(Commentary. Caroline Baum is a columnist for Bloomberg News. The opinions expressed are her own.)
By Caroline Baum
May 19 (Bloomberg) -- I've never understood the hoopla over the Treasury's report on international capital flows, known familiarly as the TIC data. So I decided to go on a mission to figure out why so many people made such a fuss over them.
Every month, the Treasury reports on transactions with foreigners that took place two months earlier. On May 16, we learned how many and what kind of securities foreigners purchased in March.
Now, this may be fascinating information from an analytical perspective. ``But if you are trying to make a trade, it's truly ancient history,'' says Neal Soss, chief economist at Credit Suisse First Boston. ``It's like looking at mutual-fund flows with a lag.''
Somehow, the U.S. managed to finance its current-account deficit in March; the dollar even rose. Does it really matter how we financed it? Are securities purchases qualitatively better than foreign direct investment in automotive plants?
I started out at the Treasury International Capital System home page, which is a navigational challenge on an already user- unfriendly site. (Note to Treasury: Please hire a good Web site designer.) I recommend bookmarking anything you might want to return to because you won't find it again.
I read the frequently asked questions on the TIC home page and all the fine print: the description of the banking claims data (deposits due to or from foreign entities), of nonbanking positions data (once I figure out what a nonbank is, I'll tackle their claims and liabilities), and of securities holdings and transactions data.
Official vs. Private
I was waiting for enlightenment.
I moved on to the data on transactions by sector, thinking maybe it was the source of the purchases that mattered. Is it bad if the private sector buys Treasuries and central banks sell?
``If the deficit is being financed privately, there's a different sense than needing official accounts to finance it,'' Soss says.
That's because official accounts -- foreign central banks -- aren't making investment decisions based on value. They buy dollars to prevent their domestic currencies from rising and park them in U.S. Treasuries. In other words, they're the buyers of last resort.
How, then, to explain the post-TIC report whining from analysts about the need for the dollar to fall to finance the current-account deficit? Those buyers of last resort -- foreign central banks -- sold $15 billion of Treasury securities, the most since August 1998. At the same time, ``that small, insignificant group called the private sector bought a record $42.8 billion,'' says Jim Bianco, president of Bianco Research in Chicago.
Accentuate the Negative
``We were presented with two pieces of data: huge outflows from central banks and huge inflows from the private sector,'' he says. ``What people took away from it was another reason to rant about the dollar needing to go down.''
They found additional reason in the total amount of U.S. securities purchased by foreigners in March: a net $45.7 billion, the smallest amount since October 2003 and half the amount purchased as recently as January. That $45.7 billion includes Treasuries, agencies, corporate bonds and equities.
Purchases of corporate bonds and equities are an indication of foreign investors' ``risk preferences,'' Bianco says. The purchase of Treasuries, on the other hand, reflects ``the outlook for the currency.''
Interpretation Issues
Just when I thought I had a handle on things, I read that ``Caribbean Banking Centers,'' a hedge fund hangout, were responsible for a big chunk of the private-sector purchases of Treasuries.
So the private sector is buying; that's good. But it's fast money; that's bad.
I was beginning to catch on. Whatever the outcome portrayed by the TIC data, it was always negative. There was no upside to this report, not to mention the multiple problems with interpretations.
First, the data aren't seasonally adjusted, so they fail to capture country peculiarities, such as the Japanese year-end in March. Second, country purchases reflect where the trade was booked, not the nationality of the end-user.
Third, and more fundamentally, the assumption that foreigners determine the trend in the markets is just dead wrong, Bianco says.
``The force of the weight is with domestic investors, not foreigners,'' he says. That's true whether it's interest rates or equities.
Back to Square One
The end of my journey was in sight. The TIC data are reported with a lag. They're difficult to interpret. And the value of the information is suspect. Maybe the report is more trouble than it's worth.
``It has no relevance to anything,'' says Ram Bhagavatula, chief economist for North America at the Royal Bank of Scotland in New York. ``It's only a partial look at what's happening to capital flows. It doesn't tell you about demand for U.S. dollar assets. It's like the drunk looking for his keys under the light because it's the only place where he can see.''
I may have come full circle, but now I have a lot more knowledge and conviction when I say: I still don't understand the hoopla over the TIC report.
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