US Treasury Bonds and the Chinese

If this wasn't so true, it'd be hilarious. I couldn't have said this better, so I will quote Steve Sjuggerud:

An Embarrassing Day for America: What it Means for Your Investments
By Dr. Steve Sjuggerud

Yesterday, a bunch of Chinese people laughed at us...

What was the joke? U.S. Treasury Secretary Tim Geithner told a crowd of students in Beijing that the trillion dollars worth of U.S. government bonds the Chinese hold are "very safe."

Students laughed. They know the truth.

It was an embarrassing day for America. I never thought I'd see it...

In my career, I've learned there's nothing surer in finance than this: When a Treasury Secretary explicitly tells you "your money is safe," then your money is in big trouble.

I started my career covering emerging markets. One of our running jokes was "He's as honest as a Latin American politician on the eve of devaluation."

You see, the statement "we will not devalue the peso" was one of the simplest indicators we followed. When we heard that from a Latin American politician (and especially a treasury secretary), we knew the peso in that country was about to be devalued. It was almost a lock the country's currency was about to crash.

Why? The simplest answer is, when your country's currency is safe, you don't have to tell people it is... You never hear the Swiss or the Norwegians begging you to "just trust us," for example.

And it's not just Latin America...

On June 30, 1997, Thailand's prime minister declared, "We will not devalue our currency." Two days later, Thailand's currency lost half its value. That was the first domino to fall. Soon after, several Asian countries devalued their currencies. And yes, before each devaluation, each finance minister said the currency wouldn't be devalued.

While it's not so rare in emerging markets, it hasn't happened in recent times in large, stable countries – particularly countries like the U.S. The last time I can remember is back in 1992...

In August 1992, England's treasury secretary Norman Lamont said, "There are going to be no devaluations... We will do whatever is necessary, and I hope there is no doubt about that at all."

Soon after, George Soros made $10 billion betting against the treasury secretary. England devalued its currency, and Soros became a billionaire on one of the most famous trades in history.

This week, U.S. Treasury Secretary Tim Geithner meets with Chinese leaders. His top goal is to reassure them their money invested in U.S. dollars is safe.

But I think the treasury secretary doth protest too much. The historical record is terrible. Position yourself accordingly.

Good investing,

Steve