Interconnected Markets

In a recent conversation with a friend, we discussed how interconnected global financial markets were (the conversation began with my assertion that the European situation could cause a lot more pain the U.S. than consensus likely believes).

Below are a few charts that outline just how interconnected things have become.

The first chart shows the international investment positions of the U.S. (the level of U.S. owned assets abroad and foreign assets owned within the U.S.). I normalized the amounts by showing the level relative to the size of the U.S. economy. As can be seen, the level of ownership both in and out of the U.S. has spiked since the early 1970's, with foreign ownership of assets within the U.S. increasing at a faster pace (U.S. owned assets abroad by almost 15% of GDP or more than $2 trillion).

The next chart outlines what makes up that $2 trillion difference. While U.S. investors own more in terms of foreign equity (direct investment and stocks) than foreign investors own within the U.S., foreign investors are much larger creditors within both the public (government) and private (corporate) sectors.

Rather than make any bold statement of what this truly means (I am trying to digest it myself), I'll instead leave readers with two (conflicting) quotes:

“A creditor is worse than a slave-owner; for the master owns only your person, but a creditor owns your dignity, and can command it.” -Victor Hugo

“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” -Jean Paul Getty

Source: BEA

Where's the Investment?

Calculated Risk posted some great recession measure "drawdown" charts:

• Real GDP / GDI
• Real income less transfer payments
• Industrial Production
• Employment

One additional area not outlined in the post was investment, which is the only component of GDP (of the C + I + G + NX) to still be in negative territory relative to pre-crisis levels.

The bulk of the decline is concentrated in residential investment, but non-residential investment has declined over that time as well.

Source: BEA

Where's the Investment?

Traveling again today, so this is all you'll get until later this evening / tomorrow from EconomPic....

In response to my post on the breakdown of GDP by decade, reader DIY Investor comments:

It would be interesting if the investment portion could be broken out between housing and other and be done on an annual basis for the 00s. There may be some pent up demand building on the part of business investment which could bode well for the stock market. My best guess is that the numbers are dominated by the housing crisis.

At least that's my take.

The chart of investment, both nonresidential (structures and equipment / software) and residential below....



Some results that I found interesting:

• The residential boom doesn't look so large as compared to previous cycles, though the collapse is rather epic (and will only get worse)
• Investment in structures has been flat going on 20+ years (outsourcing?)
• After the (telecom) investment bubble in the late 90's / early 00's, equipment and software investment is at a 50 year low (the potential that there is pent up demand for new investment)
  

The result... a huge lack of investment. As EconomPic has detailed before, this was a partial cause in the jump in profits over the past decade (less investment temporarily increases the bottom line) and now growth is slowing (innovation helps increase the top line / economy).

Source: BEA