China is dumping US Treasuries and equities

The fear that foreign holders of US Treasury bonds are diversifying away from US Dollar-denominated assets is materializing. China, the largest holder of US Treasuries, is doing exactly that, while investing in natural resource companies and assets.

In order to prevent bond auctions from failing, mysterious buyers from England are stepping up to the plate to fill in the gap. Which is surprising since the UK may possibly be in worse fiscal shape than the US.

http://www.zerohedge.com/article/tic-data-confirms-china-bond-sell-continues-foreigners-dump-corporate-bonds-and-stocks

US Treasury bond auctions--a warning

http://seekingalpha.com/article/188380-the-u-s-land-of-the-free-and-home-of-a-nearly-failed-treasury-auction-of-its-own?source=feed

To see such a MASSIVE drop off in Indirect Buyers (40% down to 28%) is a MAJOR warning sign that Foreign Governments are no longer willing to buy long-term US debt.

This auction was a very small step away from a failed auction. To see Primary Dealers buying so much (remember they HAVE to buy it) and Indirect Buyers so little, only confirms what I’ve been saying for months: that the US is entering a Debt Spiral; a situation in which it must issue more and more debt (while rolling over trillions of old debt) at the very time that fewer and fewer investors are willing to lend to the US for any lengthy period of time (more than ten years).

Folks, forget Greece, the US has its own debt problems. And they’re MAJOR. The fact that stocks RALLIED on this news tells you how disconnected stocks are from reality. The Debt Spiral has started and is now accelerating. It’s only a matter of time before it becomes a full-fledged crisis. And this one will make 2008 look like a cakewalk.

German Chancellor bashes the US monetary policy

Merkel is the latest foreign leader to blast the Fed and US Treasury. According to Eric Roseman:

“Over the last 12 months we’ve witnessed one of the most stunning economic crashes in history…whereby bank balance sheet risk has been transferred from the private sector to government.”

“And, with the printing presses now on full blast, it’s no wonder investors – especially the Chinese – are growing nervous as Treasury prints bonds like there’s no tomorrow. Almost on a weekly basis Treasury is auctioning tens of billions of dollars of U.S. paper.”

“According to Bianco Research, the aggregate cost of the U.S. bail-out program is now estimated at $4.2 trillion dollars – larger than the inflation-adjusted cost of WW II.”

“Grant’s Interest Rate Observer pegs the current stimulus at roughly 30% of GDP, or gross domestic product. To put this monster into perspective, the total sum of all fiscal and monetary measures during the 12 previous U.S. economic downturns since 1929 comes to a mere 39% of GDP.”

“What’s truly alarming is not only the aggressive attempt to balloon credit but the failure of the Federal Reserve to mop-up excess Treasury sales… “

“Like Britain, Germany, Holland and Ireland among others, the United States has struggled to sell longer dated government bonds recently. The risk is growing that one or several sovereign issuers will fail to auction off debt; this has already happened four times in Germany since last October – a spectacular upset because Germany is the world’s second most liquid bond market and in my eyes a far stronger credit risk that any other nation – including the United States.”

“Government has swept this crisis under the rug.”

“We all better hope that investors don’t force government bond yields much higher…because it might result in another disaster as mortgage-backed securities, CDOs, mortgage rates, housing prices and other loans tied to intermediate term rates are forced higher. Consumers can’t handle high rates.”

“We are now in the latter stages of debt deflation – saved by government. World governments will eventually succeed in growing the economy again through the monetization of debt and ultimately will fail to arrest inflation as it develops again over the next 12-36 months.”

“The consequences of this policy action will be horrendous down the road for most assets, except gold, commodities and TIPS as another dollar and possibly, euro crisis, hits the fan.”

Oh oh...looks like quantitative easing won't work after all

As I've ranted on endlessly, quantitative easing (QE), a method of monetizing debt where the central bank purchases it's own government bonds, has a poor track record. QE, which the Bank of England initiated two weeks ago, and the Fed is implementing this week, has the aim of reducing long-term interest rates, in order to facilitate an economic recovery. When homeowners can obtain low-interest mortgages (which are tied to bond yields), it is stimulative to the economy. It works great in theory, but in practice, it is disastrous long-term, as QE induces unintended inflation down the road. You can't print money and not expect inflation, once it flows into the economy. So the net effect is opposite to the desired effect long-term, even if its desired positive effect (lower interest rates) is temporary.

As someone who is betting on higher rates (and lower bond prices), I figured we had at least several quarters before 10- and 30-year yields would increase again--there would be a time lag before the stimulative effects took hold. But something more insidious is in play, and something I've also warned against frequently. This reversal of long-term interest rates rising again is already happening this week.

The Chinese sovereign fund has been the largest purchaser of said US Treasury bonds for their reserves, historically. Due to their distrust of our central bank's print-and-spend policies, they are unwilling to step up their buying anymore. This reduced demand from the Chinese and other foreign central banks result in lack of participation at these bond auctions. QE is inflationary, and no one wants to hold our debt for 30 years, betting there will be no inflation in that span of 30 years. Remember: inflation is a bond killer, as it eats into the income bond yields promise. Hence, this bubble will burst also. And when it does, yields will spike up, raising our country's borrowing costs (higher rates = lower bond prices). This will make it more difficult for the US Government, the borrower of last resort, to repay their IOU's. In this scenario, a default is imminent, ushering in not the Dark Age, but squarely into the Stone Age. This is my biggest fear, and why I was totally against QE--hence, my comments about the Fed selling its soul to the devil. There is no turning back now, because if rates keep climbing up, and our borrowing costs keep increasing (along with our debt), the Fed will keep buying more US Treasuries in a vicious spiral. I also mentioned the bond vigilantes resurfacing, the small group of big bond investors who keep irresponsible central banks in check. When this irresponsibility pops up, the vigilantes drive down bond prices, driving up interest rates simultaneously. This is bad for not only bonds, but it also very bad for stocks. Equities don't like high interest rates, because it makes the low yields on stocks unattractive (remember: investors buy stocks by betting on asset appreciation, not necessarily for income. They theoretically take on more risk in exchange for reaping greater rewards on rising equity prices).

The UK had a bond auction that actually failed, as there were NO buyers. So it's not just our bonds sovereign funds worldwide are shunning; there just isn't any demand for our debt as other countries hunker down and try to repair their economies.

Bottom line: there's just too much supply of debt out there, and not enough demand from untrusting foreign bond buyers. This will lead to long-term interest rates, no matter how much intervention central banks attempt. Using QE, these central banks are just distorting interest rates short-term, but harming the long-term economic health of our economy.