Thursday, April 17, 2014

YOY Structural Support Now Negative

A number of people have emailed me asking for my thoughts on Belgium's recent "buying spree" in USG securities. Here is one of the emails:

"What do you make of the treasury buying out of Belgium? Seems like maybe someone isn’t yet ready for the transition? Really curious to see who it is."

I don't know who it is, but I thought I'd explain which part of the data that I like to watch. Two years ago I used the term "willy-nilly support" to contrast what was happening at that time with the "structural support" of previous decades. Here's a quote from that post:

"In fact, even though it is true that some combination of Japan, oil exporters, Caribbean banking center, Taiwan, Switzerland, Russia, Luxembourg, Belgium and Ireland (to name a few) managed to cobble together the necessary support last year, the dollar is now living off of a willy-nilly support system rather than the "structural support" it enjoyed for the last 30 or so years."

This Belgian buying smells worse than "willy-nilly support" to me. What I watch is the "structural support", defined as the storage of homeless dollars in central banks around the world. Here is FOA from 10/5/01:

"The game is to let the US economy suffer from its own bloated expansion by moving slowly away from supporting foreign dollar settlement with CB storage. This is more than enough to end the dollars timeline…"

To see this "structural support", I look at the "For. Official" line in the TIC data sheet of Major Foreign Holders of Treasury Securities from the US Treasury. "For. Official" means "Foreign Official" as opposed to foreign private holders of Treasuries. So this line shows how many homeless dollars the various central banks around the world are currently storing:

Notice that I highlighted $4069.2B for February 2014, and $4100.4B for Feb. 2013, a decrease of $31.2B over the last 12 months. If that doesn't make the hair on the back of your neck stand up, consider this:

On 1/1/14 I posted my New Year's Day post in which I observed, shockingly, that the year-over-year (YOY) increase of the past four years had dropped from a 3-year-average of +$422B to only +$24B for 2013. As shocking as that sounded on New Year's Day, we are no longer even in positive territory. Now we are negative YOY for the first time. For comparison, you can find older versions of mfh.txt here.

Here's what it looks like when we compare the previous three years with the past 12 months:

2010: +$456B (over 12 months)
2011: +$426B (over 12 months)
2012: +$386B (over 12 months)

Last 12 months: -$31.2B

At the beginning of this year, we were at about +$24B. As of the end of February, we have dipped into negative territory. This means that the rest of the world (ROW) is not only no longer "supporting foreign dollar settlement with CB storage," they are now, at least as of February, beginning to kick those homeless dollars out of the comfortable CB vaults and onto the street.

When I wrote my New Year's Day post, I estimated that the YOY for 2013 would be +$24B. It was an estimate because only the data through October was available at that time. When the actuals came in around mid-February, it turned out that my estimate was high. The actual came in at +$22.2B, compared to +$386B the previous year, and also compared to -$31.2B now.

Anyway, whoever is standing by the dollar, he smells fishy to me. My chart in the New Year's post would now look like this, with that last red dot more negative now than it was positive at the beginning of the year: