China Sends Obama a Clear Message on U.S. Debt
Politics / US Bonds Mar 19, 2009 - 02:43 AM GMT
Tony Sagami writes: What would happen if your boss cut your salary, you had no savings, and none of the banks or credit card companies would lend you any money? You'd be in some deep doo-doo, wouldn't you?
Well … that's exactly the situation the U.S. is potentially staring at if foreign governments decide they don't want to loan us any more money by buying U.S. Treasury and other government-backed bonds.
And who buys most of our bonds? China and Japan …
At the end of 2008, China owned $727.4 billion worth of U.S. Treasury bonds. And Japan was second, at $626 billion.
Japan has drastically curtailed buying U.S. bonds now that its economy is in shambles. But China has been — and continues to be — the most important lender to the U.S., essentially funding a big chunk of President Obama's $787-billion economic stimulus plan.
The problem is …
China is Re-Thinking the Wisdom Of Holding So Much U.S. Debt
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| Chinese Premier Wen Jiabao is worried about the stability of China's huge portfolio of U.S. government bonds. |
Chinese Premier Wen Jiabao, speaking at the closing press conference of China's National People's Congress — China's annual legislative session — dropped this verbal bomb on the Obama administration last week:
“To be honest, I am definitely a little worried. We have loaned huge amounts of money to the United States, so of course, we have to be concerned. We hope the United States honors its word and ensures the safety of Chinese assets.”
I highly doubt that those remarks were impromptu. They are a clear message to the Obama administration that it needs to stop spending like a drunken sailor if it expects the rest of the world to buy U.S. government bonds.
The line of Chinese policymakers, economists, and scholars voicing concerns about investing too much of their country's $2 trillion surplus in U.S. debt is growing longer and longer. Many are urging diversifying out of U.S. bonds and into more tangible assets such as natural resources and gold.
The reason is simple:
There is an expectation that U.S. bonds are headed for a big drop in value because we are simply printing too much money to fund our stimulus spending spree.
In fact, the Chinese are already starting to move out of U.S. bonds …
Last summer, China's big state-owned banks — such as the Bank of China and the Bank of Communications — began dramatically reducing their holdings in Fannie Mae and Freddie Mac debt.
It turns out the Chinese made a pretty savvy move … Fannie Mae and Freddie Mac bonds have gotten annihilated since then.
Now, the Chinese are concerned that U.S. Treasury debt could suffer as well.
So what can you do if you think the Chinese and Premier Wen Jiaboa are right?
Four Safe Hiding Spots To Consider:
Safe Hiding Spot #1 — Shorten-up on maturities …
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| Long-term bonds are the last thing you'll want to be holding if Obama's administration keeps spending like a drunken sailor. |
If you're a fixed-income investor, you could shorten the maturities of your bond portfolio. The Obama administration can't spend, spend, spend without creating a big inflationary problem down the road. That means long-term bonds are the very last thing you want to be holding when inflation takes off.
Safe Hiding Spot #2 — Funds that profit from rising interest rates …
As the mountain of debt shoots to the moon and the safety of U.S. obligations comes under attack, the Treasury will likely have to boost interest rates to get investors to buy its bonds. And there are mutual funds that could make you richer along the way. For example, the Rydex Inverse Gov Long Bond Strategy (RYJUX) fund and the ProFunds Rising Rates Opportunity (RRPIX) fund are meant to profit from rising Treasury bond interest rates.
Safe Hiding Spot #3 — This fund offers protection against a tumbling U.S. dollar …
Another high-profit strategy is to bet that the U.S. dollar is headed for trouble. The Merck Hard Currency (MERKX) fund invests in the currencies of countries with the strongest economies and budget surpluses and could do very well if the U.S. dollar falls. Subscribers of my Asia Stock Alert already own this fund.
Safe Hiding Spot #4 — Non-dollar debt …
I believe the most lucrative strategy of all will be investing in long-term, non-dollar denominated debt of countries with prudent fiscal and monetary practices. International bond funds, like the T. Rowe Price International Bond (RPIBX) or the American Century International Bond (BEGBX), could be big winners.
To sum it up: If I could make one and only one prediction for the next year, it would be that the U.S. dollar is going lower. A lot lower.
And if I'm right, any of the above safe hiding spots should do very, very well.
Best wishes,
Tony
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