Phorgy Phynance

Archive for the ‘Savings Glut’ Category

Petrodollars and the reversal of the savings glut

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An interesting article from the WSJ:

How a Gulf Petro-State Invests Its Oil Riches

Now, I am an admitted amateur when it comes to macroeconomics and asset management. I did have a pretty fantastic immersion in the subjects for two years, but realistically, what can you learn in two years when you are starting from basically zero? Not much. But I’m continuing to learn and be fascinated by them.

I’ve learned enough at this point though that I can start to be irritating by voicing my amateurish opinions. One of my amateurish opinions was that a “fight to quality” may not include the typical safe haven, i.e. US treasuries. Of course I got scoffed at and had raw vegetables thrown at me for being so hysterical. I’ve written about it here so far

I’ve also talked about a possible reversal of the oil savings glut here:

I’ve also pointed to an interesting Times article, US financial watchdog says economy at risk from ‘non-ally’ bondholders here:

Anyway, there is a bit of all of this rolled up into one in the WSJ article above. Here are a few snippets:

The investments he has since pursued put his fund at the forefront of far-reaching change in how the oil wealth of the Persian Gulf is deployed. Instead of mostly U.S. Treasury securities, Kuwait now invests in things like higher-yielding bonds, Chinese office buildings and Asian private-equity funds. And, in a move with implications for the strength of the U.S.’s currency and economy, the Kuwait fund is de-emphasizing holdings priced in dollars.


Mr. Al-Sa’ad learned that Yale was 28% in stocks, 17% in private-equity funds and 20% in real estate at the time. Kuwait was 2.5% in real estate and 1.5% in private-equity funds. The bulk of its money was in U.S. Treasurys. Despite that hoard, the fund had enough losses elsewhere that its returns were negative in 2001 and 2002, Mr. Al-Sa’ad says.


“We must deploy the money in a way to keep Kuwait going when the oil is gone,” Mr. Al-Sa’ad says. “We don’t have the cheap labor of China or the services of Switzerland or the efficiency of Singapore.”

[Note: What?!]

That shift might lower the appetite for low-yielding investments such as the bonds the U.S. government must sell in large numbers to finance its budget and trade deficits. All else being equal, reduced buying of Treasurys and other U.S. securities would tend to weaken the dollar and make U.S. exports more competitive globally, but also burden businesses and consumers in the U.S. by pushing up interest rates.

As Mr. Al-Sa’ad moves away from assets priced in dollars, the euro and the pound sterling, he is moving toward the South Korean won, Malaysian ringgit and Indian rupee. The yen is his least-favorite currency, though, because it’s so volatile. When he was a young trader, he says, he used to get up at 3 a.m. and trade the Japanese currency. “I don’t remember a day I made money trading yen,” he says. “This currency made my hair white.”

Meanwhile, Kuwait’s central bank also has less need to buy U.S. dollars. In June, Kuwait stopped pegging its dinar to the dollar. So Kuwait no longer needs to buy dollars to keep its currency from rising when cash pours in to pay for oil exports. The dinar has appreciated about 2.5% against the dollar since the link was cut.

All very interesting, at least from the perspective of an admitted amateur armchair analyst 🙂

Written by Eric

August 25, 2007 at 10:37 pm

Never underestimate the power of the retail investor

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One of the possible explanations for the bond conundrum, i.e. longer-dated Treasury yields seemingly independent of the short end, has been the Asian savings glut. Two factors that impact the savings glut are the increasing wealth of oil exporting countries and of Asian economies.

What could undo the savings glut? One would be a stabilization in oil prices. Another would be decreased savings rates in Asia.

I just spent the last week in HK and if you weren’t aware of the investment craze going on there and in mainland China, you should quickly educate yourself. Everyone is obsessed with the stock market. People are borrowing money against their houses to invest in stocks. That doesn’t sound like a culture particularly interested in keeping up a high savings rate. As Asian investors move assets from savings to investing, what will that do to the US Treasury curve? Currently, it seems that increased oil wealth is holding down yields, but I don’t think that is sustainable. Especially as oil producers are diversifying away from the USD.

Another sign of Asian investor’s decreased willingness to save comes from Japan, where it makes perfect sense. Why save when the interest rates are so low? One thing I’ve been keeping on the back of my mind for the last few months is the impact of retail investors in Japan.

Here’s an interesting article that came out Friday in the TimesOnline:

The kimono traders
Japanese housewives have ditched their traditional subservient image for the world of currency trading – influencing both international markets and Japan’s economy.

Here’s an excerpt (my emphasis in bold):

Yuko Kuriki, the instructor, says women want to use the markets to assert their independence as thinkers and create their own financial security. “Japan certainly has a sense of embarrassment about individuals getting rich but people have come to realise that without risk, you can’t get anywhere so there is a shift from savings to investment. Some women are now risking the family savings on stocks and forex: some are worried about their future, others are unashamedly greedy,” she says. “We are a culture that is traditionally most concerned with not losing money, rather than making lots of it. But the country has offered no yields for a decade so we have had to become investors.”

Written by Eric

August 5, 2007 at 8:35 am