China's 2011 holdings US Treasuries debt cut again in October

China trimmed its holdings of US Treasury debt by US$ 14.2 billion in October, driving its holdings to the lowest level this year.

This move to cut the US debt holdings indicated an attempt by the People's Bank of China (PBOC) to increase its cash holdings of dollars in order to shore up the value of the yuan.

The yuan has been faced with increasing downward pressure as investors sold the currency seeking a safe haven in the US dollar amid a grim outlook for the global economy.


China held a total of US$ 1,134 billion of US Treasury debt as of October 2011. According to the US Treasury Department, China accounted for approximately 24% of total foreign holdings of US debt. Despite this latest cut, China remains the largest foreign holder of US treasuries.

Analysts advocate China should continue to accelerate the diversification of its US$ 3.2 trillion foreign-exchange reserves, amid growing global financial uncertainty. Currently, about one-third of China's foreign-exchange reserves is invested in US Treasury bonds.

The PBOC has been reported it's planning to create a fund worth US$ 300 billion to invest the country's foreign-exchange reserves in the US and European markets. The fund will reportedly seek to invest in real assets and company shares, rather than government securities.

Gao Xiqing, vice-chairman of China Investment Corp, the country's sovereign wealth fund, said recently that the fund is actively looking for investment opportunities in infrastructure projects in countries including Britain, the US, and Brazil.

Standard & Poors Cuts USA Sovereign Credit Rating to "Negative" from "Stable"

The US ratings agencies, long discredited for kow-towing to the major Wall Street investment houses, as they led a race to the bottom in terms of assigning ratings to sophisticated and complex instruments they themselves were not able to fully understand, finally peered over the fiscal precipice on Monday with Standard & Poors opening the first salvo to admonish the US sovereign credit rating. It cut its long-term outlook on the US to "negative" from "stable." The revision sparked fears that Uncle Sam could soon surrender his coveted "AAA" rating, the cornerstone of "reserve currency" status.

I've always seen these firms as lagging indicators to the machinations in the real economy. Look at what happened in the Eurozone with Greece, Ireland and Portugal. They were late...as usual...in recognising the gargantuan sovereign fiscal risks. Maybe they don't see it as part of their remit anymore to stand up to and ruffle governments' feathers before fiscal road accidents happen. It used to be said the role of the Federal Reserve was to take away the punch bowl just as the party got swinging...with the independent ratings agencies jousting alongside in tandem. However, the pressure within these agencies to search for new sources of income compromised their high ethical standards in the quarterly earnings pressure-cooker that is Wall Street.

For most of 2011, long-term bond yields have been in a trading range between 4.375% and 4.65%. Despite the upward trajectory of QE2 money printing, an endless stream of Treasury bonds issuance and foreign buyers starting to make noises about US fiscal irresponsibilty (Brazil, Russia and China) and the Government's ability to repay, yields have remained stubbornly low.

But interest rates will have to go higher soon...the Treasury has to offer attractive yields to appeal to these overseas buyers to buy ever higher volumes. In February, PIMCO, led by bond king Bill Gross, a conservative bond stalwart, announced its exit from the US treasury market completely. That's akin to Burger King declaring they no longer will use beef in their burgers.

The opportunity to short the treasury bond market is not far off, with yields near the lowest points and pricing near the top of their trading ranges. QE2 ends on 30th June and will open up uncertainty as the market addicts develope cold turkey. Where else can one find the grease to ramp up the markets? A lucrative ETF, ProShares UltraShort 20+ Year Treasury (symbol NYSE: TBT) is a good proxy to brace for a decline in treasury prices, gaining 2% for each 1% fall in price.

2011 Japan Earthquake, Nuclear Accident and Economic Implications

The sixth largest earthquake ever recorded at 9.0 on 11 March in northern Japan and the ensuing tsunami plus nuclear accident at the Fukushima Daicchi is a potential game-changer to the current fragile global economic stability.

With facts still foggy a week after the event, it is not inconceivable fear starts to take over. After all, in the nuclear industry "perceptions" are everything (aka Three Mile Island 1979, Chernobyl 1986). Already some multinational companies have chartered private jets to evacuate their overseas staff from Japan.

This radiation threat can zigzag but I see the economic picture taking shape in the following direction:

1. The world watches rivetted by this destruction in an advanced economy. One reactor may be so catastrophically damaged it contaminates the whole site so rendering the permanent complete shutdown of the entire electricity generating complex. Immediate energy shortages cascade to a grinding slowdown for industries served in the local area. It will take weeks to play out.

2. Japan is a major world player. The smooth cash flows in the global economic system to this financial centre will be disrupted as Japan rethinks the rebuilding programmes for this region which will probably take several years. Initial estimates are this area generates 3% of the national output. Just-in-time manufacturing and logistics patterns can screech to a halt if there are no alternative networks available and the implications can be heavy for domestic exporters and multinational companies. For the financial players, global money movements can be disrupted as their interest rate sensitive strategies and carry trades in the country start to morph into something completely unexpected in an uprooted Japanese landscape. Already we saw drastic and unexpected G7 intervention in the yen this week.

3. Should Japanese exports plunge and imports rise for the reconstruction efforts, Japanese money flows will tend to stay onshore within Japan. They may find they cannot participate in the US Treasury auctions of which they are the world's second biggest holder. US Treasury yields will therefore start to notch up and this can have ominous implications for bondholders and governments in their debt-servicing interest payments.

4. With money ebbing away from the US Treasury auctions, already magnified by fiscal crises in Western Europe PIGS countries, questions will be raised whether another round of quantitative easing be required after the end of June. The current rising oil price due to north African tensions (another potential game-changer in Middle-East oil dynamics) does not help. Is the groundwork being "justifiably" prepared for QE3 based on this Japan crisis?

5. There could be spill-over effects into the enormous derivatives arena. This is a fast-changing financial landscape for the international big boys and any changes in the economic assumptions that underpin these assets can quickly turn them toxic.

6. Everything changes. Faster than you can believe.

The baseline is starting to shift this week. We cannot foretell whether the resulting market turbulence (Nikkei down 16.5% in two days, worst performance since 1987 crash) was just a temporary hiccup or the harbinger of bigger moves to come over the the next two months, as the economic consequences of the guargantuan task ahead for the world's leading creditor nation are digested. Japan recovered relatively quickly from the 1995 Kobe 6.9 earthquake.

After the stunning market rebounds over the last two years, it may be time to hit the sidelines by paring down the non-core holdings and move to cash.

Black clouds gather over Europe...a Greek tragedy playing out...

Greece is in trouble. At first gradually, and then with alarming speed, the country has lost credibility with investors because it borrowed too much money and now it can't afford to service its debt. Greece's problems don't directly influence most Chinese and American businesses, but they remind us of the greater issue that's still out there...

The whole world is carrying too much debt. Years and years of artificially low interest rates, lax lending standards, and a belief that assets can't fall have clogged our arteries with bad investments and unserviceable debts. We had a heart attack in 2008. It hurt, but it didn't kill us. We should have learned from it. Instead, we ordered the world's biggest plate of pancakes and bacon. We took on another huge slab of debt and we supported all the malinvestments. Greece's problems are like chest pains after you've just left the hospital. They make your family nervous... Given the massive debt levels, investors are demanding a very high rate of return at 7% because the risk of default is high, compared with 4.5% a few months ago.. If Greece is not able to raise capital, it won t be able to meet its obligations.




















If Germany bails out Greece, it just makes the problems in Europe worse. Greece stops trying to fix itself, and now every other broke European country knows they can have a bailout, too. They also stop austerity measures. And meanwhile, the debt burden is still there. It hasn't gone away. They've just pushed the default farther into the future.


Greece, in other words, is the fiscal Petri dish that reveals in gory detail what could happen if soveriegn governments fail to maintain the confidence of investors. It is not merely that those interest rates are already inflicting an awful toll on borrowers in Athens and beyond. It is that they are sending the national government towards a full-blown debt spiral, in which the cost of its annual interest bill becomes so unmanageable that it can hardly afford to supply its citizens with basic services.

But on the bigger matter of what this euro collapse country by country means: in the usual sequence, if Greece were still using its own drachma, the world would write down the currency, devaluing it in exchange terms. The holders of Greek bonds would take a big capital loss and the system would eventually regain a better trade balance as Greece wouldn’t be able to afford to import as much at the same time that exports would increase thanks to cheaper labor. But with the European Union in place, the exchange rate can't move, so Greek interest rates have jumped.

Greece is not a major economic power. It only represents 2% of Europe s GDP. The market is paying close attention to this situation because Greece is a microcosm of Europe. Many other nations are in a similar situation (Portugal, Ireland, Italy, Spain, Bulgaria, Latvia, Lithuania and even the United Kingdom). Enormous debts have resulted from liberal social programs (national healthcare, pensions, welfare) and many governments have been spending beyond their means for decades. A year ago, they were not in a financial position to spend billions of dollars on bailouts and stimulus programs but they did. Now, they are dangerously close to the breaking down completely.

The situation in Greece might be resolved in the next two weeks, but the next problem is just around the corner. Last week, Portugal tried to raise $1 billion in a one-year auction and they had to cancel it due to low demand. When a country can t even auction short-term maturities, it is in dire straits. Spain s unemployment rate is 19.5% and their debt has been downgraded. Spain is a much bigger problem as the country represents 13% of Europe s GDP. All countries are struggling with their own deficits and they can t jeopardize their own well being to help other nations. The dominos are lined up and wobbling, and almost anything – even a concerted push by speculators – could set them in motion. It seems to me that the euro is turning out to be much more complex to manage than the US dollar and could be very vulnerable for years to come.

To play offense, you can short the Euro ETF "ProShares UltraShort Euro" (EUO:NYSE). Block-tackling through defence, consider going switching to US Treasury bonds as a safe haven this year.

US Bonds: a safe haven to diversify away from the PIGS (but for 2010 only) ...