Search for safe havens increasingly desperate

May 18, 2010

The search by global investors for safe havens is looking increasingly desperate. Net foreign investment flows to long-term U.S. securities were $141 billion in March, the most since records began, of which $108 billion was into Treasuries. Rather than a touching sign of confidence in Uncle Sam, this may derive from a more simple consideration: there’s nowhere else to go.

March saw rapidly rising investor concern about Greece’s debt position and the future of the euro, so it was not surprising that flows into American securities increased sharply. Even so, the U.S. budget position is not hugely superior to Greece’s — although its debt levels are lower — and there is as yet little action to improve it. So the flow to U.S. Treasuries, most of it from private investors presumably with other choices, is surprising.

That is, until one considers the alternatives. Of the EU countries, even Germany, with a growing export-led economy, a payments surplus and admirable fiscal discipline, is endangered by the need to fork out for the bad actors elsewhere in its neighborhood.

Japan has indulged in so much fiscal stimulus that it combines debt of 200 percent of GDP with a budget deficit at near-American levels. Poles of growth such as India and Latin America have histories of long-term insouciance about budget deficits and foreign debt respectively that make them unattractive for the risk-averse.

International equities had a very good run for a year from March 2009, but in March 2010 were poised at a short-term peak. Even Chinese debt and equities looked vulnerable as the Chinese attempted to restrain a credit bubble.

Some havens exist but they are relatively small. Canada is both well-governed and with a well-balanced economy. Australia has done well, but its housing bubble and proposed mining tax raise doubts about its economic future.

That leaves the global investor coming back to gold, the traditional safe haven. World official gold reserves in March 2010 were worth just over $1 trillion, one eighth of total reserves and one sixth of the total gold supply. Increasingly, that looks a viable alternative for the world’s increasingly skittish investment capital.

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