RED ALERT - Don't trust the TIC data

Friday, May 20, 2005

I have voiced my concerns about the reliability of the most recent macroeconomic data issued by the US administration repeatedly in earlier posts here, here and here. Other bloggers like Barry Ritholtz and CalculatedRisk have also been puzzled about some indicators. Leave suspicions aside and open your data archive, here comes the proof that the administration is altering data in a way that cannot be excused with statistical adjustments. All it needs is a comparison of the latest Treasury Inflow Capital (TIC) data, published on May 17 with the data published on March 15, which I reported on in this post. I apologize for still not being able to publish tables and graphics due to my average-only computer skills. But read on and follow the links and I am confident you will have to wipe some foam off your mouth and what will likely remain is a bitter taste.
Readers will remember that markets jumped (surprisingly) on Tuesday when the latest official set of data showed that net capital inflows fell roughly by half to 45 billion dollars within a month. TIC data cannot be disregarded as meaningless. After all they are a good measurement of how much a country is trusted in the international investment community. But the numbers do become meaningless when their new historic values deviate up to 38 percent from preceding historic values. Analysis on the basis of flawed data makes as much sense as turning to an astrologer for the future direction of capital markets.
While the grand total of inflows was changed downwards from 1,960 to 1,908 billion dollars or 2,7 percent less, the detailed country figures of America's biggest lenders show amazing changes. All figures below are in billion dollars. New is the amount stated in the May release, old are the figures from the March release of the US Treasury.
Japan new: 679.3 old: 701.6 difference: minus 22.3 or 3.2 %
China new: 223.5 old: 194.5 difference: plus 29 or 14.9 %
Caribbean new: 94.2 old: 92.5 difference: plus 1.7 or 1.8 %
UK new: 100.3 old: 163 difference: minus 62.7 or 38.5 %
Taiwan new: 68.3 old: 59.2 difference: plus 9.2 or 15.4 %
OPEC new: 67 old: 64.7 difference: plus 2.3 or 3.6 %
Korea new: 53.6 old: 67.7 difference: minus 14.1 or 20.8 %
Germany new: 53.8 old: 57.1 difference: minus 3.3 or 5.8 %
Hongkong new: 45.3 old: 59.2 difference: minus 13.9 or 23.5 %
Switzerland new: 41 old: 50 difference: minus 9 or 18 %
Luxembourg new: 41.8 old: 29.3 difference: plus 12.5 or 42.7 %
Canada new: 35.4 old: 43.4 difference: minus 8 or 18.4 %
All other new: 125.8 old: 141.3 difference: minus 15.5 or 11 %
The US Treasury has not published an explanation for the changes in the data sets, which are not limited to the January data. The data of earlier periods has been altered as well. Data of the smaller lenders were omitted whereas small means below 30 billion dollars.
If you want to read more doubts and details on this matter, I recommend Rob Kirby's article on Financial Sense. Mr. Kirby has included facsimiles of the two differing datasheets in his story that dives much deeper into the matter, outlining some irregularities in the development of bond yields.
What is most interesting is the change of the UK detail data. Tony Blair and the Bank of England are faced with enough problems at home than to spend taxpayer's money on US debt paper purchases. The Bank of England has already gambled away enough billions by selling a big part of its gold reserves around the millennium for no apparent reason. At these times gold traded below 300 dollars.
As the British pound has risen against the dollar even stronger than the Euro did, purchases by the British central bank must have brought sizable paper losses so far. If the Bank of England has been able to hedge its currency risk, some other market participants must be sitting on these losses now. Is it a coincidence that rumours of a big hedge fund about to go bust have surfaced in the very recent past?
Truth is always the first victim in times of war
Remembering the careless handling of truth by the Bush administration in so many matters like the reason for the invasion of Iraq, the gross disrespect for human rights in the torture camps Guantanamo and Abu Ghraib and now also in Afghanistan, the difference between exit polls and the actual presidential election outcome 2004 (in the Ukraine the US demanded - successfully - a new vote for exactly this reason), the idea that officials are tempted to fiddle with some data in order to keep the game running cannot be pushed out of the window.
Looking into the carefree spending habits of the White House and its affiliates and the foreseeable problems like energy supply, discussed in this post, the state of a slowing economy that has outsourced its productive capacities and a nation that constantly spends 6 percent more than it takes in leaves room to some second thoughts. Add into the picture the huge growth in US money supply and there is more than just one reason to worry about the future of the global economy. Too big to fail does not work out on the international level. Debts and war have always been the two main reasons that brought empires to their knees. No country has ever amassed so many debts as the US who will owe the rest of the world 8 trillion dollars by yearend. At the same time the US are engaged in a war with no exit strategy and are confronted with rising hostility in the Muslim world and Latin America.
One blogger attributed my suspicions about the recent economic data with the quote "the Prudent Investor smells a rat." I would rather say, I cannot pretend to ignore the smell of a heap of elephant droppings in financial and political matters.
UPDATE: Mark Thoma (economistsview) enriches blogosphere with the latest approval ratings of president Bush and his handling of the US' most pressing problems. In short they slid to much lower levels since January and except for the fight against terrorism are all below the 50-percent mark. The question what is influencing his overall approval most brought the economy to the top of the list.


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