Personal Dork Assistant

Sensible Numbers

Wow, a securities analyst saying something sensible about the economy.

Chinese Connection. One of the most aggressive buyers of U.S. Treasuries in recent months has been China's central bank. Data collected monthly by the U.S. Treasury can be used to derive net purchases by all Chinese investors. Over the past 12 months, Chinese net purchases totaled a record $37 billion. Over the past three months through April, they purchased a record $71 billion, at an annual rate (Figure 5). My guess is that the Chinese central bank accounts for most of these purchases. Data compiled by the International Monetary Fund show that China's international reserves excluding gold soared to a record $321 billion in March, up $90 billion from a year ago (Figure 6).

While the trade-weighted dollar is down 18% since the beginning of last year, the Chinese Renminbi remained flat relative to the dollar. Clearly, the Chinese central bank has pegged this exchange rate by aggressively buying the dollar and investing the proceeds in U.S. Treasuries. Apparently, they haven't "sterilized" this increase in their assets by selling Chinese bonds. So monetary base is growing rapidly in China and so is the M1 measure of the money supply, which rose 18.6% last year, the latest available data.

"Ed, when do you expect that the Fed's easing will boost capital spending?" This is a question I hear often from investors. My answer: "It's happening already, but mainly in China!" Of course, the Chinese are reciprocating the favor. Their central bank's actions have helped to push interest rates down in the United States. This has provided a huge boost to housing sales and to mortgage refinancing activity. We in turn buy Chinese made goods to furnish our homes.

On the other hand, he concluded that the low interest rates (i.e. high bond valuations) implies that stocks are undervalued. Um... okay. Sure, the stagnant employment numbers are balanced by cheap goods and cheap money, but there's still the huge trade deficits that nobody seems to ever notice, not to mention the plain old budget deficit. I guess this works as long as China feels like trading stuff for U.S. paper. U.S. real estate works, too.