A Seismic Shift

Posted by on 08/10/09 in America, Debt, Global Politics

There was a brief but interesting piece in the Wall Street Journal last Thursday that encapsulated many of the trends we have been witnessing these past several weeks. In opening, the article stated that, “The Treasury Department, responding to growing demand from China and other investors, will boost the sale of inflation-protected bonds that hold their value as consumer prices rise.”  (WSJ, August 6, 2009, “US, In Nod to China, To Sell More TIPS”)

As a reminder, TIPS are generally US Treasury Bonds that adjust the principal value monthly to reflect changes in the Consumer Price Index. Thus, as inflation increases, the bonds increase in value (and the coupon payments increase proportionately). Should inflation fall, so too would the adjustments. Of course, market forces also impact the value of the bonds.

So why is this interesting?

  • China continues to indicate interest in buying securities of the US Government.
  • China wants to be better able to hedge the value of its US Government securities against inflation.
  • The request for more TIPS would seem to support expectations of rising commodity prices. Such increases can come because of both increased demand and decreased supply.
  • China is concerned about domestic inflation rising rapidly and creating more instability at home.
  • China is concerned about the value of US debt diluting still further.

These themes are underscored by those echoed in our many conversations with money managers and strategists around the globe. Generally, the following themes are dominating the near term economic outlook:

  • There is a continued emphasis on China and India as premier engines of global economic growth (with Brazil, Thailand, and other “emerging” economies close behind).
  • Natural resources and the companies that find, service, and distribute them continue to emerge as compelling opportunities.
  • Publicly traded real estate (REITs, REOCs) has been healing in terms of share price though there are continued negative pressures on rents and vacancies.
  • The U.S. dollar is expected to continue to weaken in terms of value and in how other countries rely upon it.

These themes are not new. Indeed, they were the same themes that were largely prevalent over the past several years. Indeed, one thing that the global credit crisis has NOT done is profoundly weaken the emerging economies or fundamentally alter the trend toward globalization. If anything, we may find looking back years from now that the current crisis served as a marker along the way for a seismic shift in the global economic balance of power. This is not necessarily a bad thing, but it certainly influences how one thinks of the world and how one invests.