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The Nine Chinese Men Who Control the Fate of AmericaBy Dr. Steve SjuggerudWednesday, January 6, 2010
Nine politicians in China control the fate of the United States of America.
I'm not kidding. The implications are scary. Let me explain... These nine men are the Standing Committee of the Communist Party of China. They control the value of China's currency. Fortunately, it's easy to forecast what a politician will do... He will do whatever it takes to keep his job. The story is remarkably simple... In China, the goal of these nine politicians is to keep the Communist Party in power. The way to accomplish that goal is for the masses to stay employed. Right now, China keeps the people working by exporting cheap goods. In order to make sure those Chinese goods stay cheap, the Standing Committee sets the currency exchange rate artificially low. And that is the crucial part of the story... How do these nine politicians keep the exchange rate low? They buy U.S. dollars. Importantly, these nine men don't just sit on stacks of dollar bills... They invest those dollars in U.S. Treasury bonds. It's gotten out of hand. China owns nearly $1 trillion worth of U.S. debt. China's holdings have increased dramatically every year... They've grown nearly tenfold since the end of 2000:
And China's soon-to-be trillion dollars of U.S. government debt is not the end of the story. It's the beginning... In order for other Asian countries to compete with China, they have to artificially keep their own exchange rates low. And that's exactly what they're doing. They're doing it the same way China does... They're buying mountains of U.S. Treasury bonds, too. At this point, foreigners now own half of the U.S. Treasuries outstanding (of the ones that are not held by the U.S. government). And they're buying more... Most importantly, there's enough demand for U.S. debt from foreigners that the U.S. government can finance its deficits for years to come... all by simply selling Treasury bonds to foreigners. Would you lend money to the U.S. government at 3.5% interest for 10 years? I sure wouldn't. I really can't name anyone who thinks 3.5% in government bonds is a good deal. The foreigners aren't buying to earn 3.5% interest. They're buying to keep the value of their currencies down. India is an interesting example... Earlier this year, when India spent $6.7 billion buying gold from the IMF, it was all over the news. What WASN'T reported was that India bought far more U.S. Treasury bonds than gold. India has increased its stake in Treasuries by over $22 billion since last summer – increasing its Treasury bond holdings more than 200%. So, yes, there's a mountain of demand for U.S. dollars – Treasury bonds – from all over the developing world. The important thing is demand will last. It will last as long as the nine men on China's Standing Committee don't change their minds. So what does all this mean? It means the U.S. dollar will not crash right now. Most investors believe the U.S. dollar is about to crash. But the facts are clear... The dollar has ready buyers of hundreds of billions of dollars worth of Treasuries. While the dollar might lose ground against gold, the reality is, no other paper currency has a tailwind of hundreds of billions of dollars of buying waiting in the wings like the U.S. dollar does. Eventually, the dollar bears will be right. The U.S. will have to face all its debt one day. But that story is not in my True Wealth Script for 2010. Good investing, Steve
Further Reading:
A Major Uptrend Is Just Getting Started in This Hated Asset 
STOCK MARKET INSURANCE IS ON SALE AGAIN Volatility, we hardly knew ye... Part II.
Back in September, we ran a chart of Wall Street's most common gauge of investor fear, the "VIX." This index tracks the price people are willing to pay for protective stock options, aka "portfolio insurance." We pointed out how folks just aren't scared of risk anymore. They're becoming less worried... Folks in the insurance industry can tell you an interesting thing about their business. Their customers are most willing to buy insurance against earthquakes and hurricanes right after a disaster... right when prices are high. This is when the threat is fresh in the buyer's mind. Most folks aren't much interested in buying insurance when things have been calm for a decade... when insurance is cheap. This phenomenon is at work in the VIX right now. As you can see from today's chart, the VIX reached a "super spike" point around 80 in December 2008. As billions of government dollars salved the wounds of the housing crisis, the VIX drifted lower and lower all last year. And just in the last several trading sessions, the fear gauge dropped below the 20 level. Investors aren't much concerned with risk... and "insurance" is cheap.  |
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