US Dollar: The Unsafe Safe Haven
Stocks in, dollar out. That was the mood in the markets yesterday. One half we can understand. The other has us flabbergasted. That investors would sell the dollar seems like a no brainer. That they would buy stocks seems like a got-no-brainer. So, what gives?
First, the comprehensible: The greenback slipped about half a percent during yesterday’s trading. The papers attributed the selloff to allayed fears over Greece’s implosion and stronger economic data out of the States. For the sake of illustration, let’s pretend that Greece really is back to beach parties and ouzo-fueled debt orgies and that what passes for government “data” in the US is actually tenable (rather large concessions, you’ll surely agree). Why would people take the news as a signal to sell the dollar?
Curiously enough, the dollar is still considered by many to be the world’s most reliable currency, the island to which all flights of safety are destined. Ergo, when the tide of risk recedes (or is at least perceived to have receded), once-skittish investors emerge from their dollar-clad bunker to re-enter the world of reckless speculation. Financially speaking, the dollar falls during periods of economic peace and rallies during times of war.
The thinking behind this is, of course, utterly ridiculous. As far as safe havens go, the dollar is about as secure as a dam constructed out of papier-mâché. Some 97% of the dollar’s value eroded during the course of the last century…a third of it washed away in the past decade alone. Who in their right mind would store their wealth behind such flimsy protection? Apparently, dollar savers are attempting to build a brand new Atlantis. (There’s a Dubai World tie-in here…but we’ll leave that for another day.)
To be sure, it will take more than a single day and night of misfortune to sink the greenback. Nevertheless, there are still plenty of reasons to ditch the dollar sooner rather than later. The fact that foreign demand for US Treasury securities fell by a record amount in December might be a good place to start. According to the US Treasury Department, China, previously America’s largest foreign debt holder, sold $34.2 billion in Treasury securities during December. That leaves Japan, with a $768.8 billion stash, as the biggest holder of US government debt. Overall, net purchases of long-term US securities plummeted from $126.4 billion in November to just $63.3 billion in December, according to Treasury figures. Long story short, the most indebted nation in history is having trouble shopping its IOUs around. As a result, yields on long-dated bonds have been creeping gradually higher.
EverBank’s Chuck Butler explained the situation in yesterday’s edition of The Daily Pfennig:
“‘Indirect buyers’ are the foreign central banks, and they normally take down 40% of a Treasury issue. Well, last week, they took down only 28% of the issue… Uh-oh! But then, there were the ‘direct buyers’ upping their participation in the auction to a record level of 24%!
“Now, most of the market participants don’t have a clue what these numbers are telling us… The ‘direct buyers’ are ‘unknown.’ Yes, there is no way to tell who makes up the ‘direct buyers.’ For all we know, the Fed took down the entire amount! Why, you may ask, is this a problem? Well… if not for the ‘unknown buyers,’ the auction would have failed!
“To speak of a US Treasury auction and say that it failed would almost be akin to the day the earth stood still. We would see yields soar, and the dollar get deep-sixed. So until that day happens… every auction should become quite interesting, as long as the US continues to drive up deficit spending and keep rates at ultra-low levels.”