Tuesday, September 6, 2016

TRUMP FEAR: Mexicans Dumping of US Treasuries Accelerates

By Louis Cammarosano

Mr. Trump has made building a wall along the Mexican border and having Mexico pay for it a major theme of his campaign for the Presidency. Donald Trump recently visited Mexico and Mexican President Enrique Peña Nieto. According to reports, Messrs. Trump and Nieto did not discuss the proposed wall that would separate the United States and Mexico. Yesterday, however, A Mexican lawmaker indicated that any attempt to make Mexico pay for the wall should be met with a bill that would expropriate U.S. assets held in the country.

Extreme measures such as expropriation are a dual edged sword. Expropriation of another country’s assets could lead to many forms of retailiation, including expropriation of the expropriating country’s assets.

Observers of foreign holders of U.S. Treasury securites pay close attention to the holdings of the number one and two foreign holders, China and Japan. Scrutiny of holders like Belgium, Saudi Arabia and Russia also merit scrutiny.
The chart below shows Mexican U.S. Treasury Holdings from the period immediately preceeding Donald Trump’s June 16, 2015 announcement that he would seek the Presidency of the United States through the most recent US Treasury report on foreign holders of U.S. Treasury Securities. You will note a correlation with Trump’s candidacy for President and Mexico’s declining Treasury holdings, not necessarily a casusation.
Mexican holdings of US Treasuries April 2015 - June 2016

Mexican holdings of U.S. Treasury Securities have fallen steadily since Donald Trump announced his candidacy for President of the United States.

In April 2015, Mexico was the fifteenth largest foreign holder of U.S. Treasury Securities. In June Mexican holdings of U.S. Treasury Securities fell to twenty- fourth.
The “Trump Effect”?
I have received comments to the effect that “everyone is selling US Treasuries” and because Mexico’s economy is based in large part on oil exports it is shedding of US Treasuries as a result of trade imbalances and a bad economy caused by lower oil prices.
While it is true that overall foreigners have decreased their holdings of US Treasuries and a trade imbalance may cause the selling of Treasuries, Mexico’s 40% drop in just 14 months is extreme.
n.b. There are many reasons a country may sell US treasuries including diversification, economic and geopolitical. Mexico’s balance of payments are of year end 2015 were in deficit as were Brazil’s. Russia ran a surplus. Mexico’s balance of trade has improved since April 2016.
Consider Russia, a country that is also heavily reliant on oil exports. Russia’s US Treasury holdings over the past year or so have increased.
Russian Treasury Holdings 2015 - 2016
Russia has increased its US Treasury holdings as it builds it reserves.
or consider Brazil’s US Treasury holdings:
Brazilian us treasury holdings 2015 - 2016
While Brazil has fallen on hard times, it did not sell 40% of its US Treasuries.
The above originally appeared at smaulgld.com

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