I went to an interesting conference put on by the Society of Quantitative Analysts last week. The first speaker was Alessio de Longis of OppenheimerFunds, slides here. He made several interesting points, two of which I want to highlight.
First, he dug into what happens in a global flight to quality episode where an increase in risk aversion causes a decline in stock prices, a rise in bond prices and a rise in the dollar. De Longis describes the safe haven dollar as a myth. He identified seven episodes since 1997 and examined capital flows over those episodes. What he found was no systematic relationship between foreign flows into the US, but rather a strong relationship between US flows and a crisis. Specifically, a tendency for US investors to reduce portfolio exposures in these periods and they speculate that this tendency is the source of the boost given the dollar in these episodes.
The second interesting point from this presentation was describing the US as a whole as giant hedge fund. By which he means that if you take the international investment position of the US you see a big net long equity position (at about 19% of GDP) and a big short fixed income position (about 41% of GDP). De Longis is saying that like a hedge fund, that the US in aggregate is borrowing money from overseas and using (part of) the leverage to buy equities. Since net international positions have to sum to zero, it won’t surprise you to learn that most other countries’ fixed income and equity positions run the opposite position.
When listening to the first part of the presentation I wondered if the authors have investigated if this pattern holds in other countries. Are asset shifts in Japan or the UK more associated with foreign or domestic flows? But after the description of the US dollar as the financing vehicle of global risk assets I am not sure that their idea should hold other places.
He goes on to build an interesting single factor foreign currency trading system, but the idea I was most interested in was conceptual shift of looking for flight to quality macro flows as being primarily a function of US investors.
This post was edited on May 26, 2015 to correct the size of the US net investment positions which should have been expressed in terms of US GDP not world GDP.