Tuesday, November 27, 2007

Hey, Foreigners Holding Devaluing US Dollars: US Assets for Sale

It looks like Citigroup has found a white knight to save their skin, in the person of the Abu Dhabi's national investment fund. According to this article at the International Herald Tribune, Robert Rubin himself went over there to get on his knees and beg them to save the company. (I think I'm exaggerating, I hope I'm exaggerating,....)

drowning
[Thanks to homeschoolstudentplanner.com for the image.]

I feel like we're living in an Alice in Wonderland kind of reality. You see nothing on the surface; but behind that mirror, there's a whole lot of strange things going on. Sure, unemployment is still under 5 percent, but behind the scenes Wall Street is scrambling, the Dow is jittery, gold keeps testing its nominal high from back in 1980, investors are fleeing to bonds, and credit derivatives are reaching an all-time high (a speculative strategy that wagers on price movements in both directions for all kinds of things, and that are presently betting someone is in for some huge losses).

Countrywide has resorted to borrowing from the semi-government banks to save its skin, the English bank that had lines out its door a few weeks ago is now considering a merger with the Virgin Atlantic people, the economic community is split about our future: either we're headed for a recession or everything's just fine ... all this while we go about our business drinking our coffee, going to work and pulling out the credit cards like nothing was happening.

Yep, the big banks are in trouble, and they're trying not to show it. Meanwhile, the Fed will probably have to lower its target rate in December, contrary to what they said earlier; and this means that the dollar will tank even more.

Holding dollars, therefore, is no longer very interesting from an investment point of view, and large investors are diversifying. One of the things they do to diversify is to buy assets that have a dollar price tag. That way, they can get rid of the silly paper they're holding that is worth less and less, and they get something real in its place. A hefty share of Citigroup is one of those things. We should be seeing a lot more of this (i.e. foreign purchasing of American assets) before all this blows over.

I guess Congress will think twice about questioning this sale to the Saudis. Remember the port deal that fell through? Now we're thanking our lucky stars those same Arabs are still in the game.

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