Gartman: Investors to Leave US

Friday, 18 Oct 2013 11:33 AM

By Michael Kling

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The United States' brush with the debt default will prompt both Americans and foreigners to move their investments out of the country, predicts Dennis Gartman, founder of The Gartman Letter.

"Will foreign investors continue to move money to foreign investment? The answer to that is resoundingly yes," Gartman told CNBC. "I suspect the damage has been severe and probably permanent."

In the week ending Thursday, investors pulled $43 billion out of U.S.-based money market funds, which invest in short-term Treasury bills, CNBC reports, citing data from Lipper.

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That was the largest one-week decline since August 2011 and a turnabout from last month when investors sent $40.7 billion into money market funds.

"Money went to the sidelines, money went to cash and now it's going back to where it was," Gartman told CNBC. "The leaching away of confidence likely has stopped."

Money appeared to flow out of U.S. stocks and into overseas funds.

Mutual funds holding U.S. mutual funds that hold stocks saw $5.2 billion of outflows the last week of the shutdown, the largest amount this year, CNBC reported, citing data from the Investment Company Institute, while mutual funds investing in foreign companies had $2.1 billion of inflows, the most in three weeks.

Adam Posen, head of the Peterson Institute for International Economics, a nonprofit, nonpartisan research organization, also foresees declining investment in the United States, because of Washington's dysfunction.

"Investors, who we need to get the economy out of the sort of slow-growth, high-unemployment state we're in, will feel much more uncertain, and will be less likely to make investments," he told NPR. "And foreigners will be less likely to make investments in the U.S. because you just don't know what the environment's going to be."

The shutdown standoff will help the Chinese renminbi become more accepted as an alternative to the dollar faster, at least in Asia, and Chinese government bonds could become seen as an alternative to U.S. Treasurys, Posen noted.

Congress approved funding to keep the government open until Jan. 15 and extended the debt ceiling until Feb. 7. Confidence in the U.S. will continue to erode if Congress again fails to reach a compromise and the government shutdown, he added.

A major question is if China will continue purchasing large amounts of U.S. government bonds.

An editorial in China's Xinhua state news agency advocated the world to start building a "de-Americanized world" and to create a new international reserve currency to replace the U.S. dollar "so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States."

Editor’s Note: Retirees Slammed with 85% Pay Cut (New Video)

Related Stories:

UC Berkeley's Eichengreen: Washington Standoff May Mean End of Dollar as Top Currency

Foreign Investment in US Trumps US Investment Overseas by Record Amount

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