Dear Friends,

Please review the following charts detailing the Treasury International Capital Flows data for the month of November 2008 along with some comments.

In the first chart shown, please note that the Treasury has two different methods for computing the net capital flows for each month. One uses only long term securities while a newer methodology measures both LONG term and SHORT term securities. The BLUE line is long term securities while the RED line is the plot of both long and short term securities. The BLACK line is the absolute value of the US trade balance which happens to be negative.

You will note that since July of last year (2008), when the credit crisis seemed to erupt, with the exception of only one month, notably September, foreign investors, both private and official, have been unloading long term US debt in favor of shorter dated securities. This data can be quite volatile so it is rash to make too many assumptions based off a few months activity but I would say that we are seeing what seems like the beginning of a serious trend. Demand by foreign investors for long term US debt is a measure of their willingness to continue financing US deficit spending. Should this data mark what becomes a definitive trend, that would leave only the Fed and the Treasury itself as the buyers of last resort for their own issuances.

You will also notice in subsequent charts, the move to begin with the last 2 month’s data has now been confirmed – China has become the largest holder of US Treasury debt in the world having easily eclipsed Japan which has quietly been continuing to slowly draw down its reserves of Treasuries. Who would have ever envisioned 10 years ago that the nation which is the model of free market capitalism would have become completely dependent on a Communist nation to finance its way of life.

Lastly, note that all major categories of US Debt were offloaded by foreign investors in November 2008. Bonds, Agency debt (Fannie and Freddie) along with US corporate issues were summarily dumped. The only US securities that showed net inflows were US equities.

Click here for today’s November 2008 TIC Data with commentary from Trader Dan Norcini