BRICs Shift From Dollar

With the continuous concern about the value of U.S. currency, Brazil, Russia, India and China are considering buying each other’s bonds and swapping currencies to lessen dependence on the U.S. dollar .

The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries.

This is not something for the immediate future, but rather a direction of movement, no more than a few percent of reserves could be reinvested into BRIC bonds. What we’re seeing is a continuation of discussions to find an alternative to the dollar, yet nobody is going fundamentally to alter anything yet.

This move shows a very strong desire of developing countries to play a bigger role in world finance, especially given the growing insecurity related to the current crisis. Russia challenged the dollar domination earlier saying “There can be no successful global currency system if the financial instruments that are used are denominated in only one currency”.

In the long term, it is beneficial for all that the world needs a few strong currencies, however, it cannot happen quickly.

Reversing Stimulus is under consideration

G-8 finance ministers began drawing up contingency plans for rolling back budget deficits and bank bailouts as the economy shows signs of recovery and investors start worrying about inflation.

It’s prudent to consider what exit strategies to deploy once global growth is secured and how to do so without reigniting the two-year crisis. At the same time, it’s premature to rein back more than $2 trillion in stimulus packages.

But some politicians stressed the necessary to continue focusing on the growth now, it is too early to shift toward policy restraint according to the speech by U.S. Treasury Secretary Timothy Geithner.

The dilemma for policy makers is that withdrawing stimulus measures too soon could choke the recovery before it starts, and allowing them to last too long might push up borrowing costs.

Markets aren’t looking for specific exit strategies now, but want governments to start thinking about them. They worry that inflation is going to build up if nothing is done to withdraw the stimulus.

Foreign demand for US financial assets falls

Foreign demand for long-term U.S. financial assets fell in April as both China and Japan trimmed their holdings of Treasury securities.

The Treasury Department said Monday that net purchases of stocks, notes and bonds obtained by foreigners fell to $11.2 billion in April, from $55.4 billion in March.

China, the largest holder of U.S. Treasury securities, trimmed its holdings to $763.5 billion in April, from $767.9 billion in March. China's holdings of Treasury securities represent about 10 percent of America's publicly held debt. Japan, the second largest holder of Treasury securities, reduced its holdings to $685.9 billion, from $686.7 billion a month earlier.

Treasury Secretary Timothy Geithner traveled to Beijing earlier this month to assure the Chinese government that the Obama administration is determined to get control of an exploding U.S. budget deficit, which is projected to hit a record $1.84 trillion this year. The administration has said while its aggressive moves to fight the recession and a severe financial crisis will push up the budget deficit temporarily, it intends to reduce the deficit as soon as the economic situation permits.

With the government's borrowing needs soaring, there have been some concerns that foreign interest in holding U.S. debt might falter, causing interest rates to rise.

The administration contends that recent increases in the interest rates for U.S. Treasury securities were not a sign of investor unease but a reflection of improving economic conditions.

BlackRock balance index and active funds?

BlackRock Inc.’s purchase of Barclays Global Investors for a record $13.5 billion is the first attempt by a top-ranked fund manager to unite two opposing investment philosophies.

Managers at New York-based BlackRock, who oversee $1.31 trillion, select investments based on research, and have a reputation for spotting value in hard-to-sell fixed-income securities. BGI, based in San Francisco, has $1.5 trillion in assets, mostly in funds whose holdings are determined by the indexes they are designed to mimic. For BlackRock, which is renowned in fixed-income investing, this will be a significant departure.

BlackRock’s Chief Executive Officer Larry Fink called the deal a “transformational transaction” in a conference call with reporters.

The conventional wisdom holds that if you want to be a dominant money manager, you have to be flexible about style and strategy, in other word, you have to offer everything a potential client might want.

The debate over which style produces better returns for investors over the long term has carried on since index-based funds first appeared in the mid-1970s. Money managers focus primarily on one approach or the other. Active managers look for companies they expect to beat the market. Passive investors try to track benchmarks such as the Standard & Poor’s 500.

Diversified U.S. equity index funds declined 38 percent in 2008, edging out their active peers, which fell 39 percent. That helped persuade more investors to move to passive investing.

Index funds attracted $34 billion in net deposits last year while all U.S.-registered stock and bond mutual funds lost $230 billion in redemptions. Exchange-traded funds, which also follow indexes and trade throughout the day like stocks, added $177 billion through new sales.

Active funds have performed better so far this year. Diversified active U.S. equity funds returned an average 10 percent through June 10, compared with a gain of 7.3 percent for diversified equity index funds.

BlackRock, which acquired Merrill Lynch & Co.’s asset- management business in 2006, will become the world’s biggest money manager with BGI. The combined company, with more than $2.7 trillion under management, will dwarf Boston-based rivals State Street Corp., which oversaw $1.44 trillion as of Dec. 31, and Fidelity Investments, with $1.25 trillion.

One risk of the deal is losing customers as BlackRock seeks to fold in BGI. Any large merger between asset managers can make big clients of both firms nervous. It might spark getting put on a watch list, and it can slow down a firm’s pipeline of new business, especially in alternative investments.

Can new lending drive China economy freely?

China’s new lending doubled in May and industrial output and retail sales climbed more than economists estimated as government stimulus spending revived the world’s third-biggest economy.

New loans jumped to 664.5 billion yuan ($97 billion) from 318.5 billion yuan a year earlier. It add to accelerating fixed-asset investment and surging auto and property sales in signaling that the government is successfully countering a slump in exports. Record lending is stoking concern that China’s recovery may come at the expense of inflating asset bubbles and adding to banks’ bad loans. The pace of bank lending is dangerous and the risks include inflation, bad loans and economic volatility.

But the recovery is still fragile since this is an economy that is increasingly reliant on public demand. Aside from private residential property investment, private demand remains soft.

On the other hand, the rapid growth of credit should be regarded as a warning sign. In china, nearly always when we have financial difficulties at banking institutions, it’s preceded by rapid growth in lending.

The credit boom may help to end declines in consumer prices, however, inflation may bounce back faster than economic growth.

Hedge Fund outflow continues, but slows

Hedge fund outflows totaled $115.7 billion in the first three months of the year. Outflows slowed significantly from the fourth quarter of last year, dropping by 21%, but the first quarter was still the second-worst in terms of outflows in 15 years.

All strategies posted outflows during the quarter, but equity long/short funds were the hardest hit, with $34 billion evaporating. So far, hedge fund managed $1.18 trillion at the end of March, down from $1.29 trillion at the beginning of the year.

The lifting of redemption restrictions is blamed for the continued outflows. It suggested the outflows will continue to slow this quarter, and that hedge fund might actually begin to take in new money by the third quarter. Some larger institutional investors, especially pension funds, are beginning to come back to the hedge fund industry.