Wednesday, November 3, 2010
Richard W. Fisher, president of the Fed bank of Dallas, said last month:
In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin.Shahien Nasiripour fills in some details today on why Fed policy is indeed helpful ... just not to America:
[I]f it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased.
No wonder the developing world is experiencing a huge asset bubble. See this, this, this, this, this, this,this, this and this.
"Firms continue to cut back on their capital expenditures and R&D outlays," analysts at JPMorgan Chase said in a September report. Money spent on long-term investments and research and development represents less than 55 percent of operating cash flow at the non-financial companies that make up the Standard & Poor's 500 index. It's down from a high of more than 85 percent as recently as 2001, the analysts noted.
But money is flowing overseas.
The proportion of capital expenditures spent abroad has risen from 18 percent in 2001 to 27 percent in 2008, the JPMorgan analysts wrote. It's likely higher today "thanks to growth opportunities prevalent in emerging markets."
On Oct. 29, the Treasury Department reported that U.S. portfolios held some $6 trillion of foreign securities at the end of last year. At the end of 2008, U.S. portfolios held $4.3 trillion in foreign securities.
The trend continues this year. There's been a net outflow of money from domestic equities every month since May, according to the Investment Company Institute. Foreign equities, on the other hand, have been growing.
In other words, the Fed's next round of asset purchases may not help American families. Rather, it may benefit the citizens of other nations.
Indeed, as AP writes today:
In fact, the Fed has been using our money to bail out foreign countries for years. See this, this, this, this, this and this.*
Stocks in developing countries are a likely candidate for the next bubble. Cash from Europe and the U.S. has plowed into emerging markets, such as Brazil and Chile, since the financial crisis, largely because these countries have less debt and faster economic growth than in the developed world.
"I think bubbles are the main villain in this piece," Grantham says.
Cheap debt provided the fuel for the housing bubble, allowing home buyers to take out larger loans on the belief that somebody else would buy the house at a higher price. Fed chief Ben Bernanke's answer, Grantham said, is to start the cycle over again by blowing a new bubble. "All they can do is replace one bubble with another one," he said.
Nasiripour also documents:
- Big corporations have gotten wealthy from Fed policies like quantitative easing, while Main Street hasn't seen a cent (see this for background)
- Banks won't lend out extra cash sitting around, but will just deposit their excess reserves at the Fed or buy treasuries. "Dumping another trillion dollars into the system now will most likely mean they will follow the same path into excess reserves, or government securities, or 'safe' asset purchases," Kansas City Fed president Thomas Hoening said Oct. 12. (see this for background)
Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., told clients last month that "lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry." "This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced," Grantham, whose firm manages more than $104 billion, wrote in his latest quarterly newsletter. "It is likely that there is no net benefit to artificially low rates." (see this for background)