“The two most powerful warriors are patience and time.”
-- Leo Nikolaevich Tolstoy
As bearish as I am on Treasuries right now, in recent days I've heard some compelling arguments why it might be some time before inevitable inflationary pressures drive yields higher. Please don't think I've reversed my position, because I haven't; I still expect Treasuries and the dollar to fall apart when Fed policies finally reach the broader economy. Once the storm comes, the United States will never fully recover; the financial center of power will shift to Asia, and the dollar will collapse. In the meantime, however, Treasury yields may hover at historic lows.
The first argument has to do with the biggest U.S. creditors -- China and Japan. In recent weeks, I've pointed out many times that both China and Japan hold trillions of dollars worth of U.S. Treasuries. I've suggested that both governments might be losing their appetites for U.S. debt for several reasons:
1. Treasuries are paying absurdly low yields.
2. The U.S. consumes excessively and manufactures very little. It is the biggest debtor nation on earth. I don't care what S&P says -- the U.S. is a credit risk if ever there was one; China and Japan aren't stupid.
3. Both China and Japan are experiencing severe recessions, and their ability to fund U.S. debt has been curtailed.
4. Both Japan and China must fund their own economic stimulus packages, and one way of doing that might be to liquidate U.S. Treasuries at all time highs.
One question I frequently hear is this: "If the Chinese and Japanese aren't going to buy Treasuries, what will they buy?" Eventually, the answer will be commodities -- especially precious metals. Also, China, because of its increasing need for oil, will undoubtedly use its cash to increase its reserves.
