Always The Dollars

by: Alhambra Investment Partners

By Jeffrey P. Snider

Even though the data is stale by the time of its eventual release, I think the TIC figures still maintain some relevance. If nothing else, even on a rear-facing basis, it provides more consistent data to confirm or deny previous narratives. To this point, that description includes central banks mobilizing dollar assets to deflect continuous dollar funding difficulties.

The February data, the latest release, sports another rebound in dollar buying by foreign entities. On the surface, it appears as if dollar conditions have normalized or something close to it.

ABOOK Apr 2014 TIC Total

It is a far cry from May and June 2013, but the cumulative totals show that dollar dependency may be more nuanced.

ABOOK Apr 2014 TIC Official UST

There has been a tendency in recent months to put aside emerging market financial problems as a singularity. It's easy to follow that assumption as there are no longer daily currency crashes and the ubiquitous dysfunction we saw during the height of the taper-selloff last year, but that does not mean the ripples of volatility have been fully erased. And that is an important distinction that cannot be ignored, because it is not obvious.

ABOOK Apr 2014 TIC Official & Private US$

I think the chart immediately above says a lot about the current state of global finance and the dollar reserve. There was clearly a huge disturbance in the middle of 2013, but we are not yet close to resuming previous trends, suggesting something further askew. In contrast, the return of dollar functionality was quick and sharp in the middle of 2009, far greater than the pace seen today even though the assumed trough was relatively equivalent.

That would suggest, at least to me, some continuation in dollar disruption. We know that China has been enthralled by financial difficulties, and though the mainstream continues to ascribe it as purposeful policy, there is little doubt in my mind that this dollar decay is behind it. Sure enough, Chinese holdings of UST fell again, if ever so slightly, in February just as the yuan/copper crush was underway.

While the geographic dispersion of UST is not a comprehensive measure, it does contain at least clues about "who" might be doing "what." From there we can piece together "why."

The latest TIC release indicates that total foreign holdings of UST grew by $45 billion in February, and were up $176 billion since the April 2013 peak. As the charts above indicate, for a few months in the summertime it looked like foreigners were dumping UST in large quantities. So in this broad survey, it seems as if that ended in July and the robust buying resumed by August. Nothing more to fear?

ABOOK Apr 2014 TIC Geography

The red line above is the thirteen largest individual national holders of UST plus the Treasury's remainder column of "All Other." As of February, the conglomeration here represented 83% of all foreign UST holdings.

Again, as the red line indicates, the interruption in dollar acquisition (of which UST is a proxy) appears temporary and mild. However, if we subtract the influence of Belgium and Japan the pattern changes in full. What once looked like a return to normalcy is revealed as durable funding difficulties. Since Belgium and Japan largely represent developed world central banks and governments (Belgium as a conduit of European entities public and private), that leaves the whole of emerging markets, including China, within the green line shrinking UST exposure.

I could speculate as to the sudden interest of Japan and Europe in U.S. sovereign debt, but the emphasis here is the wider dollar problem. As is always the case with crisis, nothing is linear. I take this as a signal that although dollar travails have been rendered far less visible in more recent weeks and months, they are not yet extinguished. Call it an ebb in the taper/tightening flow drama that remains. Given the stasis state of the eurodollar market, I am at least somewhat surprised that the results are not more benign (and they may well be in upcoming months). That might recommend a precarious position in these emerging markets should another bout of tightening ensue at some point. That extends beyond just China.