March 17, 2012 at 3:39 am #17593
EXCELLENT SECOND COURSE OF FINANCIAL FOOD FOR THOUGHT TODAY BY ROB ON THE US T-BOND BUBBLE. IT WAS THE PERFECT FOLLOWUP TO BILL’S FIRST COURSE PIECE LAST WEEK ABOUT HOW JAPAN’S WOES COULD QUICKLY BECOME UNCLE SAM’S. I OFFER THE FOLLOWING DESERT TO THEIR WELL CONSIDERED SMORGASHBOARD OF THOUGHT: CONSIDER THE CHINESE: WHAT IF, TO AVOID THE HARD LANDING MANY PREDICT FOR CHINA, THE CHICOMS DIP INTO THEIR SUBSTANTIAL HOARD OF “RESERVES”?** SURE, THIS MIGHT TEMPORARILY HALT A CHINESE RECESSION, HOWEVER, WOULD IT NOT ALSO CONVERT A 2ND LARGE T-BOND HOLDER INTO A WHOLESALE T-BOND SELLER? (AS ROB INDICATED, CHINA HAS ALREADY TRIMMED ITS T-BOND HOLDINGS A SMIDGE. WHAT IF IT CUT THOSE HOLDINGS IN HALF . . . AND DID SO ABOUT THE SAME TIME JAPAN WAS DOING LIKEWISE?) ALLOW ME TO OFFER THE FOLLOWING AFTER DINNER DRINK AS WELL: WHAT IF THE LARGE MIDDLE EASTERN T-BOND BUYERS ARE FORCED BY HIGHER MILITARY/SECURITY EXPENDITURES TO SELL THEIR TO-BONDS TOO? IF IRAN HAS ANY BONDS BUT IS ATTACKED BY ISRAEL OR THE USA, WOULD THE MULLAHS NOT SELL THEIR BONDS TO BUY MORE ARMS FROM RUSSIA (AS WELL AS TO SPITE THE STATES)? HMM. AND, WHAT IF THE HOUSE OF SAUD BECOMES NERVOUS ABOUT SABRE RATTLING IN IRAN? MIGHT IT NOT ALSO CONVERT PETRO-DOLLARS INTO WEAPONS, INSTEAD OF INTO TREASURIES? LET’S MAKE IT WORSE: WHAT IF IRAN ACTUALLY ATTACKED SAUDI ARABIA? NOW THAT WE ARE ALL SUFFERING FROM BOND MARKET INDIGESTION, LET’S CONSIDER AGAIN THE PRIVATE INVESTOR WHOM ROB MENTIONS AS A FLEETING DINER, A CONNOISSEUR OF “FAST INVESTMENT FOOD”. IF PRIVATE INVESTORS SEE FOREIGNERS ABANDONING THE T-BOND MKT, WILL THEY NOT ALSO BEGIN TO REALIZE THAT THE T-BOND EMPEROR HAS NO CLOTHES . . . AND THAT HE BEARS A BLOATED MIDRIFF, A KIND OF BUBBLE BELLY, ONE IN SORE NEED OF RELIEF?
OF COURSE, IF THE PRIVATE INVESTOR SEES T-BOND RATES RISING ACROSS THE CURVE AND THE NEW HIGHER RATES FLOWING OVER INTO COMMERCIAL DEBT MARKETS, HOW EXCITED WILL HE BE ABOUT SWIMMING IN THE STOCK MARKET? THAT SAID, WHERE SHALL HE GO TO SECURE HIGH GROUND? WHAT SHALL BE THE ROCK OF HIS SALVATION? HEH.
**To make the case that China will never suffer a hard landing, China bulls always point to China’s massive hoard of reserves. These uber-bulls on China state that the Chicoms will do anything to avoid another Tiananmen Square. They’ll sell whatever reserves they have to fight economic stagnation at home. Hmm. It’s odd though, that China bulls never mention the effect that large scale reserve selling would have upon the price of the assets held in the sovereign reserve account.March 23, 2012 at 2:23 pm #27193
Interesting perspective, but as a lot of people are talking about the treasury bond bubble, and the the media jumped on this for the few days that treasury yields have been going up, let me offer this perspective. Maybe this bubble is not yet ready to pop. On the side of the long treasury bond is the ageing demographic of the US. Pension funds are forced to allocate to long dated bonds away from stocks as people get older. It is indeed true that the mullahs may try to offload their T-Bond holdings, but to spite the US will cost them a lot of money from the decline in the value of their assets. As far as Saudi Arabia is concerned, if it was attacked by the Iranians, the US would go to war directly with Iran. Worldwide, capital would flow to US assets as a safety trade. Right or wrong, at times of distress there is always a capital flight to the US. You aren’t going to want to take a hit to your wealth just to hurt someone else. Again, the Chinese would not want to hurt themselves through a massive liquidation of T-Bonds, given a significant portion of their reserves are still held in USD. Remember, a mass sale of bonds would likely also weaken the USD, but even if it doesn’t how much of a haircut are the Chinese going to take on their asset positions. The current issue for China is that if there is a slowing, which would result in upheaval, and the only model for generating wealth that they have is to export, they will need to weaken the Renminbi. The US is still a big part of their market, so they will look to weaken against the USD. To do this they need to sell Renminbi and buy US assets, the most liquid assets you can buy and that will accommodate large capital allocations are still good old treasuries. In case the Chinese get into an inflationary scenario, that causes social upheaval, then yes they might consider letting the Renminbi continue to appreciate, and this may lead to a sale of US assets. However, unless they have moved away from a totally export driven model, they will continue to be wary of currency appreciation too quickly. That is the only way they can continue to increase wealth distribution and move more people into the cities and give them jobs with a decent wage. Also, what about Europe? If Europe implodes or looks like it is going to be at the point of contagion, the only market large enough to take on the money flows out of the Euro that will result will be the US. I would therefore argue that maybe treasuries still have some life left in them.March 23, 2012 at 9:57 pm #27194
YOU CANNOT HAVE A BUBBLE IN THE BOND MARKET.YOU ALWAYS GET PAID PAR AT MATURITYMarch 27, 2012 at 12:43 am #17913
I don’t think we need to worry about the Chinese dumping their T-Bills. As the old saying goes….if you owe the bank $100K that is your problem…if you owe the bank $100M that is the banks problem. We owe the Chinese so much $$ it is a real problem for them.
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