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KAI RYSSDAL: The Federal Reserve published its regional survey of the American economy today. The Beige Book landed with a resounding thud — the Fed says growth has slowed almost everywhere, and the Treasury Department says foreign investors are pulling their money out of U.S. markets at a record pace.
The Treasury International Capitol report — TIC, it’s called — came out late yesterday afternoon. We’ve got Alec Young from Standard & Poor’s Equity Research in New York on the line. Mr. Young, good to have you with us.
Alec Young: Pleasure.
RYSSDAL: This TIC report, as scary a name as that might be… the numbers in it — did they indicate foreign investors really have an aversion to American equities?
Young: We don’t think so. We think it was more of a one-month aberration. The August TIC data reflected foreign investors selling dollar-denominated assets more than they have in the recent past. And we think that’s a reflection of the fact that we had some real credit market turbulence in the month of August, as investors had a lot of margin calls and what-not on some “illiquid” assets. That forced them to sell their most liquid assets, which are generally U.S. treasuries, in order to cover some of those margin calls. We think that was a phenomenon particularly evidenced in the hedge fund community. And that’s really what drove the dollar selling in the month of August.
RYSSDAL: What about some of the continuing trends since August? I’m thinking specifically of dollar weakness here.
Young: Sure. We think other factors are driving the dollar weakness, the biggest of which is interest-rate differentials. You have the U.S. Central Bank reducing its interest rates — reducing the amount of interest you earn on dollars — while most of the central banks around the world are actually raising the interest rates and the interest you earn on their currencies. And so that makes the dollar less attractive, and we think that’s driving the dollar weakness.
RYSSDAL: Let me take something you said and turn it on its head for a minute: You mentioned that investors consider dollar-denominated assets their most liquid thing, which is why they got sold in August. That really is a good thing, that we’re liquid, right?
Young: Yeah, absolutely. I mean, it reflects how deep our capital markets are. There are so many players in here, trading treasuries, trading U.S. stocks… The U.S. is still seen as the most transparent and dynamic encomony in the world, and while there’s certainly more competition today than there was 10 or 20 years ago, we don’t see a lack of willingness by foreigners to hold our securities. If we continue to see that trend play out over the next few months, we may re-evaluate it. But at this point, we see it as a one-month abberation.
RYSSDAL: All right, but what if? You know, what if those numbers don’t bounce back?
Young: Well, that’s something we’ll have to take a look at if it turns out the be the case. But one thing we think is likely to keep foreign central banks buying treasuries over the long term is that the U.S. is still a primary destination for a lot of their exports. And the way the U.S. funds a lot of its imports is through borrowed money, by selling treasuries. So if the Chinese or the Japanese — if they stop buying treasuries, we stop buying their stuff. And if that happens, they’re in just as much trouble as we are.
RYSSDAL: Alec Young is an international equity strategist at Standard & Poor’s Equity Research. Mr. Young, thanks a lot for your time.
Young: My pleasure.
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