Foreign
Investors Love U.S. Assets
by Sy Harding, editor
The Street Smart Report Online
Enthusiasm
for stocks in the last few years of this record bull-market has
been unprecedented. As Arthur Levitt, Chairman of the Securities
and Exchange Commission, recently pointed out, "In the checkout
line at the supermarket or hardware store you're as likely to
hear people talking about the Nasdaq's performance as you are
the latest Harry Potter book."
It's not only U.S.
investors. Foreign investors have developed an equally insatiable
appetite for U.S. financial assets. Financial `think tank' Bridgewater
Associates goes so far as to say, "The great unsung hero
of the U.S. economic boom has been foreign capital, providing
the fuel for the most massive private borrowing and investing
spree the U.S. has seen in a century."
And there's no end
in sight. Foreign investors poured as much new money into U.S.
stocks in the first six months of this year as they did in any
full year in the past, with the exception of 1999, and now own
a record 8% of total U.S. stock market assets. But even that
pales by comparison to their record 20% ownership of U.S. corporate-bonds,
and 38% ownership of U.S. Treasury debt, almost double the levels
of five years ago.
To put the infatuation
with U.S. financial assets, and the international indebtedness
of the U.S., another way, in the 12-month period ended March
31st, the world's `surplus capital' countries, `exported' almost
$600 billion of capital. The U.S. soaked up $400 billion of it,
or 67% of the total.
Is that good or bad?
Well, so far it hasn't
just been good, but great, as it certainly helped finance and
propel prosperity in the U.S. to levels for which we should all
be thankful. The lowest interest rates, lowest unemployment rates,
and highest investment returns since the 1950s.
But every party has
to end, and here's yet another reason we'd be wise to keep an
eye on this one, in the event that foreign investors decide to
pack it in early. I particularly worry that foreign investors
might soon be awakened to the reality that they added currency
risk to normal market risk by investing in the U.S.
The U.S. dollar has
been in a powerfully strong rally since 1995, adding considerably
to the attraction of U.S. investments. However, that has not
always been the dollar's direction. Just like the stock market,
the dollar is perfectly capable of going down as well as up.
It plunged precipitously as recently as from 1985 through 1987.
It plunged again from 1989 through 1990, and from 1994 into 1995.
Why is that significant
now? Well, each time the dollar plunged before, either the Fed
was in an interest-rate hiking mode, or the stock market was
overvalued and about to enter a bear market. And as we are all
aware, the Fed is currently in its first tightening cycle since
1994, having hiked interest rates six times in the last 13 months.
That has not usually been good for the U.S. dollar.
The risk is that just
as foreign investors were responsible for creating much of the
current prosperity in the U.S. by sending their money into our
economy, so they are equally capable of pulling the rug out from
under us if they decide to bring their money home.
As if we didn't have enough to worry about now that U.S. investors have had their confidence shaken by the unhappy endings of the Internet fairy tales, the apparent topping out of the market in March, and growing earnings warnings as the economy slows, now we have to be concerned that foreign investors will stop loving us.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $225 (now in its 13th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com. Mr. Harding has been consistently ranked in the Top Ten Timers for years. He recently authored the book, Riding the BearHow to Prosper in the Coming Bear Market, $12.95. The book introduces The Seasonal Timing System© which tripled the return of the S&P 500 over the last 35 years with 50% of market risk and just two trades a year. Available at most book stores, amazon.com, barnesandnoble.com or StreetSmartReport.com.
