China is now a net SELLER of U.S. Treasury notes and bonds!

by Mike Larson 09-06-09
Mike Larson

We told you this was coming. Heck: A blind man could have seen it a mile away.

For many months now, we’ve predicted that Washington’s wild spending and borrowing spree would make the global investors who buy our longer-term Treasuries — notes and bonds — as nervous as long-tailed cats in a room full of rocking chairs.

We’ve cautioned you that our sky-high deficits, record shattering borrowing by the U.S. Treasury and runaway money printing by the Federal Reserve would cause them to lose sleep, worrying about the real return on their money — not to mention, the return OF their money.

We forecast that as these concerns deepened, they would reduce the amount of money they were willing to loan Washington … or stop loaning us money altogether … or even begin selling the longer-term Treasuries they already own.

Now, those forecasts have begun to come true — in spades!

Just a few days ago, the U.S. Treasury Department revealed that China actually REDUCED its note and bond holdings by $25 billion in June. Although China did NOT sell shorter-term Treasury bills — and isn’t expected to — it’s still the largest amount of Treasuries China has ever sold in a single month.

This is a huge development:

* In 2006, China and Hong Kong accounted for more than 50 percent of the increase in the amount of Treasury debt sold to the public …

* In 2008, their share had fallen to 22 percent as the U.S. government increased its public debt by a record $1.2 trillion …

* In the first half of THIS year, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasury bonds that were sold — and now …

* In June, China became a net SELLER of U.S. Treasury notes and bonds!

So what’s next? Will China dump the rest of its estimated $876 billion hoard of U.S. Treasuries and crash the Treasury market — and by doing so, kill the U.S. dollar, drive interest rates sky high and leave the U.S. economy a smoking ruin?

Absolutely not. Beijing’s leaders are far too smart for that. They’re well aware that doing that would crush the value of the Treasuries they own and cost them a king’s ransom.

But one thing seems clear: One of Washington’s most dependable sources of loans to finance our out-of-control deficits is drying up. That means demand for longer-term Treasuries is softening.

That also means you can pretty much count on much higher interest rates in 2010 and beyond — and you can count on those higher rates to crush any chances of a vigorous recovery or rapidly rising stock prices here.

Meanwhile — even as the U.S. stock market has rebounded by about 13 percent this year …

* China’s Shanghai Index is up 46.5 percent — the average stock producing nearly $4 in profits for every $1 produced by the S&P!

* Hong Kong is up 37.1 percent — three times more than the S&P 500 …

* Singapore is up 47.2 percent, generating nearly $4 in profits for every $1 produced by the S&P 500, and …

* Taiwan is up 48.7 percent, also beating the S&P 500 stock by nearly four to one.

* In Vietnam, the average stock is up a resounding 73.2 percent — spinning off $5.63 in profits for every $1 being earned on the S&P 500.

* is growing rich selling China the natural resources it needs to fuel its record-shattering economic boom — and so far this year, the average Brazilian stock has outpaced the average S&P stock by nearly five to one.

* India, the world’s second-most populous nation is also enjoying an historic economic expansion — and so far in 2009, the average Indian stock has generated more than $6 in profits for every $1 earned on the S&P 500.

* And resource-rich Russia is also making a bundle selling oil and other resources to China and India — and so far this year, the Russian stock market has been on a tear — UP a whopping 76.3 percent …

And spinning off nearly SIX DOLLARS in profits for every ONE dollar being earned on our own S&P 500!

Until next time,

Mike