March 15, 2011
Dallas, Texas, USA
Dallas, Texas, USA
It’s no secret that the United States government owes a pretty penny to foreigners. Certainly, what America owes to foreigners pales in comparison to what it owes to Ben Bernanke… but still, $4.45 trillion is no small number, even in these crazy times when terms like “kajillion bajillion” are more appropriate to quantify debt and entitlements.
China is the largest foreign buyer of US Treasuries with around $1.15 trillion in holdings… Japan is the second largest at around $886 billion. Curiously, the trend for China has been down– the Middle Kingdom has been steadily reducing its position since peaking in October 2010.
Japan, on the other hand, has been steadily increasing its Treasury holdings over the same period. Its government does have a long pattern of currency intervention, and there has been much grumbling in Tokyo about the effects of the strong yen on their exports.
Fast forward to this past weekend. Earthquake. Tsunami. Volcano. Nuclear radiation. Japan clearly has other things on its mind right now than to continue financing the ongoing largess in Washington DC.
At a minimum, Japan will likely slow (or eliminate) its US Treasury purchases, instead focusing on dumping money into its own economy. At greater risk, Japan may choose to allow much of its Treasury portfolio to simply mature, requiring the US government to repay tens of billions of dollars of principal (which it doesn’t have).
With so much uncertainty, many investors around the world are buying Treasuries at the moment, so if Japan starts selling its portfolio into that momentum, the impact may be negligible… for now. Rearranging the deck chairs, if you will.
Come June 30th, though, with the supposed end of the “I’m not printing money” money printing that is quantitative easing, the US government will have lost, in theory, two of its biggest buyers– the Federal Reserve and Japan. And with both China and the OPEC nations slashing their own Treasury purchases, it leaves one simple question:
Who will buy all of this damned US government debt?
Below are some of the possible outlets:
1) US commercial banks. They’re awash with cash and partially owned by the government anyhow. The Treasury department could easily influence banks to increase their net bond purchases. This would have the effect of crowding out (once again) small businesses and individuals’ access to credit.
2) Retirement accounts. There’s $5 trillion of fresh meat available in US retirement accounts. It would be nothing for the Congress to pass a law requiring money managers to allocate a portion of their onshore retirement accounts to the ‘safety and security’ of US Treasuries. Kiss your retirement savings’ purchasing power goodbye.
3) Higher taxes. This is a given, unfortunately. It’s erroneous to conclude that higher tax rates yield higher tax revenues– yet this is the standard mantra of politicians. Higher tax rates reduce incentives to invest, take risks, and create wealth. Economic activity falls.
4) Default. Paint China as the root of all evil, the real reason behind America’s financial decline. Find a plausible reason to single out China and default on the debt that they own. I think this is possible down the road, but it would take a few years of preparatory political jockeying to pull off. What’s more likely is….
5) QE3. It’s coming back, like a bad Stallone franchise that just won’t go away. The lender of last resort will once again be the last resort… for the US government.
After a brief period of dollar strength from reduced risk tolerance, investors will realize that the world ex-Japan did not, in fact, come to an end… and they will resume the long-term trend of selling dollars for precious metals and more stable currencies (Australia, Singapore, and possibly even Japan).
The next few months may prove to be the best (and last) time to get out of the dollar.
From Along The Watchtower
If you bought the first dip (which I didn't), have a tight stop.
If you're trading this craziness (which I'm not), be very cautious.
First of all, I think its funny that CNBS is still breathlessly awaiting the FOMC minutes. As if it can't be all thrown out the window in light of current events. Here's why the Japan situation only further assures QE to infinity:
1) Japan must have cash to rebuild.
2) Japan will, undoubtedly, sell some treasuries to raise cash. This selling increases downward pressure on treasury price and upward pressure on rates.
3) Japan will then convert the $US it receives into yen. This selling of $ increases the downward pressure on the USDX. This buying of yen helps support value of yen against issuance of new yen to fund reconstruction.
4) Already 70%+ of the overall treasury market, the Fed is left with no choice but to not only continue QE but actually increase it.
One day soon, that realization will grip the PM "markets" and prices will shoot higher again. That day is definitely not today. It may not come tomorrow or next week, either, but that day is, most assuredly, coming. Perhaps, though, this is already being reflected in the USDX. Never, ever, ever in the past could a catastrophe like Japan happen and the dollar not rally. It is the safe haven! Well, apparently, not anymore. Look at this chart. The USDX should be up 100 basis points today. Instead, its flat to down.
With all of the continued uncertainty in Japan and with the PMs having violated their first, primary level of support, I doubt that the selloff is over. I fully expect another wave down...perhaps overnight and into tomorrow and Thursday. I have not done any dip buying today and I don't plan to. However, for me, there are some very clear entry points on the charts so I am patiently awaiting the opportunity to buy, if it comes. First, take a look at silver. This is where I'll buy first because the fundos are so overwhelmingly strong that even the slightest bit of sentiment change will send it charging back very quickly.
Around $32.50 is a point where I will be looking to buy.
In gold, the area around 1370-75 looks to be a logical entry zone.
Interestingly, those levels may be reached at roughly the same moment in time. Sort of like 1320 and 26.50 were struck in late January.
Again, first and foremost, pray that Japan is spared what could be the worst environmental disaster in recent history. Those poor people have been through enough.
If you are trading, I'd set a stop below this mornings lows and be very diligent and cautious.
More later this afternoon. TF
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