------------- Joel Bowman, attempting to comprehend what it means for a
whole country to be in the red... What exactly does it mean for an entire nation to be in
debt? What are the consequences for an economy burdened by
a current account deficit topping the $700bn mark? In an article in yesterday's Financial Times, the Bush
administration laid part of the blame for this disastrous
situation on China's, "tightly managed pegged exchange
rate" and "foreign exchange market intervention to limit
currency appreciation." Eh...? Is it too elementary to apply simple economic theory to
this complex macroeconomic conundrum? Is it too obvious to
suggest that for a country to enjoy a healthy balance sheet
they need to produce and export more than the value of the
imports they consume? Undoubtedly, it is far more
convoluted than this. The Financial Times goes on to note, "China is the third
largest exporter of capital, after Japan and Germany, with
Russia and Saudi Arabia also running growing capital
account surpluses on the back of high energy prices." It seems that what a nation does with its cash is also of
great importance. Saving it would seem to rank fairly high
on the to-do-list if it hopes to attain a positive ledger.
Using it to "buy" more debt is, not surprisingly, far lower
on the list. "In China's case," the F.T. reports, "while domestic
investment has been rising, national savings have risen
faster." Is it any wonder the cover of every major economic
publication seems to feature the words "Emerging," and
"Superpower" over pictures of red dragons wielding hammers
and sickles? And what of our own situation? "The counterparts of these capital accounts are trade
deficits run by the US, UK, Australia, Spain and Turkey." Hmmm...not a good outlook it seems. Below, Dan Denning
takes a far closer look at exactly what it means for an
entire nation to be in (ever-increasing) debt and what the
consequences are for you and I...
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------------------------- Attention!...Deficit-Disorder
By Dan Denning "Here is where China and India and all the bristling new
economic entrants come in. They are today's equivalent of
Schumpeter's railroads. They and the phenomenon of
globalization are agents of creative destruction writ
large. From now on, hardly any way of doing things which
used to be optimal will ever be the same." Richard Fisher, President
Dallas Federal Reserve This week's most valuable investment insight will NOT issue
from the mouth of Ben Bernanke, the brand new Chairman of
the Federal Reserve. But the week's most valuable insight
might spring from the pages of a bland report from the U.S.
Department of Treasury. On Wednesday, Mr. Bernanke will trudge up to Capitol Hill
to deliver his inaugural testimony before Congress. For the
sake of theatre, we will be curious to see how Bernanke's
style differs from the cryptic and ponderous oratory of his
predecessor. But for the sake of investing, we will turn
our attention to the release of the TIC data, also on
Wednesday. TIC stands for the Treasury International Capital system.
It's a monthly and quarterly survey that tells us who owns
what. The data within the survey reveal the dollar value of
foreign assets that we Americans own. The data also reveal
the dollar value of American assets that foreigners own. Recently, the rest of the world has begun accumulating more
of "us" than we own of "them." (Luckily, American investors
have been earning more on their assets overseas than
foreign investors have been earning on their assets in
America. This delightful circumstance has prevented all
sorts of nasty economic consequences). Why does it matter who owns what? Sign Up for The Rude Awakening Start your mornings off with a dose of Rude news. The Rude Awakening is dedicated to highlighting phenomena in the financial markets that others may not see. Let the Wall Street Journal and the New York Times "break news." Sign up FREE Today! We will not share your email address with anyone else, period.
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TIC Data: Long-Term Liability Well, you could say that a nation that runs a $700-billion
current account deficit is a long-term liability,
especially if that nation is continually selling assets,
instead of acquiring them. As our national balance worsens,
so does our credit-worthiness, which might be of interest
to anyone who owns a U.S. Treasury bond...or a U.S. dollar. The TIC data provide a timely glimpse into the condition of
our national balance sheet...or more precisely, the
transference of wealth from America to the rest of the
world. A disturbing story in yesterday's Wall Street
Journal detailed one aspect of this accelerating wealth
transfer. The story, entitled "Global Emergence of the Emerging
Markets," relates: "Companies from emerging markets, armed with piles of cash
from rising commodity prices and abundant financing, are
snapping up targets in Europe and the U.S., a trend that
could shift the global economic balance of power in some
industries...In the latest example, shareholders of ports
operator Peninsular & Oriental Steam Navigation are
scheduled to meet today to vote on a $6.8 billion takeover
by Dubai Ports World, a company backed by the government in
Dubai, one of the seven emirates in the oil-rich United
Arab Emirates. The deal is expected to be approved, ending
a three-month bidding war for P&O, one of Britain's oldest
companies, between the Dubai company and one from
Singapore. If shareholders sign off, the top three global
ports operators will be based outside the U.S. and Europe. "Last year, companies from the Middle East, Latin America,
Asia and other regions spent more than $42 billion on deals
[in Europe] - more than twice as much as in 2004. So far
this year, companies from emerging markets have announced
deals valued at a total of $9.3 billion in Europe, which
tops the total for all of 2003, according to research firm
Dealogic. In the U.S., companies from emerging markets
spent more than $14 billion on 96 deals in 2005. That
passed the previous record of about $10 billion, set in
2000...Many buyers are backed by national governments that
are looking to invest their newfound riches in other
industries that will help diversify their economic base or
provide new distribution outlets for their exports." The story went on to explain how one Indian telecom
company, Videsh Sanchar Nigam (NYSE: VSL), bought up the
fiber-optic assets of Tyco International, as that hobbled
conglomerate went through a restructuring, undoing all the
"synergies" of the prior ten years that were supposed to
have been both profitable (good for the shareholders) and
good for the economy. Videsh bough the "massive fiber-optic
network, a state-of-the-art, 37,200-mile long fiber loop
laid along ocean floors and into dozens of cities world-
wide. The network cost more than $3 billion to build, but
was bought by VSNL for $130 million in 2004. Wow! Think about that for a second. The network cost $3 to
build and VSNL bought it for $130 million. Tyco
shareholders and bondholders spent $3 billion and got next
to nothing. VSNL spent $130 million and steps into a world
where broadband content and services are just now starting
to take off. All that fiber is starting to light up. So this it what happens when America consumes more than it
produces. It pays borrowed dollar bills to the countries
who manufacture things. These countries then use those
dollars to buy what's left of our good businesses, or
what's left of the good assets of businesses that have been
run into the ground. TIC Data: Money Migration It's a massive wealth transfer, what I've called "The Money
Migration." That's why deficits matter...not just this
week...not just to the holders of U.S. Treasury bonds...but
to all of us who earn dollar bills. That's also why I think the current account deficit should
carry a new name – one that makes it more apparent what
it's really measuring; namely the self-inflicted
destruction of America's economic competitiveness. Perhaps
we should call it the "Economic Suicide Index'...or the
"Greed Surplus." Or we could just give the entire country a
"Darwin Award" for collectively engaging in the kind of
self-destructive behaviour that will self-select us out of
the gene pool of future economic success-stories. Successful economies abide by one vital rule: Produce more
than you consume. To engage in the opposite activity is to
transfer wealth and to invite impoverishment...We are well
on our way. [Joel's Note: Cerebral: 1. Of or relating to the brain or cerebrum.
2. Appealing to or requiring the use of the intellect;
intellectual rather than emotional. Over the years, Dan has mastered the ability of utilizing
analytical applications when identifying investment
opportunities rather than relying on emotions and other
questionable indicators. Consequently, he has managed to be
ahead of the game on some major macro-economic trends.
Staying a few steps in front has allowed Dan to deliver
considerable profit opportunities to his readers. You can
read into tomorrow's headlines and take advantage of them
today by reading on below: Strategic Investment:
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And the Markets...
| Monday | Friday | This week | Year-to-Date | DOW | 10,892 | 10,919 | -27 | 1.6% | S&P | 1,263 | 1,267 | -4 | 1.2% | NASDAQ | 2,240 | 2,262 | -22 | 1.6% | 10-year Treasury | 4.58 | 4.59 | -1.00 | 18.00 | 30-year Treasury | 4.56 | 4.55 | 1.00 | 2.00 | Russell 2000 | 711 | 717 | -7 | 5.5% | Gold | $540.15 | $550.80 | -$10.65 | 4.5% | Silver | $9.14 | $9.37 | -$0.23 | 3.6% | CRB | 327.57 | 331.60 | -4.03 | -1.3% | WTI NYMEX CRUDE | $61.20 | $61.84 | -$0.64 | 0.3% | Yen (YEN/USD) | JPY 117.72 | JPY 117.92 | 0.20 | 0.2% | Dollar (USD/EUR) | $1.1907 | $1.1901 | -6 | -0.6% | Dollar (USD/GBP) | $1.7419 | $1.7441 | 22 | -1.2% |
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