Anyone who contends that Ben Bernanke’s latest round of money printing is not having a material impact on either job growth and/or meaningful investment is clearly not looking hard enough…or in the right place.
While it is true that US equities have, after a rollercoaster fortnight, retreated below their pre-QE2 announcement levels…and while the employment outlook in the US remains stubbornly entrenched in economic reality, much to the chagrin of central planners/bankers with a mandate to achieve “full” employment, Mr. Bernanke’s newly created dollars are, indeed, beginning to find their way into productive capital formation and much needed reinvestment…abroad.
“You’re seeing leakage from quantitative easing,” Stephen Wood, chief market strategist for Russell Investments in New York, recently told Bloomberg. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-US opportunities.”
Readers of these pages are familiar with the recent run up in resource prices and, although a bit of the froth was blown off the commodity cappuccino during the past few sessions, the long-term trend supporting higher resource prices – i.e., voracious demand from emerging markets and the debasement of the dollar in which most of these things are priced – remains in place. But what of the emerging markets themselves? Could Bernanke’s promiscuity at the printing press actually be encouraging the flow of EZ money out of the US and into these foreign markets? Almost certainly.
“The best way to visualize this process,” writes Dr. Marc Faber, editor of the highly-recommended Gloom, Doom & Boom Report and a perennial favorite at our annual investment symposium in Vancouver, “is to think of a huge money- printing machine in the US that produces an unlimited quantity of dollars. Most of these dollars flow to the corporate sector, financial institutions, and wealthy individuals. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, and boosts economic activity and increases wealth in emerging economies relative to the US.
“Some of these dollars then find their way back to the US and support Treasury bond prices,” continues Dr. Faber, before adding, “But since fewer dollars find their way back to the US than exit the country, the dollar has a weakening tendency against emerging market currencies and, especially, against hard assets whose supply is extremely limited compared to the money that the money machine keeps spitting out.”
Indeed, in the first half of this year, figures compiled by the Commerce Department show that overseas investments by US firms outpaced the rate at which foreign firms invested in the US by an annual rate of about $220 billion. For perspective, back in the first half of 2006, when the US economy was humming along – towards disaster – and the term “quantitative easing” had not yet found its place in the common, politico-doublespeak of the day, the US was a net recipient of funds. The annual net inflow was then about $30 billion.
Such a massive turnaround was not (entirely) lost on policymakers. As Richard Fisher, president of the Federal Reserve Bank of Dallas, pondered in a recent speech, “I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”
Of course, that speech was given in October…long before Bernanke’s QE2 ship set sail.
According to data compiled by Bloomberg, US corporations have issued more than $1.07 trillion in debt year-to-date. On the surface, that might appear to be a good sign. The willingness to go into debt is, in a way, a measure of confidence…or stupidity…or, more likely, a combination of the two. Perhaps, therefore, these companies are raising cash for expansion plans, for research and development and to hire new workers. Wouldn’t that be a good thing for the US economy in general? It would…except that much of that cash will be deployed overseas, where higher growth rates offer a more attractive return on investment. The newswire cites a host of US-based companies taking advantage of this EZ money trade. Here are three of them:
- Southern Copper, a Phoenix-based mining outfit that raised $1.5 billion in an April debt offering, will use that money to improve and upgrade its facilities…at its mines in Mexico and Peru
- Cliffs Natural Resources Inc., North America’s largest iron-ore producer, will use part of a $400 million offering to repay debt…associated with a Brazilian mining project
- Valmont Industries Inc., an Omaha-based light pole and communications outfit, will use the proceeds of a $300 million debt issuance to help fund its $439 million acquisition of Delta PLC…a London-based maker of similar products.
To be clear, this is by no means an indictment of these, or any other, companies looking to shore up or expand their bottom lines by investing overseas. Rather, your editor is simply observing that money – and the companies trying to make it – invariably flows to where it is treated best. And, right now, you can mail a postcard to many of those “best” places without the need to include a US zip code at all.
But none of this should come as any real surprise, Fellow Reckoners. You can’t unleash – and/or promise to unleash – $600 billion worth of liquidity into the US market without some “leakage.” That’s especially true when the pool of growth opportunity in the United States is so very shallow, and the depth of potential in emerging markets is so very great. It’s a bit like trying to fill a thimble with a fire hose…most of the water ends up where it wasn’t intended.
By Joel Bowman