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I watched with interest the turnout at the anti-tax “tea parties” all around the country last week. The Atlanta gathering attracted 20,000 people, but close to 1,000 protestors gathered in my little corner of northwest Montana.
Regardless of whether you think those people are right or wrong, it shows that a growing number of people are unhappy with the spend, spend, spend mentality of the knuckleheads we elected.
While those angry Americans are sending thousands of teabags to Washington D.C., they aren’t the only ones concerned with our runaway spending.
In fact, those protestors may be the least of President Obama’s and Fed Chairman Ben Bernanke’s worries. I’m talking about foreign governments, whom the United States has depended on to finance our deficits through the purchase of U.S. Treasury securities.
There are $6.37 TRILLION of outstanding marketable U.S. Treasury securities. Of that $6.37 trillion, $3.16 trillion or roughly one-half are held by foreign investors.
The Balance Sheet
Of A Bankrupt Gambler
More than any other country, China owns the largest chunk of those bonds. China is now the largest foreign holder of U.S. Treasuries with $744.3 billion at the end of February.
China and the rest of the world are getting ants in their pants and are reconsidering the wisdom of holding bonds from a country with a balance sheet that looks like it belongs to a bankrupt gambler.
China, because of its still-ballooning trade surplus, is forced each month to do something with all those dollars we keep sending them. In February (the most recent Treasury data), China bought $5.6 billion of short-term Treasury bills but sold $954 million of long-term Treasury bonds.
That was the first time since November that China purchased more bills than longer-maturity debt.
Guess why? Well, here’s what two Chinese experts said about it last weekend at the Boao Forum for Asia:
“The U.S. should link the earnings of government bonds with inflation to protect the interests of international investors, including Asian nations,” said Zeng Peiyan, the former Chinese vice-premier chairman of the People’s Bank of China and head of the International Economic Exchanges, a government think tank.
“The depreciation of the dollar has become an inevitable historical trend,” said Zheng Xinli, vice president of China Center for International Economic Exchanges. “Countries with considerable holdings, such as China, India, Japan and South Korea, should join hands to demand that the U.S. make commitments to peg the value of U.S. Treasury bonds to the inflation rates of the U.S. dollar.”
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| Chinese Premier Wen Jiabao is growing increasingly worried about the ability of the United States to pay back its massive debts. |
The biggest Chinese cheese of all, Chinese Premier Wen Jiabao, issued a similar warning a few weeks ago.
“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.”
Those were not impromptu remarks. They are a clear message that China isn’t going to keep buying U.S. government bonds.
That anti-dollar, anti-U.S. bond attitude is spreading around the globe. An editorial piece in the India Daily last week was more specific and more disastrous.
- “Federal Reserve’s policies are about to backfire. America may face something never seen before ever in the history of world economics. It is an unemployment level at the depression level. And it may accompany severe double-digit inflation.”
- “By 2015, 78 percent of U.S. citizens can be underemployed or unemployed.”
- “The bubble on U.S. Treasury bond is about to implode. The U.S. long-term interest rate can go as high as 22 percent, believe it or not.”
- “The U.S. dollar index can drop below 50. Currently it is at 85.”
Those are extremely dire predictions, and while I’m not sure I agree with the severity of the problem, I absolutely agree with their conclusions — a weaker U.S. dollar and higher U.S. interest rates are in the cards
Politics Aside, Here’s What You
Should Do With Your Portfolio
I don’t care what your politics are or whether you agree or disagree with the tea-party protestors, but I do care what happens to your portfolio.
If you own a bunch of U.S. stocks and U.S. bonds — you’re portfolio is headed for a big, big bruising.
You can do nothing or you can do something. If you’re more of the ‘do something’ camp, here are two options that I urge you to carefully consider.
Safe Hiding Spot: 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.
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: 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.
To be fair, I should disclose that my Asia Stock Alert subscribers own this fund and are already sitting on an open profit that I expect to get even bigger.
Best wishes,
Tony
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