About a month ago, on April 24, the Global Market Report in The Privateer (#525) was titled: "Counting On A Nervous 'TIC'". TIC stands for the Treasury International Capital report and tracks foreign purchases and sales of US "securities". Of more interest, it reports the largest foreign holders of US securities and the extent of their holdings.
Here's a brief quote from that issue of The Privateer:
"In our main "Gold This Week" report for April 15, we point out that the record US $US 61 Billion trade deficit for February 2005 was fully 33% larger than the trade deficit of February 2004. Go back to the "TIC" data we reported on earlier. It shows that foreign capital inflows into the US in the year ending in February 2005 exceeded the flow for the year ending in February 2004 by a mere 9.4%. That's the BIG gap! The increase in the US trade deficit (not to mention the US budget deficit) is far outstripping the increase in foreign capital inflows into the US. The "TIC" cannot be counted on anymore.
Well, on May 16, the latest edition of the Treasury's TIC report was released. It includes the data up to and including March 2005. You can take a look at it on their website
The most notable data in the report is that, according to the Treasury, Japan's net holdings of US securities is up less than $US 5 Billion since July 2004 and China's net holdings are up only 3 Billion since November 2004. It would seem that the two biggest "investors" in the US, Japan and China, have not been buying lately.
The actual state of affairs gets even more interesting when one compares the current TIC report with the previous one, which was published in mid March and included data up to and including January 2005. Mr Rob Kirby of financialsense.com has very illuminatingly done this. What jumps out of this comparison is the HUGE differences in the numbers issued in the mid March report as compared with the report just issued on May 16. It would seem that to make the numbers to March more "palatable", the numbers to January which were reported in the mid March TIC report have been revised - downwards - in the current report.
This "numbers game" is the latest in a series of "surprising" items of economic data which have been issuing from various departments of the US government over the past month. There has been a "surprisingly" low trade deficit, a VERY "surprisingly" high employment report, a "surprisingly" robust report on retail sales, and this week, an inflation report which claims that Consumer Price Inflation at the "core" level in April remained unchanged!!??
What a difference a month (actually three weeks) makes! To refresh your memory, please take a look at the commentary on this page from April 29 - titled Oh #$!!@#$ - They've Noticed". This was written at the end of a couple of weeks during which the economic data coming out of the US government was universally dire. As you know, the exact opposite has been the case so far in May.
When we wrote that piece in late April, Gold was trading comfortably in the mid $US 430s and the $US index was bouncing around in a tight range between 84 and 84.5. Three weeks later on May 20, Gold has dropped below the $US 420 level (to $US 417.70) and the $US index is up to 2005 highs above 86.50. The oil price is way down, and US stock markets had their best week since last November this week. Last but not least, the spread between the yields on two and ten year Treasury debt paper is down to a mere 0.45% - the lowest it has been for YEARS.
As you may know, the head of the Central Bank of South Korea told the Financial Times this week that they have sufficient reserves to secure sovereign credibility and will not be increasing those reserves any further. Combine this with the curious TIC data reported on above which shows no increase in the holdings of either Japan or China, and the realisation must begin to dawn that the US government's gravy train of swapping their debts for Asia's real goods is winding down - fast.
It is pretty clear that we are living in a financial, fiscal, and economic fools' paradise at present. The more ominous the REAL situation gets, the more "optimistic" become the numbers being churned out of Washington DC. There is, of course, nothing new in this state of affairs, it is a near constant of the recent history of political economy. But because the magnitude of the discrepancies is so great, the potential for financial upheaval is bigger than it has ever been.
Last week, we dwelt here at some length on the reasons for the new found "strength" of the US Dollar (and concomitant weakness of the $US Gold price). This week, we have a "deadline" of sorts. Mr James Drummond of the Financial Times has reported as follows:
“Hedge funds are liquidating positions in the expectation that investors will be redeeming substantial sums in early July, according to prime brokers and fund managers. Many hedge funds offer only quarterly redemption and require 30 days notice that investors will be withdrawing funds. This means that fund managers are looking to find cash at the moment so as not to be caught short next month. The past two weeks have proved among the most testing times for hedge funds since the collapse of Long Term Capital Management in 1998. No well-known names have gone under since the debt of General Motors and Ford was downgraded to non-investment grade this month, but many hedge funds are on the defensive.”
Please refer to our report of last week (use the link above). It is precisely the past two weeks (as referred to by Mr Drummond) which have seen the sudden spurt of the US Dollar in the international exchange markets. Hedge funds are indeed "liquidating positions" - and repatriating the capital back into US Dollars and then back into the US to prepare for this possibility of large-scale redemption demands.
What we are in the midst of now is a "shear" between contrived appearance and reality in the financial and economic realm which is every bit as big if not bigger than was the similar "shear" in political and geo-political terms which took place in the lead up to the US attack on Iraq in March 2003. It is a very dangerous situation, and there is no way around it. In the midst of it all, Gold is actually doing very well, being down only marginally in $US terms this month and not down at all in terms of most other major world currencies.
We are fully aware that these are trying times for nearly everyone, and especially for those reading this analysis. We understand the anger and frustration that has been expressed to us by many subscribers (both Privateer and Gold This Week subscribers) in recent weeks. It is indeed galling watching those who are making an economic silk purse out of a worn out sow's ear seem to get away with it yet again.
Politics and economics are indivisible. Gold is, as we state at the top of this page, the POLITICAL METAL. The more twisted the politics becomes, the more twisted the economics becomes. The more that happens, the more Gold reacts as an reverse barometer. Have you ever noticed that the "price" of Gold seldom if ever rises when it "should" be falling, but it very often falls when it SHOULD be rising? Have you ever noticed that the reverse is the case with most if not all "paper based" assets?
The "numbers game" has always been an integral part of all interventionist economic systems. They form the "Potemkin villages" erected by Central Bankers and Treasurers - the false fronts behind which REAL life becomes more and more at variance with the "official" state of affairs. In such circumstances, the most important thing one can do is to keep one's gaze firmly fixed on what is REALLY going on. The times when it is hardest to face facts is precisely the time when it is most difficult to find any in the "information" being presented by government.
That's how this numbers game works. It has broken out this month in all its "glory".