Julian Robertson Is Warning Us

Erin Burnett interviewed investment legend Julian Robertson on Street Signs yesterday. The second part of the video isn’t working so here is the first part. I’ve e-mailed CNBC because I’m dying to see part two as well.

In this video, he talks about our massive deficits, our reliance on China and Japan to buy our debt and the possiblity of 15-20% inflation and “financial armageddon” if they stop buying or, heaven forbid, start to sell our treasuries.

Comments

[Zedar:]

Thanks for sharing and requesting part II. I agree with many of his points and it is interesting that he thinks there may not be a market for US long term debt.

Sep 26 03:41 PM

[boris yin:]

full transcript is available at following URL: www.cnbc.com/id/330091...

Sep 26 09:43 PM

[Macro_Man:]

Not sure of his logic or his facts. Despite popular opinions, the bulk of the long-term Treasuries is held by U.S. holders...by which I mean, State and local governments, banks, insurance companies, pension funds, U.S. nationals etc etc. Even if the Chinese stop buying US Treasuries, we will be fine. It will be the dollar that will get affected temporarily.

As the U.S. imports less and less and saves more and more, our reliance on foreign capital will drop steadily.

Julian Robertson can short all he likes, he will just lose money. I think that in 2 years time the long bond will be below 4% than above it. Think Japan.

Sep 27 09:02 AM

[Tony Daltorio:]

I agree with Julian Robertson who is an investing legend and who is right much more often than he is wrong.

Sep 27 10:02 AM

[LCACM:]

If the Chinese stop buying US treasuries, it will be good for the US economic health. Needless to say that the US economy will go through a painfull wihdrawal period, but the US will emerge a stronger economy after it gives up on it's addiction. As a result of giving up the addiction of US government selling Treasuries to the Chinese government, US companies could be selling US made products to Chinese consumers.

Sep 27 12:43 PM

[DonC.:]

Funny how nobody seems to remember how Julian ran his Tiger Fund family into the Ground back in the dotcom. days. And no, I didn't invest with him back then and certainly wouldn't touch him with a 10ft pole today. Interest rates at 15-20% LOL, Give me a break!

Sep 27 10:33 PM

[chap08:]

I am slightly suspicious of the fact that any scare about China and Japan not buying treasuries results in Robertson making lots of money. That might not be the reason he's saying it but it happens to be true.

At the same time, he is wrong. Japan are saying some strange things at the moment, but China will keep on buying treasuries and propping up the dollar. Any change will be gradual. He actually explains why in the interview (can't remember if it was in this part or the next). Chinese domestic and political reasons mean that they need to keep their exports going.

Sep 28 07:40 AM

[James Lewis:]

If the Chinese stopped buying treasuries, the USA would stop buying Chinese goods. This would allow domestic savings to increase, the savings would then be put into treasury bonds by the banks holding the savings. The FED would increase purchases of Treasuries.

It is not armageddon, it is a far prettier picture than what is happening now. But the transition is where the problem lies.

During the transition, many many negative consequences can arise and the situation would prove very difficult to manage. Those who belive the dollar will crash could be very wrong as interest rates could easily be put up to 7% to generate buying. However this would strangle the economy and knock down the price of various assets would could add further risk to the banking sector due to balance sheet/insolvency issues.

Of course the Chinese will not sell down bonds in a reckless manor. Because belive it or not, they would come off worse. Far Far worse. They do not only have economic worries in this respect, but large social issues if this is to arise.

Quick example:

China sells down bonds in a reckless manor, this in turn causes 50% of their sovereign reserves to de-value due to dropping dollar/treasury pricesd. If they lose enough money on their reserves, their entire subsidised sponsored reserve building activites will become loss making. In effect the huge amount of yuan they have printed as their usd reserves have increased will lose intrinsic value interntionally Without huge usd reserves the yuan is worth as much as monopoly money. Internally their banking system is in worse shape than the USA banking sector. The only difference is there is a guarantee on the banking sector due to the usd reserves they hold.

If they stop buying usd debt and cause a tail spin in the USA the USA will have to stop buying their goods. Their economy is developed and the banking systems balance sheets are all dependent on exports. All recent loans to build infrastructure will be value destroying causing yet more solvency issues at the banks. FDI would terminate straight away as the Yuan would have to rise initially as they sold off the USD reserves. This would destroy manufacturing sector as the rest of the world would be shut out from buying from China due to the increased costs of chinese goods. This would cause yet more solvency issues at the banks.

In effect the Chinese financial system would crash, all money would flood out. No one out of choice would finance any sort of deficit from China due to the bitter relationships developed through China's mercantile actions of the last 10 years. There would be no domestic economy to take the slack of the external destruction of demand due to the structural imbalance of the economy and wealth distribution.

China is not stupid, they are playing a tough hand. But Hu Jintiao knows full well; being an exceptionally smart man. That it is China who is in the most fragile position. NOT USA

Sep 29 06:41 AM

[James Lewis:]

The lesson here is as follows:

It takes 100 years to develop a large economy. The only way that it can be done quickly is by wasting excessive amounts of capital. The quicker the development, the more the waste in the capital allocation process. The quicker the development the more inbalances that will exist.

The only way to cirumvent time in development is using excess capital. Excess Capital can only be generated for development by an excess of investment and by creating trade surpluses. This has been used many times in the past by many countries. But excess investment is almost always value destroying. Also creating excess trade surplus can only be done by excess production and holding down domestic consumption. It is these two principles that cause so much pain after they have peaked.

Economic planners seem to believe that a consumption based economy is negative because their views are that to win you need to trade unfairly and buidl up reserves, They see this as their weapon of development. In fact by taking this path, the weapon is given to the countries they purchase the goods.

The only true way to develop a country so it is sustainable is to look inward, to develop organically internally. You have to win the inner game before winning the outer game.

China should have started to develop the internal economy around 2004. Instead of buying the USA manfactured goods (financial products), they should have sold down reserves. Increased the yuan gradually and spread the wealth. They should have made internal investments in the health care sector back in 2004. Their view was build reserves as fast as possible so when the music stops china has the most money. But actually they missed this opportunity buying USA manufactured goods (financial products) instead.

Where do we go from here...very obvious.
When a country realises that it has to create internal growth as external growth no longer exists. And realises the internal economy is not developed due to economic and more important wage differential inbalances. The immediate jerk reaction is to inflate asset prices to create wealth affect/domestic consumption. It has been done many many times. But actually this just makes the inbalances worse as this is just another form of investment. It does not spread wealth, it concentrates the wealth more in upper middle/upper classes.

China needs to increase wages over every sector

China in the short term needs to subsidise the extra cost of employment by eradicating PAYE tax so's not to destroy manufacturuers. But at the same time make it harder for companies to fire workers by upholding employee rights (only way to do this is by opening employment rights bureaus in every industrial zone) At the same time develop service/agricutlure sectors to rtake up slack of employment emnating from low added value manufacturing bankcruptcies.

China needs to develop tax collection and go after the billions of USD that the rich have not paid tax on. This is very easy to do as it is sitting in real estate and in Hong Kong. This money then needs to be used to subisidise increase of wages. This is a direct transfer of wealth from rich-poor. With the effect of stimulating domestic demand through increasing disposable income of the poor.

China needs to slowly stop buying USA manufactured financial products in a way that does not cause spiral effect for both countries. An idea would be to buy USA manufactured goods, which would be good for the dollar (hence good for the chinese)
They can earn duties + VAT on all USA manufactured goods which will far better than value destroying earnings of making goods they are not proficient at making. This will not destroy the domestic producers as consumption will have increased significantly due to wage increases. Lets also be clear that by not buying USA manufactured goods, China has to buy USA manufactured financial products due to the holdings of usd in the trade surpluses. They have to buy something with the USD. Buying natural resources is not a diversification process as the cost of the natural resources is worth more than the resources. Value destroying again.

Proectionsim for domestic producers is hurting China because of the follow through process above. China can not mitigate its inbalances and its huge holdings of USD. In fact doing so only hurts China.

The above spreads wealth, creates more employment opportunities, mitigates social risk and acts to resolve internal imbalances. It is very short sighted for China to seek revenge for the disgsuting way it has been treated in the past by ther West. Instead they should build strength from within.

After all, with 1.3 billion people, they can ill afford enemies.

Sep 29 07:22 AM