Tipping Point for U.S. Treasuries?

If the day comes when the U.S. Treasury bond auction fails, it will be too late to react. With some help from the mass media, the situation is likely to get very ugly. Markets move faster than ever and once a tipping point is reached, you’ll be like every other sheep at the slaughterhouse. Seeing the signals and preparing for this potential calamity may end up being the next major investing opportunity or wealth destructive event of our lives.

Because the magnitude of its potential impact is so great (some say 50% devaluation of the USD and/or interest rates in the high teens), anyone with significant USD denominated savings should answer the key questions for themselves - even if it is simply to dispel the fear the possibility creates. At what point will the U.S. government run out of debt capacity? What are the factors that tell us when this is likely to occur? And, what is the chain reaction that follows?

To begin to answer these questions, I’ve attempted to map out the cause and effect flows that would lead to a tipping point in Treasuries. The chart below starts to identify and quantify (where possible) forces and events that can lead to a tipping point. So many different factoids are thrown around on this topic that without some framework to evaluate the issue, it is easy to get confused. This is my effort. I hope to improve it over time – feedback and facts are welcome.

click to enlarge image

The left side of the flows shows the seemingly unstoppable forces leading to substantial US government debt and continued funding of deficit spending through the sale of Treasury bonds. US leaders have clearly articulated the path they will take. Like any good democracy, it reflects the same debt bloated path its citizens have taken over the past several decades. The government will spend whatever is needed to attempt to prevent a depression and restart growth.

Until that is accomplished, US leaders aren’t going to protect against the potential pain this over leverage is likely to create. Their logic is that the spending will allow the US to grow its way out of this mess or at least ration the pain over time. What they are saying is essentially, why worry about treating your cancer, if you’ve just been shot and are bleeding to death. Besides, inflation down the road will lessen the pain of debt repayment in the long run anyway.

US public debt is now projected to reach over 80% of GDP in the near term. This excludes the huge entitlement commitments which are projected to grow dramatically in the coming decade if aggressive changes are not made. I’ve seen numbers for that liability ranging from $20-40T. The chance of the US generating fiscal surpluses to start paying down this debt, let alone not adding to the debt, is remote. The current budget proposes deficits of $1-2T per year into the foreseeable future and our democracy is incapable of inflicting the kind of excruciating pain it would cause to actually reverse this.

On the other side are the buyers of US debt. They are the ultimate deciders of US debt capacity and will be responsible for triggering a tipping point. Foreign holders represent about 55% of the outstanding US government debt. The Chinese alone hold about $750B or 15%. Their influence dramatically increased over the last year as they purchased almost 40% of the debt issued by the US that was purchased by foreign holders. Japan is the second largest holder with about $640B. Because of the concentration of holders of US debt, either one of these buyers can upend the Treasury market by halting the purchase of new bonds or trying to sell their existing holdings.

Understanding the economic, political and other forces impacting the foreign Treasury buyers decision (in particular the Chinese) to continue to hold and buy Treasuries seems to be the most critical part of determining where the tipping point may occur.

There are a number of factors affecting the Chinese decision. First is the question of how much debt the US is capable of supporting, given its GDP, before significant interest rate increases or devaluation would be required. What level is too high 80%, 100%, 120% of GDP? With Entitlement commitments, the US is already 3-4 times higher than these percentages. Some economists argue that the US could support well over 100% levels. They point out that some European countries like Italy have functioned at these high levels as well as Japan. At the deepest point in the Great Depression , US public debt to GDP reached 185%. Conversely, Ireland recently lost its AAA rating when it forecast debt levels in 2010 at 80% of their GDP.

With all the comments from the Chinese, it may be that we have already passed the level and it is only other constraints preventing them from walking away. Recent moves by the Chinese to shorten up the maturities on their Treasury portfolio have heightened this exact concern.

There are important constraints preventing China from abandoning the US Treasury even if they seriously question US credit worthiness. Many experts claim that China is too dependent on exporting to the US and cannot risk damaging that export market. China’s exports represent about 40% of its $3.4T economy with the US representing about 1/4 of that 40% or roughly 10% of their economy. The Chinese are taking aggressive steps to reduce their dependence on exports in general and US exports in particular. The $600B stimulus (which is almost 2.5 times the size of the US $850B stimulus relative to our respective GDPs) and their substantial efforts to develop Latin, Indian and African export markets are clear signs that their dependence on US exports will continue to decline. Recent reports indicate that China expects exports to fall to less than 30% of GDP within the next several years alone. The power of this constraint is waning greatly.

Another constraint on China is the use of the USD as the international currency for denominating commodity prices and as a ‘safe place’ to invest its significant reserves. Long term, the Chinese would like to remove this constraint by establishing an international currency. They repeated their desire to establish an international currency recently before the G20 meetings in London. As the US executes a policy of printing money to fund its huge deficits, the Chinese proposal will become more and more attractive to many of the larger economies of the world (in particular the Germans and Japanese who depend greatly on exports).

In addition to the risk of the Chinese walking away from US Treasuries, remember that significant changes in other critical buyers of US Treasuries could also lead to a tipping point. The recent commitment by the US to purchase 50B GBP, 80B Euros and 10T Yen may be an insurance policy they have created to provide these countries an ability to buy US Treasuries if the Chinese balk. The closer we get to the tipping point, the smaller the change required to make it happen.

The arrows leading out from the tipping point in the center to the blue boxes show the three primary levers the US has to respond. First, the Treasury can crank up rates to attract more buyers. Second, the Fed can step in and buy the bonds – effectively printing money. Third, the US government can cut spending. It’s hard to imagine any meaningful use of #3, so a combination of #1 and #2 are what we can look for.

For the Fed to increase rates, they must go directly against their basic plan of trying to stimulate growth. They also must be aware of the significant costs is adds to US debt service (something like $50B per year per percentage point). This means printing money is the only remaining option. The Fed is already executing a plan to buy $300B of Treasuries as a warm-up. Their stated policy is to continue to keep rates low to stimulate growth. They have been able to do this so far because of the strong demand for the US dollar due to its relative safety versus other currencies around the world at this time. If that psychology breaks, rates will have to move up to continue to attract Treasury buyers – another important factor to watch.

I don’t pretend to be an economist, but I feel forced to try to objectively make sense of this because of the huge potential risks and opportunities the scenario creates. It seems to me that, like many potential crises, people are not allowing themselves to accept the facts because of the magnitude of the consequences. I hope someone can give me the facts to make this go away. Until then, my plan is to continue to track the signals indicating when and where a tipping point may be reached. Stay tuned.

Disclosures: Author owns TBT

Comments

[Roger Knights:]

"It seems to me that, like many potential crises, people are not allowing themselves to accept the facts because of the magnitude of the consequences."

You've nailed it--Denial.

Apr 22 09:05 AM

[BigJake:]

I can't see the graphic you included because it is so damn small. is there anywhere I can look at it where it is enlarged?

Apr 22 09:13 AM

[doubleguns:]

If our bonds begin to fail inflation will be twice the inverse of the USD depriciating. 50% depriciation is 100% inflation rate.

Sorry to keep hammering it but gold is the hedge to alleviate some of this pain. A diversified potfolio of commodities and basic materials would be very wise.

Tipping over would happen very fast and create a lot of panic. You will not have time to move much money before you realized a serious trip to the woodshed.

Apr 22 09:24 AM

[Bjarne Jensen:]

I too would like to see your graph.

Regarding China: By creating currancy swaps with their 'other' trading partners, China has begun to incrementally establish the Yuan as the new trading/reserve currency in the world. It's just a matter of time until the only country that needs the dollar is the United States.

Apr 22 09:28 AM

[manya05:]

It is not denial, do you really believe the government will let one of these auctions fail? there are multiple avenues to hide the failure of an auction, including finding proxy buyers for the US government and hiding them behind a Caribbean banking cartel. The proxy buyer will be paid later, with interest, in essence issuing off-the-book US bonds to cover the legal bonds. The markets are broken, and ethical behavior has been suspended until further notice. Do not worry, the auctions will not fail.

Apr 22 09:35 AM

[mbkelly75:]

A couple of comments here: 1) I used a program "PDF reDirect V2" to print directly to a PDF and was able to use standard commands to enlarge the chart enough to clearly see. 2) China and several other countries around the world are ALREADY using their excess horde of Dollars to purchase commodities such as Gold, and Oil. I have also increased my portfolio's holdings of Gold and Silver from 6% to 12% and have a large holding of dividend-paying energy stocks compounding monthly. Some stocks are paying their dividend in currencies other than the Dollar and this may be helpful later on also.

Thank You for the work you have done so far and I will be interested in seeing what else you find out or observe.

Apr 22 09:54 AM

[History Buf...:]

Good article. I agree with Manya05, however, there is no risk of an overt auction "failure" because the results are rigged. If the Chinese won't buy them some other party will have been bribed or otherwise provided with the wherewithal to purchase the treasuries.

This is just a ponzi scheme, similar to what Charles Keating used in the Arizona real estate market in the 80s to pump up the value of the assets in his savings & loan.

By the time an auction actually does "fail" it will be too late and we will have fallen off another cliff.

Apr 22 10:09 AM

[mbkelly75:]

I offer my apologies here. I have Glaucoma and my computer has special programs to make things visible to me. It did not occur to me before coffee that I was not using standard commands. With magification that made the graph visible to me - my wife could not read it. I would appreciate a larger, clearer version of the graph also so I can pass it and this article on to other people. My wife would like to see it also. Thank You.

Apr 22 10:16 AM

[Mr. Big:]

In my opinion, the moment the Fed had to step in as a buyer of US Treasuries, the auction has already failed. The Fed's participation is literally pushing out potential buyers. Recent estimates suggest that the Fed's involvement in the UST market is responsible for depressing approximately 70 to 80 basis points in yield in the 10-year. That's big enough to shut out any potential buyer who has a brain.

My personal feeling is that if the US really wants to suppress long term rates, the Fed must be willing to print well over $2 trillion for 2009 alone... ($1 trillion for new issues and another $1 trillion for refinancings)....and this assumes there are still buyers willing to absorb treasuries at ridiculous prices. How big is too big for the Fed's balance sheet? I guess we'll find out later this year....

Apr 22 10:26 AM

[altaman:]

This is an excellent article that lays out the large forces at work in the Treasuries market. I watch the daily action in the 10 year and notice that prices only go up when the Fed is buying. Otherwise the price trend is down and rates trend up towards 3%. The government is trying to hold rates below this point so they can keep pumping out mortgages around 4.5%. I believe they are between a rock and a hard place (need to borrow huge sums but at low rates) and soon this effort will fail as buyers simply will not accept 3% as a sufficient return given the obvious inflation to come. I consider a sustained breach of 3% as a sign that we have reached the tipping point and are off the races as the government's entire strategy, besides singing "happy days are here again," its to pump in cheap money to prop-up all of the insolvent institutions.

Apr 22 10:59 AM

[yellowhoard:]

This is my theory as well. The Chinese eventually back their currency with metal and assume the role of world's reserve currency.

Money would pour into China. The growth that they achieved over the last ten years would seem trivial compared to the next ten years.


On Apr 22 09:28 AM Bjarne Jensen wrote:

> I too would like to see your graph.
>
> Regarding China: By creating currancy swaps with their 'other' trading
> partners, China has begun to incrementally establish the Yuan as
> the new trading/reserve currency in the world. It's just a matter
> of time until the only country that needs the dollar is the United
> States.

Apr 22 11:00 AM

[nobby73:]

Although it's going to happen, I think the tipping point is a good way in the distance, especially given the patience of the Chinese. By that time, your TBT holding will have been hugely eroded by the loss through daily rebalancing...

Apr 22 11:02 AM

[Alan Young:]

An important topic. I can't read or expand your chart, so I don't know whether you've brought any new insight to it or not.
As far as holding TBT... sometimes the right fundamentals don't lead to the right investment result. See seekingalpha.com/artic...

Apr 22 11:09 AM

[nicatime:]

I have seen many requests for a veiwable chart but no response. Has anyone received the chart as a download?

Apr 22 11:50 AM

[Jasper M:]

Cetin is . . . right! (shhhh, don't tell anyone!) For the moment. Chinese have nothing better to do with their (shrinking) income from exports. Not enough Swiss Francs. And no sign any other player's currency is better managed.
YellowHoard, I WIsh they Would back the Yuan in gold, but accepting that sort of market discipline would mean a relinquishment of control, something I am doubtful the ChiComs can make themselves embrace. Love to be wrong about this.

Apr 22 01:42 PM

[nobby73:]

Another thing in my view, let's not forget how deep the loathing of Japan is in China. They would not want to strengthen Japan's position by kicking the American dog when it's down. Keeping accruing Treasuries thus keeping the US economy in the lead will give them the perfect position to slip-stream past when the time is right. As we all know, they are in no particular rush...


On Apr 22 11:24 AM Freya wrote:

> nobby73: Total agreement. The Chinese made a deal at the G20. Trickit
> wanted Tax havens revealed, China wanted greater status, the US wanted
> China to keep buying Treasuries.
>
> Trickit was bought off, the US got China to agree, China agreed to
> continue buying. China gets to decide what conditions are attached
> to IMF loans in the Asean region. India went along with China.<br/>
>
> Geithner's about face regarding Currency Manipulation by China was
> part of the deal.
>
> A New World Order was announced by the G20, or should I say a New
> pecking order.
>
> Anyway, when the Auctions go off without a hitch, I posit that the
> Economic War games held after the G20 in which China always won,
> puts China in a leadership role for the foreseeable future.
>
> This is a pet theory.
>

Apr 22 02:00 PM

[Joe Q:]

That's the first thing that occurred to me. The feds have ways to make it look like a treasury auction succeeded, and the consequence of failure is too dire to not have back-up plans in place for such an eventuality. That being the case, there could be some kind of tell-tale evidence in the public domain when they do something sneaky like that.


On Apr 22 09:35 AM manya05 wrote:

> It is not denial, do you really believe the government will let one
> of these auctions fail? there are multiple avenues to hide the failure
> of an auction, including finding proxy buyers for the US government
> and hiding them behind a Caribbean banking cartel. The proxy buyer
> will be paid later, with interest, in essence issuing off-the-book
> US bonds to cover the legal bonds. The markets are broken, and ethical
> behavior has been suspended until further notice. Do not worry, the
> auctions will not fail.

Apr 22 02:21 PM

[@TexasER:]

Cetin is absolutely right! There is nothing to fear for the moment.

However, should the Chinese surpluses suddenly evaporate through the Chinese equivalent of a FASB rule change, things could change in a hurry.

I also agree with Manyana...a treasury auction will not be allowed to fail. And the fed wouldn't have to do anything as exotic as going offshore.

They would simply order their puppet "too big to fail" banks make the purchases. Using money that they borrow from the Fed against their newly re-valued assets.

What a mess.

Apr 22 03:24 PM

[KSengineer:]

Thanks! Terrific article.

Apr 22 03:33 PM

[GMiki1:]

I'm simply asking: How is it that the British Gilt auction failed a week or so ago? Couldn't the British central bank monetize its debt? As for China, I think they do want the yuan to be the new reserve currency, and, yes, they're putting surplus into commodities.

I saw something on PBS last night about the Chinese building subway tunnels (like crazy) to provide greater mass transportation. Car sales there have exploded and they want to minimize traffic and pollution in that regard.

My thoughts were about the base metals used for the tunnels, the subway cars, AND the authomobiles. So even though the Cinese are stockpiling commodities, they are also burning through quite a lot.

This week's Ted Butler commentary on silver is about the use of silver in advanced electrical applications. The Chinese have a lot of that going on as well.

Apr 22 03:36 PM

[Need2Learn:]

Hmm, it seems your numbers are a bit low. Have you seen this site: www.truthin08.org/

Apr 22 04:06 PM

[oldman:]

our government will bail out our government.

Apr 22 04:23 PM

[atlasman:]

i have always viewed gold as an insurance policy, not an investment. This is what you are insuring against.

Nice article.

-Atlasman

Apr 22 06:59 PM

[malerror:]

They (china) already did this with Argentina last month


On Apr 22 11:00 AM yellowhoard wrote:

> This is my theory as well. The Chinese eventually back their currency
> with metal and assume the role of world's reserve currency.
>
> Money would pour into China. The growth that they achieved over the
> last ten years would seem trivial compared to the next ten years.
>

Apr 22 07:27 PM

[GoldMoney:]

Leveraged index funds are meant for day trading only! Do not buy and hold Powershares or Direxion ETFs! They decline with time regardless of market direction! No, no, no!

Also, Treasury auctions won't fail since the Fed will step in and print the money to buy the bonds. John Jansen (Across the Curve blog)does a great job of keeping people up to date on that.

Apr 22 08:57 PM

[atlasman:]

I forgot to add, the only way to guarantee this scenario will not play out is though strong economic growth. Now my question is do you think that cap and tax, higher taxes on achievers, and the rest of the policies of the left will give the economy the growth needed to buy our way out of this mess? If the answer is no, you should probably load up on more insurance.

- Atlasman

Apr 22 09:07 PM

[Ned Stringham:]

I like your of watching the T-Bill rate relative to maintaining the 4.5% mortgage rates. Until foreclosures are under control, the Fed will do what they can to control rates. If they can't, it signals bigger problems. Thanks


On Apr 22 10:59 AM altaman wrote:

> This is an excellent article that lays out the large forces at work
> in the Treasuries market. I watch the daily action in the 10 year
> and notice that prices only go up when the Fed is buying. Otherwise
> the price trend is down and rates trend up towards 3%. The government
> is trying to hold rates below this point so they can keep pumping
> out mortgages around 4.5%. I believe they are between a rock and
> a hard place (need to borrow huge sums but at low rates) and soon
> this effort will fail as buyers simply will not accept 3% as a sufficient
> return given the obvious inflation to come. I consider a sustained
> breach of 3% as a sign that we have reached the tipping point and
> are off the races as the government's entire strategy, besides singing
> "happy days are here again," its to pump in cheap money to prop-up
> all of the insolvent institutions.

Apr 22 10:35 PM

[Ned Stringham:]

Sorry about the chart. I couldn't get a better resolution on the image when I uploaded from my computer. I tried html, jpg, tif and pdf formats. Seeking Alpha requested the chart which I sent to them. Hopefully, they will be able to improve the resolution.


On Apr 22 11:09 AM Alan Young wrote:

> An important topic. I can't read or expand your chart, so I don't
> know whether you've brought any new insight to it or not.
> As far as holding TBT... sometimes the right fundamentals don't lead
> to the right investment result. See seekingalpha.com/artic...

Apr 22 10:39 PM

[Ned Stringham:]

Thanks! I had not been to this site.As I understand it, the $50T includes the expected liability for the Entitlement commitments/Social Security. While I agree this is a big issue, my assumption is that a very small amount of this will actually get paid out. Benefits will have to be severely curtailed. The other interest ing point is that these benefits are supposed to be indexed to inflation.


On Apr 22 04:06 PM Need2Learn wrote:

> Hmm, it seems your numbers are a bit low. Have you seen this site:
> www.truthin08.org//

Apr 22 10:50 PM

[Ned Stringham:]

thanks - I am trading TBT as you suggest and understand how the leveraged ETF's work. I think it will be a big winner for the 30 days after a crisis appears.


On Apr 22 08:57 PM GoldMoney wrote:

> Leveraged index funds are meant for day trading only! Do not buy
> and hold Powershares or Direxion ETFs! They decline with time regardless
> of market direction! No, no, no!
>
> Also, Treasury auctions won't fail since the Fed will step in and
> print the money to buy the bonds. John Jansen (Across the Curve blog)does
> a great job of keeping people up to date on that.

Apr 22 10:56 PM

[Ned Stringham:]

Your pet theory makes some real sense. I've noticed that Clinton's serious meetings recently in China included Treasury. The US is bartering political and military influence with its banker to get commitments for debt financing. It would be interesting to know what credit line the Chinese have extended the US. What portion of current Chinese reserves are in the Treasuries?


On Apr 22 11:24 AM Freya wrote:

> nobby73: Total agreement. The Chinese made a deal at the G20. Trickit
> wanted Tax havens revealed, China wanted greater status, the US wanted
> China to keep buying Treasuries.
>
> Trickit was bought off, the US got China to agree, China agreed to
> continue buying. China gets to decide what conditions are attached
> to IMF loans in the Asean region. India went along with China.<br/>
>
> Geithner's about face regarding Currency Manipulation by China was
> part of the deal.
>
> A New World Order was announced by the G20, or should I say a New
> pecking order.
>
> Anyway, when the Auctions go off without a hitch, I posit that the
> Economic War games held after the G20 in which China always won,
> puts China in a leadership role for the foreseeable future.
>
> This is a pet theory.
>

Apr 22 11:07 PM

[Moon Kil Woong:]

China rejecting US treasuries is the same as China refusing to sell to the US. That leaves China with supply and no demand. What other country would buy their excess demand then?

China keeps their currency low so they can keep supplying the US. Ceasing to buy treasuries would just make the US $ worth less and counteract their own efforts to keep exporting with a weak currency.

Thus the problem of trade imbalance is not just limited to a greedy US but to a unbalanced trade system that encircles the globe. Whatever pain the US would feel in this circumstance would be felt equally between debtor (US) and lenders / suppliers (Chine etc.) if not more by the lenders.

In such a case China's $2 trillion surplus would be wasted almost overnight proving that their game of cash hoarding isn't worth much if it doesn't translate to its own people or create real consumption and conversely improvements in their standard of living which should be the real economic concern of governments, not money supply expansion.

Anyway, yes a US default will equal ridiculously high interest rates and a global meltdown. And yes, the US doesn't solve anything by inflating if it decides to keep running mass deficits. And yes, no one has the political will to solve the eventual train wreck. The only point of contention I have is that it will not result in the US being subservient to other governments even though it will wreck a lot of foreign governments which will be principally our allies and closest trading partners. Thus they should hope for our continued prosperity and we should hope for theirs. To do otherwise is pure folly.

Apr 23 12:23 AM

[AntiThisEst...:]

I agree with your analysis 100%. The chinese are actually totally in control now. That is where smart money is and betting against treasuries (with TBT). I also see a tick up in chinese hoarding of commodities. They have manufacturing, cheap labor, and resources. We have debt, fraud, and quantitative easing. Long gold, short treasuries (short america?).

Apr 23 02:37 AM

[Dave Wrixon:]

No but the Bona Fide investors are already smelling a shell game, so whether it does or does not technically fail is largely irrelevant. The mere fact that you could make this statement shows that the credibility of the auctions is in tatters. Do you really think people are going to participate if they know the damn things are rigged?


On Apr 22 09:35 AM manya05 wrote:

> It is not denial, do you really believe the government will let one
> of these auctions fail? there are multiple avenues to hide the failure
> of an auction, including finding proxy buyers for the US government
> and hiding them behind a Caribbean banking cartel. The proxy buyer
> will be paid later, with interest, in essence issuing off-the-book
> US bonds to cover the legal bonds. The markets are broken, and ethical
> behavior has been suspended until further notice. Do not worry, the
> auctions will not fail.

Apr 23 03:46 AM

[White Shield:]

First of all - an excellent platform for very needed dialogue. Well developed thoughts - good job. But the greater excitement is the growing conversations such as these - people are examining financial mechanisms in ever increasing numbers. Whereas before, an "all is well - who cares?" attitude, allowed the "moneychangers" to practice their "money trap" (bubbles or "business cycles, most people call it) schemes undetected.

Even here, to varying degrees, the "symptoms" of their wickedness remains the topic. And how to "minimize, reverse", etc. those "symptoms" will remain the smokescreen that hides their true greedy intent and mechinations.

But people are waking up - "ordinary" people...not "economic scholars" (a misnomer anyway - the "master" is the scholar, not the minions). Since you obviously have interest - here is but one small clue as to "who is doing what" -
publiccentralbank.com

"Do not participate in the deeds of darkness, but rather expose them." Keep seeking my friends...the truth awaits you.

Apr 23 08:57 AM

[Long Silver...:]

Price signals are all out of whack. If the Fed is directly (or through proxies) buying up Treasuries, to keep interest rates low, then why wouldn't they later just transfer cash to Treasury without bother going through the public bond market? That next logical step in hiding our finances would keep Treasuries off the market and the reported rates low.... That would make it difficult to execute "my plan... to continue to track the signals indicating when and where a tipping point may be reached." Seems like we're headed for Niagara Falls in the night, without knowing just when we'll be going over the cliff...

Apr 23 09:12 AM

[henarl:]

Great article. As pointed out in earlier posts,TBT is only good for the short term due to the daily revaluing. By buying TBT and selling a two or three month covered call with a srike at or near the purchase price and repeating the process if the call expires worthless, or if you're exercised out, one can use TBT as a profitable short term trading position while waiting for the bottom to fall out of treasuries.

Apr 23 11:57 AM

[concerned c...:]

A huge thanks to all the commenters and the author for all the information.. on a possible future dollar collapse.

Apr 23 12:10 PM

[billyboy54:]

"Their [the Chinese] influence dramatically increased over the last year as they purchased almost 40% of the debt issued by the US that was purchased by foreign holders."

I just noticed this sentence. I was aware that China holds a large proportion of our debt, but was not aware they had increased their holdings "dramatically" over the past year.

To me, that's ominous.

The Chinese are NOT suckers..........I think we need to be very afraid..........

Apr 23 12:24 PM

[SebastianGE:]

Since every comment has been so interesting, I´d like to add a different perspective (with the same destiny for the treasuries). I´ve allready posted this on another article, but I think it suits here perfectly.
This article shows the stages of a bubble:

ftalphaville.ft.com/bl...

And now, let´s check a copule of charts regarding them:

stockcharts.com/h-sc/u...

or check also: stockcharts.com/h-sc/ui?s=$USB&p=D&yr=3...

So, what do you think? Sounds familiar, doesn´t?

Apr 23 02:25 PM

[MGA_1:]

I like it !

Good article. The current yield for the 30 bond is around 3.7% or so. Do you think this is a good 30 year investment? I don't. What happens to outstanding bonds if/when rates go up? Bad stuff. I doubt the govt is going to find buyers for all the upcoming debt. I think the crash of the t bill bubble will be beginning of a terrible downturn for the US and the flight of the investor class out of dollars.


On Apr 23 02:25 PM SebastianGE wrote:

> Since every comment has been so interesting, I´d like to add a different
> perspective (with the same destiny for the treasuries). I´ve allready
> posted this on another article, but I think it suits here perfectly.
>
> This article shows the stages of a bubble:
>
> ftalphaville.ft.com/bl...
>
>
> And now, let´s check a copule of charts regarding them:
>
> stockcharts.com/h-sc/u...;p=D&amp;yr=3&...
>
>
> or check also: stockcharts.com/h-sc/ui?s=$USB&amp;p=D&...
>
>
> So, what do you think? Sounds familiar, doesn´t?

Apr 23 02:35 PM

[wobatus:]

If there isa global meltdown, war with china, plague, cats and dogs living together, what does gold get ya? I am serious as to the last part. U.S. at least has a bread basket, etc. I understand gold is a store of value. But why? because everyone views it as such? It can't be magically created and thus have sudden huge influx of supply, I suppose, but what if people no longer thought of it in the same way?

I know tere are some industrial uses, but it isn't like oil. And people like jewelry. And you can melt it down and divide it up, but it's heavy. yada yada.

I dunno. There is something a little, um, archaic about it. Sorry.

Don't get me wrong. Not pimping for the dollar here. But gold? You couldn't have a currency backed by a basket, of, um, USEFUL commodities. Like Oil. Corn. Rice. Coal. Industrial metals? Sure, toss some gold in there.


On Apr 23 12:23 AM Moon Kil Woong wrote:

> China rejecting US treasuries is the same as China refusing to sell
> to the US. That leaves China with supply and no demand. What other
> country would buy their excess demand then?
>
> China keeps their currency low so they can keep supplying the US.
> Ceasing to buy treasuries would just make the US $ worth less and
> counteract their own efforts to keep exporting with a weak currency.
>
>
> Thus the problem of trade imbalance is not just limited to a greedy
> US but to a unbalanced trade system that encircles the globe. Whatever
> pain the US would feel in this circumstance would be felt equally
> between debtor (seekingalpha.com/symbo...) and lenders /
> suppliers (Chine etc.) if not more by the lenders.
>
> In such a case China's $2 trillion surplus would be wasted almost
> overnight proving that their game of cash hoarding isn't worth much
> if it doesn't translate to its own people or create real consumption
> and conversely improvements in their standard of living which should
> be the real economic concern of governments, not money supply expansion.
>
>
> Anyway, yes a US default will equal ridiculously high interest rates
> and a global meltdown. And yes, the US doesn't solve anything by
> inflating if it decides to keep running mass deficits. And yes, no
> one has the political will to solve the eventual train wreck. The
> only point of contention I have is that it will not result in the
> US being subservient to other governments even though it will wreck
> a lot of foreign governments which will be principally our allies
> and closest trading partners. Thus they should hope for our continued
> prosperity and we should hope for theirs. To do otherwise is pure
> folly.
>
>
>

Apr 23 03:06 PM

[Tony Daltorio:]

Very good article! However, some of the comments about China are missing the point. Yes, it is true that they will not dump the Treasuries they already hold onto the market.

The key point is that China will be greatly curtailing future purchases which means the Fed will have to print even more phony money to buy the Treasuries.

And Cetin, China has plenty of places to put their money besides giving it to the US. They are already making major purchases of most commodities along with investments directly into commodity producers. Also China has just barely begun their program of currency swaps with various nations around the globe.

Final point - much of the Chinese money will simply stay home and be spent on infrastructure projects,etc. Imagine that - the Chinese will be helping their own people instead of arrogant Americans!

Apr 23 03:46 PM

[mbkelly75:]

They fixed it - Thank You Very Much for the very clear layout. Please keep up the good work.


On Apr 22 10:39 PM Ned Stringham wrote:

> Sorry about the chart. I couldn't get a better resolution on the
> image when I uploaded from my computer. I tried html, jpg, tif and
> pdf formats. Seeking Alpha requested the chart which I sent to them.
> Hopefully, they will be able to improve the resolution.

Apr 23 04:16 PM

[James 2820:]

I clicked on the chart and it enlarged. Nice work. BTW I posted this article to Twitter, let's see what if anything happens.

James


On Apr 22 11:50 AM nicatime wrote:

> I have seen many requests for a veiwable chart but no response. Has
> anyone received the chart as a download?

Apr 23 05:20 PM

[Dan in mpls:]

I wonder how many people here are turely wealthy trying to decide what to do in the here and now. I follow most everything and understand it almost organically. But I cant quite decide if we will see another great depression grow out of the big recession or lost generation see in a few years after the US is buried in debt, or whether our good friends in China will help us out by forcing us to made the vast cuts in our government spending that have to be made. Think of the US as GM and china as Obama.

Apr 23 07:43 PM

[ripskii:]

A very interesting article and a subject everyone needs to consider for both their short and long term investment horizon. Very many excellent comments add to the dialog. One thing I notice is that most comments regard China as similar to us from both the economic and political perspective and that is not reality. China is undergoing a very large change from many viewpoints and must respond to their own internal problems as well as the obvious external ones. Their leadership have to supply internal growth to prevent unrest among the population that has greatly increased expectations. In that respect we have mutual needs to support the "system" that has delivered much of their growth (and our own) and hence their recent success. This is all about the leadership preserving their position in their system and in that they are not alone. Our task as normal investors and being outside the system, is to survive our leadership's actions and the same can be said for the Chinese investors. There will be many displacements as policies evolve, but the trick is to avoid as many pitfalls as possible.

Apr 24 12:20 AM

[PyratePrincess:]

In reference to the comments that the Fed won't let the auctions fail...
As I'm sure you're aware, there are auctions held nearly every day by the FR. In the last 6 or so months there have been more than one auction that closed without a single bid. I'm told this has never happened before (though I cannot state that as absolute fact). My source for this information is an individual who manages the IT servers/software applications for these auctions. Now, you may argue that one "no bid" auction does not constitute an auction "failure"...but in the historical context that it's either an unusual or previously non-occurring event-I'd lean towards the failure scenario.
Fedzilla basically told the chinese to pound sand when he decided to fire up the printing presses and create a trillion dollars of monopoly money.

Apr 24 02:33 AM

[Mad Hedge F...:]

It's just a matter of time. If stocks sell off from here you should get a rally in Treasuries that will be ripe for selling into. There is no way that investors are being compensated for their risk with yields at these levels, especially with massive global government reflationary efforts guaranteed to bring a resurgence of inflation. I think the futures contract on the long bond will collapse from 127 now to inder 70 in three years, once hyperinflation hits. With the leverage offered by a futures contract, the returns will be huge. However, this is not a riskless trade. There have already been several rounds of stop loss buying by traders who jumped into this strategy too early, as unimaginable buying kicked in at 120, 125, 131, 136 and finally 141. In Japan the ten year bond eventually hit a low of 0.46%, making our ten year at 2.85% look incredibly expensive. That works out to a futures price of 200 or more. Of course we are not Japan. The Treasury has done more to repair things in 60 days than Japan did in 15 years, and Japan has still not adopted full mark to mark accounting. Some 19 years after their bubble burst, the country is still seeing subpar growth, and ten year yields have made it back up to only a measly 1.25%. There are also constant games going on in the bond futures markets like expiration plays, engineered short squeezes in the underlying, and bogus news leaks. PIMCO, the Newport Beach based Pacific Investment Management Company, the world’s largest private bond investor, plays this market like a violin. Still, I think it’s worth a shot. Take another look at the Power Shares Lehman 20 year plus ETF (TBT), which gives you a 200% short on the sector. This will be the last bubble we can short into for a long time.

Apr 24 10:56 AM

[HA65MPH:]

THANKS TO THE AUTHOR , AND ALL COMMENTS . ESPECIALLY INTERESTING TO ME IS THE ALMOST 99% AGREEMENT FROM YOUR VOICES. WE AS THE 'LITTLE ' PEOPLE HAVE A FREE FORUM TO EXPRESS OUR IDEAS , AND CONCERNS . NOT WHAT THE GOVT. IS SHOVING DOWN OUR THROATS ..I FEAR FOR MY AMERICA . THIS IS AN OBAMMANATION , AND A COMPLETE TAKE OVER ...THANK YOU FOR THIS FORUM.

Apr 24 05:06 PM

[Gaucho:]

Copy and paste to Word and then strech and print


On Apr 22 09:13 AM BigJake wrote:

> I can't see the graphic you included because it is so damn small.
> is there anywhere I can look at it where it is enlarged?

Apr 24 10:15 PM

[dcb:]

i LIKE TO FOLLOW CURRENCY MARKET FOR CLUES TO STOCKS. there has been some interesting contrary indicators lately. dollar is now once more dropping which supports equity, but for the prior two weeks something was holding up equities. So, is FOREX now catching up to equity or will forex provide momentum to spring equities up another notch.

I currently see the equity run as a reflection of dollar weakness instead of macro fundamentals. This would explain the fact that oil doesn't drop besides the oversupply.

Many indices are currently at inflection points. I find it hard to think there is enough real economic growth to push them higher, so could it be a dollar trade?

treasury yield is 3%. this level has been associated with market drops almost every time so far on the upwards run. The next couple of days should be very interesting.

Apr 25 08:57 AM

[wobatus:]

yeah, I always find 99% agreement interesting.


On Apr 24 05:06 PM HA65MPH wrote:

> THANKS TO THE AUTHOR , AND ALL COMMENTS . ESPECIALLY INTERESTING
> TO ME IS THE ALMOST 99% AGREEMENT FROM YOUR VOICES. WE AS THE 'LITTLE
> ' PEOPLE HAVE A FREE FORUM TO EXPRESS OUR IDEAS , AND CONCERNS .
> NOT WHAT THE GOVT. IS SHOVING DOWN OUR THROATS ..I FEAR FOR MY AMERICA
> . THIS IS AN OBAMMANATION , AND A COMPLETE TAKE OVER ...THANK YOU
> FOR THIS FORUM.

Apr 25 11:41 AM

[wobatus:]

Thanks for the negative recommendation. Now please hold my hand and explain the error of my thoughts. Why is gold valuable, aside from its limited industrial or other uses, besides because eople say it is valuable?

Arable land produces food. Water is vital. Oil and coal provide power, useful chemicals and lubricants. Copper for industry and wiring.

Isn't much of gold's value tied in the fact that people...value it?

You have a lot of history on that score. So do religions. But it isn't the same as a fundamental need.

I don't mid being educated. Tell me. I will listen avidly.


On Apr 23 03:06 PM wobatus wrote:

> If there isa global meltdown, war with china, plague, cats and dogs
> living together, what does gold get ya? I am serious as to the last
> part. U.S. at least has a bread basket, etc. I understand gold
> is a store of value. But why? because everyone views it as such?
> It can't be magically created and thus have sudden huge influx of
> supply, I suppose, but what if people no longer thought of it in
> the same way?
>
> I know tere are some industrial uses, but it isn't like oil. And
> people like jewelry. And you can melt it down and divide it up,
> but it's heavy. yada yada.
>
> I dunno. There is something a little, um, archaic about it. Sorry.
>
>
> Don't get me wrong. Not pimping for the dollar here. But gold?
> You couldn't have a currency backed by a basket, of, um, USEFUL commodities.
> Like Oil. Corn. Rice. Coal. Industrial metals? Sure, toss some
> gold in there.

Apr 25 11:46 AM

[wturner145:]

Sounds like a dope fiend with a credit card. The day they cut it off they really shake for the next fix and when that doesn't happen it's real suffering. Now if Obumba cannot print more money because it's worthless than what? Buy a house now you can turn it into a fort with you neighbors when the lender wants his payments. How about China wanting their money back from the optimistic Americans? They are not nice when money is owed to them.

Apr 25 12:02 PM

[Harry Tuttle:]

Here are some elements to consider:

1) As the American living standards decline, the trade deficit will decline and eventually become a surplus as we will import much, much less. This will greatly reduce the need for foreign buyers of treasuries.
2) It is unlikely that the Treasury will be unable to sell its debt at any price. It is more likely that the price will go down as reluctant buyers (foreign or domestic) are enticed by higher rates which will crowd-out private bond issuers. This is what happened in Brazil and other highly indebted countries.
3) If the US dollar falls against other currencies (I think people who defend this fail to understand how much worse the situation is elsewhere), the effect in (1) will be even stronger.

Apr 25 09:27 PM

[Suncatcher:]

BREAKING NEWS, this just in from China: CHECKMATE!

Apr 27 01:12 PM

[Roger Knights:]

As of Friday, May 1, there was a bond auction failure. Only 50% of the issue sold.

May 09 03:14 AM

[Freya:]

nobby73: Total agreement. The Chinese made a deal at the G20. Trickit wanted Tax havens revealed, China wanted greater status, the US wanted China to keep buying Treasuries.

Trickit was bought off, the US got China to agree, China agreed to continue buying. China gets to decide what conditions are attached to IMF loans in the Asean region. India went along with China.

Geithner's about face regarding Currency Manipulation by China was part of the deal.

A New World Order was announced by the G20, or should I say a New pecking order.

Anyway, when the Auctions go off without a hitch, I posit that the Economic War games held after the G20 in which China always won, puts China in a leadership role for the foreseeable future.

This is a pet theory.

Apr 22 11:24 AM

[mbkelly75:]

Good call - China is actively moving down that road right now by encouraging their citizens to buy and hold Gold. Letting the people have possession of Gold is the first step towards backing their currency with Gold.


On Apr 22 11:00 AM yellowhoard wrote:

> This is my theory as well. The Chinese eventually back their currency
> with metal and assume the role of world's reserve currency.
>
> Money would pour into China. The growth that they achieved over the
> last ten years would seem trivial compared to the next ten years.
>

Nov 19 05:16 PM