Money Flows Suggest Continued Investment Into US Markets

“Davidson” submits:

The St. Louis Fed has issued revised US$ indices the past 12mos taking into account services as well as goods with the inception 2006. A separate US$ Goods/Services Index relative to Emerging Markets differs from the more inclusive Broad Goods& Services Index and supports the theme presented earlier based on Western-style portfolio manager reliance on Modern Portfolio Theory. There is anecdotal evidence supported by falling Sovereign Debt rates to 5,000yr lows(negative in some instances) and record low yields in utility common shares and REIT yields that there has been substantial capital flows back to Western markets as Western investors developed and built-out Emerging Market opportunities in the process of seeking higher investment returns. In short as Westerners invested in Emerging Markets a substantial quantity of that capital boomeranged back seeking greater safety in Western protections to property values. Emerging Market investors took advantage of global markets and escaped autocratic wealth confiscation and the loss of purchasing power by sending their newly liquid capital West.

Modern Portfolio Theory has dictated, since inception in 1952, that Western portfolio managers incorporate all suitable markets in proportion to their market presence. There is no consideration that many foreign markets do not abide to US accounting, legal or securities regulations. The earliest signs that equity capital deployed into Emerging Markets was finding its way back to Western markets as investments in Sovereign Debt and real estate(directly and via REITs) can be traced to the late 1990s in Sovereign Debt rates. The pattern became more obvious with the development of global market indices. Foreign market indices, long a practice of institutional advisors, gradually built enough of a platform to create the All Capital World Index without US Markets (ACWX) June 2008. The general pattern in global investing has been strength in the US$ whenever investors seek safety in periods of global financial stress or when US markets offer perceived higher returns. The correlations in earlier now discontinued US$ indices show two periods in particular, the early 1980s and Internet Bubble stock market of the late 1990s. The US$ rose 50%+ and 40%+ respectively.

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