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It is a well-known fact that the railroads of most European countries, and also of the United States, were built with the aid of British capital.
Ludwig Von Mises
The rules providing incentives or disincentives for various classes of investors have a major impact on prices of certain types of securities.
Foreign investors played a major role in financing railroads during the 19th century.
An understanding of the forces that channel money from this or that group to certain classes of investment is essential in explaining price movements in these securities.
Some countries encourage foreign investors; others do the opposite. Municipal bonds in the US have tax advantages for domestic investors, but not for non-residents.
Different classes of investors also have distinct investment patterns. Small investors in the US favor mutual funds, giving power to fund managers.
Top-down analysis: excerpts
Here are entry points to articles about US domestic and foreign investors on this blog:
 | US Domestic Investors: Opinion and analysis of factors that influence the behavior os US domestic investors, usually classified as ‘households’ in Federal Reserve flow of funds accounts. |
 | Foreign Investors in US: Discussion of considerations that direct the actions of foreign investors in the American capital markets. |
Top-down analysis: list of articles
These essays are focused mainly on domestic and foreign investors in the US market.
- Foreign Investors - Foreign investors help stabilize US marketsForeign funds created by the record US trade deficit of $726.9 billion in 2005 were channeled mainly into the US bond market. This went a long way towards keeping bond prices up, despite massive net corporate bond issues connected with asset-backed securities (mostly mortgage related) that also set impressive records: $462.9 billion.Foreign investors purchased (net) $214.1 billion in US Treasury securities and $351.1 billion in corporate bonds.
- Foreign Investors - Foreigners reduce support for US TreasuriesAlthough foreign investors continue to be the largest purchasers of most types of US bonds, this sector showed less interest in treasuries than in the past, shifting assets into short-term repurchase agreements in Q1 2006. If the Federal Reserve continues to push short-term interest rates upwards and if foreign investors continue to move into short-term fixed investments, such as repurchase agreements, long-term interest rates may be forced higher.
- Foreign Investors - Foreigners shun US financial assetsForeign flows into US debt markets is down 99.2% from 2006 levels.In reaction to the profligate behavior of the Pelosi-Reid Congress, foreigners have been moving from financial securities and bank deposits into direct investments and miscellaneous assets, such as real estate.Continued deficit spending by the Obama administration should drive foreigners to seek safer, non-dollar havens.
- Foreign Investors - Signs of US losing its groove?Thirty years ago, about the time the world went off the gold standard, US income from abroad was more than double the amount of income that the US paid to the rest of the world.This surplus of investment income from abroad has been gradually diminishing. This year, or the next, this foreign income surplus may disappear forever. Does this mean that the US is 'losing its groove'?
- Foreign Investors - Trade deficit continues to support bondsIn Q1 2006, the excess of US imports over exports continued to provide dollars to the rest of the world, which were invested in the US bond market.Although foreign central banks reduced flows into US treasuries and agencies after the high point of 2004, the shortfall has been more than covered by flows into bonds from foreign private sources. The driving force behind foreign purchases of US bonds is not so much related to interest rates as to worldwide neo-mercantilist impulses to favor exporters.
- Foreign Investors - Will China become America's landlord?Foreigners hold $16.9 trillion in dollar financial assets, accumulated through years of selling goods and services to the US. Profligate deficit spending by the Pelosi-Reid Congress increases the probability of dollar inflation.If foreign governments were to convert their holdings of dollar financial assets into non-financial assets, like US REITs, they can guard against dollar inflation. They might also gain a position that, in the extreme, would be against US national security interests.
- Small Investors - Baby Boomers' retirement prospectsA study by Daniel R. Ackerman, CPA, suggests that Baby Boomers who count on the long-term equity returns of 8% may be disappointed, either because returns are simply not justified, or because, if they are, the supply of equities from Boomers trying to exit the market during retirement will be so great as to depress stock prices.Reliance on income-based investment, rather than capital gains, may be a more prudent strategy.
- Small Investors - Most US households do not have IRAsDespite tax benefits and a generation of strenuous marketing efforts, over half of US households do not have Individual Retirement Accounts (IRAs).In fact, 29% of US households have neither IRAs or employer-sponsored retirement plans. IRAs owners are typically middle-aged, married, college educated, and employed — and with much higher incomes than people that don't have IRA savings.Americans between 50 and 64 years without formal retirement savings have median total financial assets of only $2,500.
- Small Investors - Mutual fund sales fall to 3-year lowNet sales of mutual fund shares dropped to the lowest point in the three years 2003-2005, with net sales of $257.5 billion. Net sales of mutual funds fell almost 14% from 2004 to 2005.Weak fund sales in combination with historical over-valuation of stocks and the impending retirement of baby boomers, are a portent of weakness in the US equity market.
- Small Investors - Thriving without a credit cardRestricted availability of consumer credit and a greater propensity of households to save before spending, may result in less use of credit cards and smaller mortgages. A return, even partial, to saving habits of the 1950s could stimulate economic recovery.The popular Dave Ramsey radio and TV shows suggest that a societal change in this direction is at least possible. Lower levels of personal debt would boost the economy and make people happier.
- Small Investors - US households have trillions in IRAsAmerican households, as of December 2004, had accumulated $3,475.1 billion in tax-deferred Individual Retirement Accounts (IRAs), according to the Federal Reserve Flow of Funds Accounts.The largest portion of these savings were held as "self-directed accounts", in which a wide diversity of investment is permissible.Over the four years, 1999 to 2002, investors added $837.2 billion to their IRAs, which, added to the $118 billion in decline in value over the period, means that the market crash cost IRA savers about $955 billion.
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