Tuesday, August 17, 2010
China Cuts US Treasury Holdings By Record Amount
So...China is dumping Treasuries.
And guess what???
INTEREST RATES HAVE FALLEN TO RECORD LOWS!
Where is the Debt/Doomsday crowd?
Where's Schiff, Jim Rogers, Gerald Celente, the clowns at the Heritage and Cato Institutes???? Our Republican and Conservative "leaders" in Congress????
Where are all these guys?
They're nowwhere to be found because they can't explain this. This is a "gut punch" to them. Their whole theory is out the window.
They just don't understand or don't want to understand, that interest rates are set by the Fed...PERIOD!!!
It doesn't matter if the Chinese or anyone else EVER buy another bond. Rates will be set where the Fed wants them. That's how it works.
You debt clowns, just go away...PLEASE!!
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23 comments:
Mike - First time poster. Keep up the good fight. One day we will realize the full potential of our economy when folks wake up to how the monetary system actually operates.
The work you and the likes of Warren Mosler and Bill Mitchell do is fantastic. Keep up the good work.
Mike,
Although interest rates are low, the dollar has depreciated against the Swiss Franc for instance by almost 400% since 1968! How do you answer those who state that large deficits simply cause currency depreciation?
AP:
Let's hope they wake up soon. I don't know how much time we've got left!
-Mike
Trader:
Against a broad group of currencies that include our major trading partners plus such countries as China, Brazil, India, Mexico, Taiwan, Korea, Singapore, Saudi Arabia, Israel and others, the dollar is down only a few percent. Not much.
See graph here:
Dollar versus important trading partners.
I would further add that fiscal policy has never been engaged to the point of sustaining full employment, with the exception of wartime.
If fiscal policy were such that full employment and output were sustained, I don't see any logical reason why the dollar should depreciate in value.
One could argue--strongly, I believe--that it has been precisely due to the fact that we have not used fiscal to sustain aggregate demand, that the dollar has weakened.
-Mike
Mike :
Two questions :
a. Did China cut future purchases?
or
b. Did China sell existing holdings?
NOTE :
1. We need to remember than not 1 single Renmibi Yuan was exchanged to buy the US Treasuries.
2. We need to remember that China opens up treasury accounts with exports sold in USA in U$D with U$D.
3. ( 1 + 2 ) : It is therefore apparent that maybe China is trying to spin the recession to their advantage > We in the USA are buying less in general and specifically less China crap.
ERGO > The Chinese therefore are making less in U$D and therefore they have less to U$D to open up U$ Treasuries which are opened, transacted, and closed in U$D.
Even if they are fading the U$D, then they will pay when the U$D skyrockets ...
remember - if there is less US Treasuries that really means there is less DEBT held by foreign entity, so the currency terrorists must come through and strengthen the dollar ??
what a load of BS contradictions.
IF I recall from yesterday, it said the Chinese were buying Japanese and European debt.
That should mean the deficit terrorists who crunch the currency exchanges must fade the Euro and the Yen.
THe (ill) logic is that where China buys the debt, that debt is reflective of a weak currency ???
China bought debt of Euros and Yen with the U$D ?
Let them provide more dollar liqudity.
I think it's hopeless to try to argue with clowns.
Their strategy is simple. Either they ignore empiric facts and stay silent for a while or they change subject both just to further their ideological/professional purpose.
For the former stands Barro who will promote his Ricardian Equivalence hoax as long as he's living and the WSJ in business.
For the last Austrians who suddenly decided that Germany is a posterchild of Austrian economics because of austerity.
You can not argue with these sort of people. They learned something in their madrasah and stick with these believes for the rest of their live. Otherwise they would only be void.
I'm confused. What evidence is there that China has dumped U.S. Treasuries?
Chad,
Treasury reported TIC data yesterday.
Link to a story here. It reports China decreased UST holdings $24B in June.
Resp,
I just read Tom Friedman's column.
He says...
"We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines"
We did not borrow money from China. We allowed them to enter our market and sell their stuff. They were paid in U$D and they used this U$D to open up Treasury accounts.
If they continue to exit, we owe them less and less ..
The column continues :
"Now our government owes more than ever and has more future obligations than ever — like expanded Medicare prescription drug benefits, expanded health care, an expanded war in Afghanistan and expanded Social Security payments (because the baby boomers are about to retire) — and less real growth to pay for it all. "
ALL of these obligations are assets for which will continue our economic engine, not be burdens.
We have work to do ... people to take care of etc ... and that is a good thing ... duh duh duh.
Friendman flirts with stimulus but does not see the big picture - our obligations represent our asset creation and maintenance - taking care of Americans.
Goog,
YOU should be writing for the NYT, not Friendman.
Great rebuttal!
He (and others like him) doesnt see how our economy will, over the next 20 years, naturally transition to an economy that works more in the care of our seniors.
How can they not understand this simple adjustment?
Mike,
How do you respond to Kyle Bass's position on JGBs. I know the quick and easy is to state that everyone who has bet against JGBs has lost money, but his case going forward seems very compelling
Wednesday, August 18, 2010
Kyle Bass Betting Against Japanese Government Bonds (JGBs)
Kyle Bass of hedge fund Hayman Advisors has a very dim outlook on parts of the world. In a recent interview with CNBC, Bass laid out his themes his hedge fund is playing and positions they've taken as a result. Remember that Kyle Bass will be presenting ideas at the Value Investing Congress in October as well. Market Folly readers can receive a discount here.
Hayman is positioned to benefit from a Japanese restructuring that will likely take place over the next few years. Bass defines the Keynesian end-point as, "when your debt service excedes your revenue". And, he thinks Japan is there. Japan's tax receipts in nominal terms are the same as they were back in 1985, whereas their expenses are 200% higher. He argues that Japan is in secular decline and they're spending roughly twice what they make. Japan has funded themselves by selling bonds to their citizens at low rates and he doesn't feel they'll be able to do this anymore.
Read more: http://www.marketfolly.com/2010/08/kyle-bass-betting-against-japanese.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarketFolly+%28Market+Folly%29&utm_content=Google+Feedfetcher#ixzz0wyLgDOiI
I'm sure Mike can answer this much more eloquently than myself but what Hayman fails to realize is JGB's do not fund anything. All the sale/purchase of JGB's does is subtract/add reserves to the banking system. JGB's do not fund spending. Nor do taxes. Japan has a lot of issues, but a failed bond auction under the current monetary regime is not one of them.
Japan may very well restructure, but it will be a political decision (and a poor one) not an economic one.
Red Rock:
Like so many others, Bass has it backwards.
When he says...
"Japan has funded themselves by selling bonds to their citizens at low rates and he doesn't feel they'll be able to do this anymore."
He doesn't understand that the savings COME from deficit spending. By definition, Japanese government deficits equal Japanese non-governmental (private sector, Japanese citizens) savings.
The only way he is going to make money on his short JGB position is if the Bank of Japan raises rates and they're not likely to do that.
This trade has been called the "Widow Maker" for good reason.
Norman and Sandifer :
If China's dumping creates a lot of liquidity, would that mean too much money chasing too few goods ?
Right now we have banks that have too much money sitting on their butts and dough.
If there is too much money, then they have to raise rates to stop inflation.
but there is not too much money, there is too much restraint
Yay Goog! - Ditto what Matt said - Your comments on this post demonstrate amazing clarity.
Hi Mortgage Angel
... just remembering the basics that Norman has repeated and they are very useful as invariants.
These invariants are fundementals which cannot be blurred. So when there is spin from a so-called tax payer advocate ( they exist on the left and on the right ) it is easy to trace the invariants and see where the truth is broken.
kind of like symmetry breaking in physics ... where does the argument's logic have a fault line starting and ending
All,
Kyle Bass' assessment of JGBs may or may not be right, but the way that he's putting this trade on gives little chance of him taking a bit hit on the trade. I saw his interview on CNBC with David Faber the other day, and his point was that Japan is 200% of GDP in debt, running 10% y/y deficits, and even though they have an aging populace who will turn from savers to spenders in short order (and something like 95% of JGBs are currently bought by Japanese citizens), that bond vol in the land of the rising sun is at or near its historic lows, and that bond skews are incredibly flat (meaning puts are cheap relative to calls). So he can go out and put on a massively levered trade on higher interest rates in Japan for a super cheap price. If you're a trader worth his salt you've got to love this trade, even if you don't love his analysis. Any time you can get a super levered trade on like this with almost no downside, it's a do. Do I think that the Browns are going to win the Super Bowl this year? No. Do you want to lay me 300 to 1 that they don't? If you do, you're a dope.
Trader,
Don't ever ask anyone to explain why currencies depreciate against other currencies. they're all just paper, and by definition they have value simply as paper. Ask why has the dollar depreciated against gold, oil, silver, and any basket of goods over the past 100 years? B/C governments expand the money supply and credit faster than we can increase production, which makes the "new dollars" all worth less. Money is simply a commodity subject to the same laws of supply and demand as every other commodity. Deflation certainly has the upper hand right now as there has been massive destruction of credit in the private economy, even as the Fed has tried to "reflate" this by printing more worthless money. The question of course is how much credit will be destroyed? And how much money will the central bank print? With Janet Yellen and Ben Bernanke at the helm, one never knows.
Eric,
Its not "printing". The Fed doesnt print money, they issue settlement balances (aka reserve balances) for the banking system.
It may be that the last 30 years of a long term trend downward in monetary policy (from the idiot Volcker Feds 20% high to todays 0%) has resulted in what will be looked at as a unique "parenthesis" in history of US monetary policy.
With a free floating, non-convertable currency like the USD or the Yen, the natural rate of interest is 0% (there is no credit risk), we've fnally arrived there after this 30 year interlude of un-necessarily higher rates. this backdrop of longterm declines in the policy rates has led to much of the price increases over this same time frame due to increased leverage on certain assets financed by the credit markets. The credit industry provided the increased leverage in a way that this ill-advised monetary policy's long term descending path provided the perfect backdrop for. Rates may finally be where they are supposed to be for the USD (very low to zero). and may stay here indefinitely.
Resp,
matt,
I understand that the fed no longer has to crank up printing presses to increase credit in the system. I use the term "print money" simply b/c it is a long since used colloquialism in finance to say print even though i agree that it's not correct. And I agree that there is no credit risk in buying treasuries...you will absolutely be paid back in full at maturity, with agreed upon interest. Where you and I may differ is what that money will buy when I get it back. I would love to have no interest in buying gold, b/c it offers no appreciation or cash flows. But I refuse to lend money to the federal government for 10 years at around 2.5% or for 30 years at around 3.5% and I hate buying into a market that's rallied over 50 % and is looking very "toppy". (I'll take S&P 800 before 1200) So I hold some commodities and some cash and nothing else for the time being. At least with these positions I can be nimble and make a decision quickly. If runaway inflation does come down the pike, it will already be too late to do anything about it, so you might want to own some gold/silver, just in case.
eric
googleheim,
You asked: "If China's dumping creates a lot of liquidity, would that mean too much money chasing too few goods ?"
The problem we have now is that there's not enough money chasing our goods and services to keep us at full-employment. Inflation's only bad if it occurs when that economy is at or above capacity, and we're nowhere near that now.
Basically, the Fed has had a long term implicit inflation target of around 2%. The long trend real GDP growth has been around 3%. Hence, trend nominal GDP has been around 5%.
If real GDP falls below 3% and inflation(via monetary expansion)doesn't fill the gap to maintain the 5% nominal target, you get an roughly proportionate economic slowdown and perhaps even a recession, with any credit or solvency problems greatly exacerbated. Of course, unemployment goes up.
Last I checked, TIPS spreads, yield curves, etc. indicated that inflation was well below 2%, indicating a slowdown, which we're seeing.
So, since the Fed is unwilling to provide more liquidity(inflation) and Congress and the President won't provide enough new stimulus, a dollar dump from overseas could be helpful.
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