Tuesday, February 12, 2019

Are US Financial Assets Getting Riskier?

A critical yet almost secret set of global macro statistics has to do with global financial flows. When is the last time you heard the Five debating global financial flows? The truth is these financial flows are cooler than a large chocolate-covered Dairy Queen at midnight after a night at the Grill.

So let’s start at the beginning. God created heaven and the earth. No, not that far back. We are used to getting international statistics. Even President Trump talks about the trade deficit. We import goods and services from other countries. You might buy an extra cool BMW in Indianapolis but the car was probably made in Germany. That’s called a US import. The US sells goods and services to people all over the world. Goods and services produced here and sold abroad are called US exports. If a person in Riga is sipping a cool JD on the rocks, then the US exported that glorious drink to Latvia.

If US imports are greater than US exports we call that a trade deficit. Even Nolan knows about trade deficits, and he is only 5.9 years old. We read about trade deficits all the time. Every paper reports monthly changes in trade deficits, and I've even seen trade deficit written on a bathroom wall.

Trade deficits are the beginning but not the end of trade. We also trade financial things like bonds, stocks, real estate, and parts of companies. Already, I see you napping, Tuna. But please stay awake. Remember the Dairy Queen reference above. This stuff is going to blow your shorts off. Okay – Tunas don’t wear shorts.

Nowadays, the financial surplus and the change in the financial surplus are the big sharks in town. Note the following:

  • A trade deficit means money flows out of the US.
  • A financial surplus means that money flows back into the US.
  • What goes up must come down – and what goes out must come back in.
It's pretty simple. If we buy a bunch of BMWs we have to send dollars abroad to buy them. When we sell J&D to Latvians, dollars come back to the US. But if we buy more BMWs than we sell JD, then some of the money stays abroad.

Aside from using those dollars as wallpaper in German bratwurst stands, those extra dollars find their way back to the US when foreigners buy US stocks, bonds, etc. And when it comes back like that it creates a international financial account surplus.

We don’t yet have fourth quarter data but I can tell you these changes happened from the third quarter of 2017 to the third quarter of 2018:

  • Financial outflows from the US declined from $374b to $132b.
  • Financial inflows into the US declined from $504b to $152b.
  • Net financial inflows went from a net inflow of $130b to a net inflow of $20b.

What do we learn from this? First during that year, both financial inflows and outflows declined. One could say there was less international financial trade in 2018 than in 2019. Second, the decline in inflows was much larger than the decline in outflows and thus the net amount of money coming back into American financial accounts fell by more than $100b. The majority of this decline came in what is labelled Portfolio Investment in funds shares and debt securities. Another significant decline came from ta reduction in Bank Loans to foreigners.

There are two reasons for this decline in financial trading. First, the US trade deficit in September of 2018 was only about $20 billion larger than in 2017. Thus, we needed less financial inflow to cover the dollar outflow caused by the trade deficit. Second, it might be a warning that foreigners are becoming less interested in US financial assets. Maybe US assets are getting riskier, and foreigners would rather buy financial investments elsewhere.

Now you are experts on international trade. Please send money or JD to me ASAP.


  1. Dear LSD. Z-z-z-z-z-z-z. Tunas don’t have eyelidz so he couldn’t completely doze off . . . . besides tunas gotta keep swimming which precludes doz’n off—a risky occurrence for a fish. Ergo he wuz forced to pay ‘tention to your stuff. There’s a sign over the blackboard in tuna class that sez something like this: Financial flowz and trade balances ebb and flow like the shallow waters in Biscayne Bay just off Beer Can Beach on Crandon Park Key Biscayne.

    Albert E, the Mensa tuna in school, sez U.S. financial flowz and trade balances are interesting and provide economistz subject matter to debate and analyze but aren’t that big of a deal in the grand scheme of Pisces Wirld. He sez the U.S. remainz the global “go to” for investment stability/safety in the long run and that flowz/balances likely reflect short-term variances in interest, exchange, and income tax rates, and countries’ general economic situation, etc. Ergo and henceforth he’s not concerned whether feriners think U.S. investment is less or more risky.

    Global ferin direct investment also declined over the past three years purportedly due to the reduction in U.S. corporate income tax rates and repatriation of U.S. multinationals’ accumulated ferin earnings—really slammed Europe. Mr. Macroman, could this decline in global ferin direct investment have presaged the decline in U.S. inflows? This tuna’s mindless inquiring mind wantz to know.

    Flowz may come and flowz may go but the U.S. will alwayz be the “go to” place, you know.

    1. Tuna, As always you are swimming with a good current and in the right direction. Your last point works because the US is the second ugliest boy at the dance. He gets to dance because their are uglier boys around. If the ugly boys get prettier, we could be in trouble.

      As for recent US inflows -- its probably a combination of things. Most of it is because of the smaller US current account deficit. Less money goes out so less money has to come back in. Also world flows are down because of various factors including trade war prospects. One would think with US interest rates above world rates and with the EU slowing considerably, that US inflows would have been much higher. But there are a lot of things going on...keep on cruising and stay out of them tuna nets.

  2. Tuna Salad anyone? The fear is that off shore economies are slowing down thus leaving the US with less demand. At the same time US citizens (legal) are keeping up the buying pace established when the economy began to boom. This may slow after the new individual tax law takes place....the one that nobody seemed to understand and that they will be paying instead of getting refunds. Next year they will have to raise the leval of tax taken out in order to not have to pay....and buy less stuff with less money.

    1. Don't get the Tuna angry -- they do not like to hear about Tuna salad! :-)

      You seem very certain about things that to me are very uncertain. We do not know how tax revenues are going to change. It will take a while. We do not know how much taxes will increase in 2020 and the size of any tax increases. And your point about imports rising relative to exports is simply not true. US trade deficits have been getting smaller, not larger. Right now I am more worried about recessions in foreign countries dragging us down than any of that domestic stuff.

    2. Dear Mr. G/LSD. Mention of tuna salad, tuna casserole, and especially tuna steak make my Pisces liver quiver. Most unpleasant.

      Last couple of dayz the TV talk’n headz report folkz are unhappy with their tax refunds—smaller than expected. Mr. G’s comment that folkz don’t unnerstand income taxes and withhold’n of such is kerect. If the amount withheld for ’18 was less than previous years due to new lower marginal tax rates then of course refunds could be less. More pertinent is the amount of federal income tax paid; less tax paid should put more $$moola in taxpayers’ handz to sprinkle ‘round the economy. Smart/informed folkz should be able to estimate their income tax liability and adjust withholding to either minimize withholding or have to write a check for a small tax payment on their 1040 return—to avoid giving Unka Sammy an intertest-free loan. Learned that in tuna school Home Budgeting 101.

    3. Dearest Chicken of the Sea, I thought you might be a wee bit touchy about the food mentions and I'm glad to see that you are back to form.
      Those Tuna schools are very highly rated.
      Your points definitely hold water and the results will only be known when we know how the tax changes affect spending. That will take a while. I still have not done my taxes and am not sure whether I can itemize anymore -- yet I might still be ahead of the game. Probably there are lots of folks like me and much depends on which method gives us the least tax liability. I might buy an extra J/D or two if things work in my favor!

  3. I think that guy in Latvia is drinking aquavit with his tuna salad sammich instead of JD. And he's probably driving a Lada and not a Bimmer. All that really screws up the inflows and outflows.

    1. The guy in Latvia is named Rai and he drinks mostly wadka from Russia and eats grilled sausage from the farm. Talk about complicated.