After shying away from buying U.S. Treasuries, as the Federal Reserve was using its QE2 to do its own buying of government bonds, China increased its holdings of U.S. government debt for the first time in six months this April.
China holds about $1.149 trillion of long-term U.S. notes and bonds. Japan is the second largest holder of long-term U.S. debt, at just under $1.0 trillion dollars.
In total, foreign holdings of long-term U.S. Treasuries sit at $4.49 trillion (Source: Bloomberg).
Excuse my ponderings this morning…
While I don’t have a PhD in Economics, if I understand this right: foreigners own the majority of the U.S. debt. The Fed has been buying the same debt under its $600-billion QE2 program.
As we move from a national debt ceiling of $14.3 trillion to $17.0 trillion or $18.0 trillion, who will buy that extra debt? There seems to be only two buyers in the marketplace, foreigners and the Federal Reserve (the latter, only if it starts QE3).
At what point do China and Japan say, “Thank you, but we have enough U.S. debt on our books?” And who will ultimately be smarter? Will the U.S. succeed in keeping interest rates low, bringing in inflation and paying foreigners back with devalued U.S. dollars?
Or will China and Japan succeed in demanding higher interest rates on U.S. debt, while they debase the U.S. dollar as the world’s reserve currency?
In my view, the remainder of this decade will be a nail-biter…a real prelude to America’s future. And I wouldn’t want to miss it for anything.
If we go back through history, when we see countries in the past exposed to great dependence on foreign investment, the debtor nation has eventually faced sovereign debt problems and high inflation. Do we really think the U.S. will escape the same fate?
Michael’s Personal Notes:
Look at just how pathetic things have become in the housing market…
Sales of existing homes in the U.S. (re-sales) fell in May to their lowest level in six months. In May, 31% of all re-sales were “distressed” homes. In that same month, 30% of all re-sales were cash transactions. The median price of a resale home in the U.S. fell 4.6% from May 2010 to May 2011 (Source of all data: National Association of Realtors).
The banks have pulled the lending strings so tight that one out of three home purchases is in cash. (What a difference from 2006!) The government has not been successful at getting banks to increase lending in the housing sector. Too many distressed properties overhang the housing market.
How can the economy possibly recover under a scenario where the housing market still can’t find a bottom in its crash? Simply, a meaningful economic expansion cannot begin without a recovery in housing.
I’m sticking with my prediction of another 7.5% decline in the price of U.S. homes this year.
Where the Market Stands; Where it’s Headed:
Whenever I guide my readers through a difficult period in the market and we pull through, I feel very proud of our efforts. Let me explain.
From the period May 2, 2011 to June 15, 2011, the Dow Jones Industrial Average fell 1,001 points, or 7.7%. By June 15, exactly one week ago today, my indicators starting flashing that stocks were severely “oversold.”
On June 15, 2011, on these pages, my lead story was, “Stock Market Bounce Imminent as Bullish Sentiment Collapses.” Just this past Monday, my lead story was “Five Reasons Why Stocks Will Rise in the Immediate Term.” As cocky as it sounds, since June 15, the Dow Jones Industrial Average has gained 315 points, about 2.7%.
In this business, you can’t be too sure about yourself because that’s when the market slaps you in the face. Humbleness is one of the keys to success in the market.
By mid-June, the attitude towards stocks was getting too negative. Investors were pulling money out of mutual funds, stock and advisors were turning bearish en masse, but corporate earnings and monetary policy remained very favorable.
This bear market rally…it will exhaust itself soon. But it has yet to finish its business of luring more investors back into the stock market. Hence, I continue with my position that a bear market prevails for stocks.
What He Said:
“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael began talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.