WHY NIIP FAILED WITH THE US
Description
As mentioned in previous posts, I have a small coffee problem. Two or three espressos a day is common for me. So once a year, normally in the summer, I take a break from coffee. The first week tends to be hell, with bad headaches and a need for long naps in the afternoon. But for me this is just my body realising how fatigued it is without stimulant effect of coffee. After a week, I adjust, and start to sleep really well. And after two weeks I feel my ability to concentrate increase. It is in this second week I had a revelation about Net International Investment Position (NIIP) and the US.
NIIP is the sum of the value of your assets invested overseas less foreigner investments into your country. A negative number mean foreigners own more of your assets than you own of theirs. I had found previously that at levels of around a negative USD 2 trillion NIIP, you should expect problems. China got to a negative USD 2 trillion private sector NIIP in 2015, just before currency devaluation fears took over. There are plenty of posts on this in my substack. Around 2017, the US also got to the USD 2 trillion level, so I started to expect dollar weakness, or stock market weakness but we have had nothing of the sort. US NIIP just keeps blowing out.
There is a very big problem with this analysis however. NIIP should sum to zero globally. A US asset, should be someone else’s liability and the converse as well. At the very least we should see a surge in a positive NIIP from Europe. We do not see this. I originally thought this could be accounted for by multinationals hiding money way in Ireland and other tax havens. I called this the “Missing Trillions”.
I am not going to lie, NIIP analysis made me a lot of money in getting bearish China when everyone else was bullish. And when something or someone is good to me, then I try and stay loyal to it. But when something is not working, I will puzzle over it for a long period of time. I want to learn from why it does not work anymore, and then make a decision.
During my recent period of coffee abstinence, and after a particular deep sleep, I had a revelation. Lets take a look at the US NIIP data. The US provides the longest data set for NIIP, and I have adjusted it in two ways. One is by GDP, to “normalise it” and the second is to split between private sector, and public sector (read foreign reserves) holdings. We are obviously more interested in private sector flows. So in the dot com boom, the private sector went negative for a while, and then dollar weakness and an emerging market boom took is positive. Since 2010, we have just seen private sector NIIP blow out.
United States
