US Recession? Part VI

Foreign Investment in the US can be on the Decline

There are 6, if not more, existing conditions that can cause a major loss of confidence of foreign investment in the US:

The US markets experience a Long Term Capital Management style crisis or more hedge fund closures such as the 2 of Bear Sterns recently.
A faltering US economy led by the collapsing housing market and declining automotive market.
Rising trade barriers and protectionism. The latest negotiations to try to secure a new global trade deal collapsed without agreement.
Recovering of the Japanese economy. Japan is one of the top 3 holders of US treasuries.
The increasingly significance of the Chinese economy. China is also one of the top 3 holders of US treasuries.
Middle East conflicts.
Back in 1999, foreign purchases of US financial assets issued were only accounted for in the range of 50%. It has been growing to now nearly 80%. Given the above existing conditions, foreign investment in the US based on the belief that the US is the best place to achieve the highest returns at the lowest risk can be on the decline.

In August 2007, foreign central banks and governments dumped a whopping 3.8% of their holdings of US debt. China, Japan, and Taiwan have been leading the sell off, which has caused the steepest decline since 1992.


Private Equity

Like the once high flying venture capital during the dotcom boom, hundreds of private equity deals done over the past few years will fail. The rise and fall of investment in private equity by individuals and institutions, and investments by private equity firms in US corporations will mirror the rise and fall of the venture capital investment.


Conclusion

The combined recessionary pressures due to the collapsing US housing market, the decline of foreign investment in the US, and upcoming failures of private equity will be major. US recession is inevitable. Financial markets will come to that realisation in the next 3 to 6 months. US unemployment will rise, subprime contagion effect such as the recent Northern Rock event in the UK will be one of many to come, while words of comfort will continue to be spelled out by the politicians and regulators who are supposed to prevent it all from happening.


Related posts:

US Recession? Part V
US Recession? Part IV
US Recession? Part III
US Recession? Part II
US Recession? Part I

Posted by Boon at 1:25 PM