Are Capital Inflows Propping Up U.S. Markets?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It seems likely that significant capital inflows are helping prop up asset valuations in the U.S.

Nobody really believes the official narrative that the "recovery" is powering the remarkable strength of U.S. stocks, bonds and real estate. The real Main Street economy is quite obviously struggling, outside the energy and Federal government sectors, and so many see the Federal Reserve's free money for financiers (a.k.a. quantitative easing) bond and mortgage-buying programs as the real reason bond yields have declined and stocks have soared.

This view has the strong merit of relying on the basics of supply and demand: if the supply of nearly free money expands while the quantity of stocks, bonds and real estate shrink, remain stable or expand at lower rates than nearly free money, the flood of liquidity will push the price of assets higher.

The Fed's suppression of interest rates has generated another powerful incentive to buy assets that generate some sort of yield: with safe Treasuries yielding so little, "risk-on" assets like stocks and junk bonds have soared due to strong demand.

But the notion that the Fed is the single cause of U.S. markets' strength doesn't quite explain why the Fed's massive reduction in QE from $85 billion/month to $25 billion/month hasn't sent markets dependent on the Federal Reserve's free money for financiers into a tailspin.

For an example of what the Fed's tapering should do if it is indeed the dominant causative factor, we need only look at what happened to peripheral capital markets in 2013 when the Fed started tapering: they tanked as speculative inflows dried up.

This leads us to wonder if capital inflows into the U.S. aren't a largely overlooked driver of rising U.S. markets. Capital inflows are certainly a factor in the buoyancy of U.S. real estate, as various estimates peg recent Chinese purchases of U.S. housing at $22 billion--and this is only a snapshot of a much larger flow of capital flowing into the U.S. real estate market from Russia, the mideast and Asia.

While capital inflows into U.S. stocks are difficult to monitor, U.S. stocks provide the same relative safety to global capital as U.S. real estate: a strong rule of law, liquid markets, and a lower risk of bail-ins, confiscations and prison sentences for ill-gotten gains reaped overseas.

Please note the phrase relative safety: there are no absolutes when it comes to central banks and states, but as conditions deteriorate elsewhere, the flexibility and wealth of the U.S. provides a relative security that may not match Switzerland, but it offers other benefits, for example, a broad and deep range of assets for sale.

Much has been made of global capital leaving U.S. Treasury bonds. For example, Foreigners Dump Record Amount of US Securities, But Who the Heck Is Still Buying? (Wolf Richter).

For years, observers have seen the massive Treasury holdings of China as a potential financial weapon: were China to dump a trillion dollars of Treasuries, that would crush the global market for U.S. bonds. (I have always held the Fed could issue a fresh $1 trillion and buy the lot in one fell swoop.)

The discussion of major foreign holders of Treasury Securities, i.e. foreign states and central banks, often overlooks one key driver of this trade: states seeking to weaken their own currency to boost exports sell their own currency and buy U.S. dollars. This increases the supply of their own currency, pushing the value lower, while the increased demand for dollars pushes the value of USD higher.

In terms of currency pairs, this weakens the currency of the buyer of Treasuries in relation to the dollar.

This is the root of the beggar thy neighbor approach to weakening one's currency at the expense of one's trading partners. But since every central bank that issues new credit-money effectively weakens its currency, this game has limits, as every major central bank has pursued easy-money policies such as quantitative easing.

In other words, major holders of U.S. Treasuries such as China and Japan have an over-riding incentive to keep buying Treasuries: keeping their currency either stable or weak vis-a-vis the U.S. dollar.

Private capital could well be selling Treasuries in order to buy "risk-on" assets such as corporate bonds, stocks or real estate, but there are other reasons for managers of private foreign capital to keep cash in U.S. Treasuries: the market is very liquid, and ownership of Treasuries is also a bet that the dollar will strengthen in relation to other currencies.

Given the increase in geopolitical tensions and other conditions--for example, Fed tapering--this is not a bad bet. Consider the trading range of the U.S. dollar since the 2008 global financial meltdown: the USD has drifted in a relatively narrow band.

Put these various factors together and it seems likely that significant capital inflows are helping prop up asset valuations in the U.S.

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Spitzer's picture

Petrodollars looking for a place to sit. They are USD so they have to be pissed away in the US.

The only threat to the status quo. Putin.

LawsofPhysics's picture

...and any trading partners that agree to trade with Putin outside of the dollar.

"Full faith and credit"

NidStyles's picture

Where does everyone think these extra USD are from...


This is the start of the return home trip for the USD. It's going to be very ugly.

MalteseFalcon's picture

What are the returning dollars going to buy?  Real estate?  Stocks, capital equipment?

Where is the problem?

andrewp111's picture

Not just Petro. China has created more credit over the last 6 years then the rest of world combined. All that cash has to go somewhere.

astoriajoe's picture

Perhaps the Chinese will be interested in some land just north of St. Louis?

dracos_ghost's picture

Nah, Detroit is cheaper. You know, that little toddling town that everyone has seemed to forget.

BrosephStiglitz's picture

Most likely this is the case.  With Japan in a death spiral, and the Eurozone coming apart at the seams there is a prospect of real interest rates rising.  Capital is seeking a market with the liquidity to park in = US.

The entire world is aflame right now and will only get worse in the short-run.

scubapro's picture



how on earth do you link a 'death spiral japan' and 'eurozone coming apart at the seam' to HIGHER rates?  if anything they liquidate there and move it here, into the largest, deepest, most liquid (and near and dear to the Feds heart) Treasury market.   Treasuries and the US dollar are where scared money goes.  $ is already climbing higher this year, next stop "weak US earnings due to strong dollar"  will push p/e ratios higher while no climb in prices.

higher rates result when FEWER people seek out Treasuries, not more.

BrosephStiglitz's picture

Higher REAL interest rates, not just nominal.  Most likely based on the risk of debt default.  There will be a risk premium charged by lenders to borrowers because of a greater risk of borrower default an unlike in the subprime mortgage crisis, and subsequent financial crisis, there will not be a lender of last resort because this time it will be nations imploding (unless the IMF steps in and I do not even know how that would work).  If the economy goes deflationary = higher real interest rate.  If nominal interest rates go higher = higher real interest rate.

That is why everyone in the financial world is "terrified of a receding wave of liquidity", ie: liquidity crisis.  There will be an increasing lack of sound money globally, by any definition.

astoriajoe's picture

strong rule of law, huh?

andrewp111's picture

In relative terms, it actually is.

astoriajoe's picture

doubly so for American based banks.

drinkin koolaid's picture

WTF Charles. You JUST figured this out. Equities are in a huge bull market. DEAL WITH IT! It's going way way higher. And to the gold bears within the next 12 months gold will have a major catch up to equities, so enjoy the takedowns, their days are numbered.

LawsofPhysics's picture

"so enjoy the takedowns, their days are numbered."  - I have, but then again, I have been hearing this since 2009.

huggy_in_london's picture

No, equities are merely in a bubble unsupported by anything other than the fed's balance sheet enlargement.

The Most Interesting Frog in the World's picture

"The Fed's suppression of interest rates..."

Do you really believe that Treasury rates would be any higher today if the Fed had not acted? I don't. In fact, in the next year I would bet that the Fed could unload their entire balance sheet and rates would still go nowhere. In fact, they would probably go lower.

Stocks, yep, they would be lower. Gold, silver,oil,HY, all lower. Treasuries, higher.

ekm1's picture

The writer is following Armstrong narrative.

Both are wrong


Market does not exist, literally.

hack3434's picture

The Armstrong narrative has so far been proven accurate...Yours well...

ekm1's picture

I've followed armstrong daily for 5 years.

He just makes stuff up. I actually "invested" money in a couple of his "predictions"

Of course I lost

garypaul's picture

I know what you mean. I tried deciphering his predictions once - all I got was `market x may go up, or down. If it doesn`t then it may go sideways`

I think I remarked on this before here on ZH.

Oh and one more thing. I know Armstrong sounds like a history professor with his encyclopaedic knowledge, but much of his writing is just copying and rehashing stuff he read elsewhere.

TVP's picture

Belgium, anyone?

I trust that ZH will keep us informed if any other countries miraculously purchase 2/3 GDP worth of US bonds.  There are bound to be more.

The question in this headline ought to be rephrased, as to ask,

"to what extent are massive capital inflows propping up U.S. markets, and who the hell can possibly be coordinating this shit from an international perspective?  Why do we allow this to continue unabated?  What can we do to bring these assholes to the fiery justice they so deserve, before the whole shit house goes up in flames??"

Ask the right questions, and the ponzi shall be exposed to the fullest extent.



RaceToTheBottom's picture

QE foreigner = QE forever = QEn

Rooter's picture

This may well be a case that capital outflows have not hurt the U.S. stockmarket.  With institutional investing comprising banks, insurance companies, pension funds and private equity, interest rates have really not supported evidence of decreasing stock valuations simply because there aren't that many places to go for return.  Also, as dismal a portrait portrays real employment numbers, companies laying off workers and the not so certain real estate marketplace in many pockets across our nation, there is a vital demand from a consumer who wishes quality and in many cases competitive pricing both which are working overtime to rebuild a country that had seen the devastating downturn of the second greatest depression that many could have faced.  America has seen adversity since the subprime lending scandal hit and many were not prepared to handle it.  However now,  there is a will in the air to survive and with that fragrance a stronger America will follow.  I do not see interest rates going up in 2014 or 2015.  The equity markets are probably the most important kindling for a robust economy with what we are facing now.

disabledvet's picture

Well German yields are WAY lower than US maybe we can start comparing Apples to Apple so to speak here.

Since the euro has massively appreciated against the US dollar until a few weeks ago (as with Cable) why not go long US equities? Japan sure is.

Meanwhile "back at he Ranch" any nothing going on so yields keeps falling because the US economy refuses to come "un-in-the-tank." Prices are rolling over...defaults still loom as massive threat here. It ain't like the war news is good (from a spending perspective) as Generalplan Obama is executed upon.

There's a ton of Government capital sloshing around here which is growth negative and cash flow negative to. The dollar surging is not growth positive either. One look at the price differential between Columbian and US based coal is all that needs knowing there.

Affix the value of that dollar or watch the value of said non treasury debt plunge.

SAT 800's picture

It must be the case that Europeans are buying the US Stock Market, and the Long Bond. This is verified by the US$ Index performance. I doubt whether there's much more left in this source; but time will tell.

Peter Pan's picture

The word manipulation does not appear even once.
So should I assume the plunge protection team or whatever the group is called these days, is not tampering with the free market?

Atlas Crapped's picture

At this stage in the currency hyperinflation, there's quite a bit of "strong dollar" asset propping. Mind boggling how long it takes to break the fiat bank, but ... it will.

Mr. Ed's picture

Very good post here!  A lot of small insights that are really on the mark.

vnct's picture

its now blatantly obvious that the US can print what it wants and use this 'wealth' in a last stretch to further its own (the governments) interests. The only way out for the 'other' countries is to counter this debt based wealth transfer by creating a new monetary standard where by savings are rewarded and inflation is not a goal but a pure market mechanism not induced by debt and money printing.


AdvancingTime's picture

I contend the government of Japan is busy bring money back home by dumping US bonds which tends to support the yen. At the same time the people of Japan are moving their wealth and savings out of Japan and much of it is flowing into the stock market in America. This is a wash but does help answer questions as to why as the yen has moved lower US markets rally. At some point the yen will continue its fall and US markets will fail to rise because they are overvalued.

As inflation begins to rise and Japan's stock market falls the tsunami of  money fleeing Japan will  constitute the end of the line for those still holding both JGBs and the yen. This has been a long time coming and I contend the cross-border flow of money leaving Japan is why some stock markets have remained so resilient . When Japan crumbles it will be felt across the world. More on this subject in the article below.

talisman's picture


The apparent magnitude of things depends entirely
on which end of the telescope they are viewed from.
This concept provides a useful perspective to understanding
whether the value of something has increased,
or whether the value of what is given in exchange
to acquire it has simply diminished