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In the morbid gloom that the World Trade Center's destruction left behind, nothing looks certain anymore. One constant of the U.S. economy in the past decade has been foreigners' unrelenting appetite for U.S. securities. Now that seems shaky, too.
The U.S. is hooked on foreign cash. That's what finances its current-account deficit, which in 2000 ballooned to $445 billion. Net portfolio investment from abroad, which first surpassed $100 billion in 1993, hit $478 billion in 2000. This year, even as the American economy slowed, foreigners bought $290 billion worth of U.S. securities through June. At midyear, they held $1.17 trillion in bonds.
So analysts are watching anxiously for clues that the foreign money is pulling out. Aggressive selling would shock U.S. markets, weaken the dollar against the euro and yen, make imports costlier, and fuel inflation. An exodus from U.S. Treasuries could boost long-term interest rates, quashing growth.NO PANIC. Foreigners were repatriating assets even before Sept. 11. Now, some are stashing them in such refuges as Switzerland. Yet there's little panic selling. "I'd characterize it as reduction in the volume of inflows," says Robert Z. Aliber, professor of international economics and finance at the University of Chicago. Fact is, the deep U.S. markets remain safer than many. "There's probably still money coming in from Tokyo," he says.
This picture could change. The Treasury Dept. won't publish its September capital-flow data until late November. So money managers are extrapolating from their own client flows and other indicators. From Sept. 17 to Sept. 21, for example, UBS Warburg's non-U.S. clients sold a net $1 billion in U.S. equities, says Andy Lees, director of UBS derivative sales in London, replacing them with British and euro-zone stocks. In the same week, UBS clients as a whole sold a net $541 million in stocks worldwide. That's modest, Lees notes, adding, "year-to-date, including the $541 million of outflows, UBS clients put $27.7 billion into global equity markets." Half of that went to the U.S.
The dollar recently hit its lowest point against the Swiss franc since January, 2000. It has also fallen against the euro and yen. But the greenback has not collapsed. The yen's rise reflects speculation and some repatriation of dollars for Japan's fiscal half-year, which ended on Sept. 30--not wholesale sell-offs by the Japanese. So the yen is unlikely to keep rising. "Japan's economy is in deep recession," says Eisuke Sakakibara, who was once Japan's top official for currency policy. "There is no reason then, based on fundamentals, that the yen should appreciate."REELING. Why are investors not fleeing? One reason is that other regions may not be better bets. Plus, investors are reeling. "People are still in shock," says one New York bond-fund manager, whose firm handles $250 billion. "They care more about reading a story to their kids. We've had more redemptions than subscriptions, but no more than before the bombing." Some foreigners are also moving into bonds rather than out of U.S. securities altogether.
The test will be the military strike. How investors react "depends on the nature of the campaign," says Joseph P. Quinlan, senior global economist at Morgan Stanley Dean Witter & Co. (MWD
). Quinlan has studied foreign investment in global crises since 1977, and his findings are encouraging. "Since 1977, there have never been more than two consecutive months of net sales by foreigners," he says. The most protracted selling was during the second oil shock, when net outflows occurred in 6 out of 12 months in 1979.
Ultimately, money managers say, investors can't avoid the U.S. "The big question is whether the advantage the U.S. has offered over the last 5 to 10 years is going to remain," says Selig L. Sechzer, senior vice-president at Alliance Capital Management in New York. "If the federal government isn't able to protect us from terrorism, flows will be interrupted. But I still see the U.S. economy as having structural advantages over other economies. The markets will come to that conclusion." That would be one victory over terrorism. By Julia Lichtblau in New York, with David Fairlamb in Frankfurt and Brian Bremner in Tokyo