|
What amazes me is
how financial journalism is at the level of sixth grade in terms of analytical
thinking. Even so-called market analysts are not much better.
GATA put out a
dispatch today citing this Agence France-Presse article published by the Sydney Morning Herald in Australia,
"China Keeps Buying U.S. Bonds Despite Concerns":
http://news.smh.com.au/breaking-news-world/china-keeps-buying-us-bonds-d...
This article is a
prime example. It reports that China
was recently expressing grave concerns about its massive U.s.
bond holdings is still buying more such bonds.
The simpletons in
the press and financial world don't have a clue. What are these sleuths
looking for? A $500 billion sell order posted with a New York broker on some rainy Monday
morning? Have they never heard of a decoy?
The U.S. Treasury reports
each month on foreign holdings of U.S. Treasuries. The Chinese would have no
more than 30 days to dispose of almost a trillion dollars in Treasury debt
before their selling would be public knowledge. Do these China watchers seriously think that the China's diversification strategy is going to
involve unloading U.S.
debt on the debt market?
You don't have to
dispose of an asset to realize its cash value.
Didn't these people
learn anything from the mortgage crisis? For bankers the best collateral in the
world is U.S. Treasury debt. That is likely to change soon, but if we deal
with the facts of today, the Chinese are holding what bankers perceive is the
most liquid and highest-quality collateral. Do you think that this
characteristic of U.S.
debt has escaped the notice of the Chinese?
I would bet that the
Chinese have been busy using their Treasury debt as collateral against
FIXED-interest-rate loans. They will have used this money to buy real assets.
We know they have bought at least 454 tonnes of gold. They are importing 70
percent more copper than they consume. They are filling up a strategic
petroleum reserve. They have been going around the world making deals for raw
materials and acquisitions of small-enough companies that they fly under the
radar. (The Chinese learned their lesson from trying to buy Unocal.)
The interest rate on
these fixed-rate loans will be partially offset by the interest paid on their
U.S.
bonds. When the bonds go tapioca, the Chinese will have two options. They can
sell some of the assets they bought but at prices much higher than what they
paid and so pay off the loans with worthless dollars, or they can simply
default and lose their collateral of now-worthless U.S. bonds.
Just to obfuscate
what they are doing, they make some complaints about U.S. debt one
day and then buy some more a few weeks later.
Financial
journalists should read the biography of Jesse Livermore to know how you can
fool even the best traders.
The Chinese have a
$300 billion sovereign wealth fund. If that is properly positioned in
commodities, it alone will hedge China's entire bond portfolio.
The notion that the
Chinese have accumulated this massive U.S. debt portfolio and only now
are wondering what to do about it is so naive it doesn't warrant serious
consideration. I have dealt with Chinese in business and they are the
sharpest knives in the drawer. My guess is that China has already diversified
most of its dollar holdings.
Now, like magicians,
the Chinese keep the eyes of the China watchers fixed on the hat,
because we all know that is truly where the magician has hidden the rabbit,
right?
The Chinese have no
interest in collapsing the U.S. Treasury market, but if you think that the
Chinese strategy to protect themselves against such an eventuality is to sit
tight, buy more, and keep their fingers crossed that everything will work out
fine, then you shouldn't go out in public alone.
The Chinese have
vault-loads of intrinsically worthless Treasury bonds that they no doubt have
used as collateral to buy intrinsically valuable assets. In contrast, Western
central bankers had vault-loads of gold they have loaned or sold to buy
intrinsically worthless interest-bearing government debt.
I bet Confucius
would have had something to say about that.
Adrian Douglas
Marketforceanalys.com
Adrian Douglas is editor of the Market
Force Analysis letter (www.marketforceanalysis.com),
which uses proprietary methods of determining market turning points.
Subscribers receive bi-weekly bulletins. He is also a member of GATA's Board of Directors.
| 
