Surprising data: U.S. debt still has takers… is our democracy doomed?
Russian SWFs get OK to invest in America… but only in the two worst stocks on the market
Analyst that predicated the January financials plunge calls for 15-50% more losses
How a Philadelphia survey might herald an entire U.S. manufacturing decline
U.S. markets fall again… an atypical chart shows the Dow deep into an 8-year bear market
Here’s some interesting news. The Chinese bought more U.S. debt in December than they sold… the first time they’ve done so since before the credit crisis began last July.
Mainland China upped its stake in American debt during the month by nearly $20 billion, to $405 billion. Thus, surprisingly, China has brought U.S. Treasury holdings back to pre-credit crisis levels.
Also interesting, Brazil more than doubled its stake in U.S. debt last year, from $53 billion to $126 billion.
As we hasten to note nearly every time this data is released, the number of Treasury notes owned by foreign governments is breathtaking. Even though Japan has been a net seller for the last six months, Japan, China, the U.K. and Brazil own over $1.4 trillion in U.S. Treasuries themselves.
“Can democracy survive when its financial roots have been cut?” asked the economist James Galbraith back in 2006. “The American citizenry has lost its pride of place as creditor of the American state. The proportion of U.S. debt owned directly by Americans has fallen to below 10%; in 1945 (when the debt was more than twice as large in relation to GDP as now), citizen-creditors just about held it all.”
Combined, financial institutions and foreign nations now own over 70% of U.S. debt.
“The scale of public debt is not the issue,” contends Galbraith, “but its ownership is. Can a country — whether the United States or any other — be truly democratic if it is in hock to banks and foreigners?”
“We no longer ‘owe it to ourselves,’ as FDR used to say,” opines our Byron King. “The banks and overseas creditors have hijacked the bond process. The citizens have little direct stake in the U.S. government, certainly not as bondholders. And more than half of all citizens pay no taxes at all. Over 50% of all taxes are paid by the wealthiest 3% of households; 90% of all taxes are paid by the wealthiest 10%.
“I guess the amounts of money were just too large for the citizenry to continue to buy bonds and keep a financial stake in the health of the government. So with no financial stake in their own government, it’s all about ‘I get mine.’ From pork at the congressional level to ‘what benefits can I get?’ at the personal. Heck, everyone wants their check from the government. Hey, where’s mine?
The Russian government has given two sovereign wealth funds worth $157 billion the green light to begin buying bonds of foreign government agencies. The Russian Finance Ministry told its SWFs yesterday that 15% of their funds can now be used to buy the debt of 15 different international government-backed companies.
Most interesting to us, the Russian funds will now be allowed to buy debt of two U.S. companies — Freddie Mac and Fannie Mae. Oy… we hope they know what they’re getting into.
The other 85% will be used to purchase sovereign debt.
Meredith Whitney, the Oppenheimer analyst who outed Citigroup back in November, has issued another sell signal for banks yesterday.
A day after Whitney’s November warning, Citigroup stock fell 7% and the Dow shed 2.6%. Soon after, Citi cut its dividend by 41%, and has lost about 30% of its “value.” At the time, Whitney’s alert was rewarded with death threats from investors in the stock.
If you’re a Citi shareholder, grab your latex gloves and start cutting out letters from the newspaper. There’s more pain to come: “The best-case downside scenario,” Whitney told CNBC, “is that there is a 15% downside in the financials; worst case is 50%.” Whitney also speculated that Citi will soon need to cut its dividend again and raise much more capital to cover write-downs.
Bond insurer MBIA withdrew from its industry trade group — the Association of Financial Guaranty Insurers — yesterday. Ironically, MBIA chieftains claim that the industry must begin separating the business of insuring muni bonds from insuring riskier assets like CDOs and asset-backed securities.
“It is up to us to shape our future,” said newly crowned MBIA CEO Jay Brown, “in a way that we believe is most responsive to the markets, our policyholders and our owners, and we must do so without the constraints of participation in an industry association that does not always share our views.”
Food prices will rise 3-4% in 2008, predicted the U.S. Department of Agriculture’s chief economist Joseph Glauber yesterday. Should his prediction come true, that would spell a whopping 8% inflation rate for food since January 2007.
“While the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs,” Glauber suggested at the USDA annual outlook conference, “it will also contribute to higher crop and livestock prices… Overall retail food prices for 2008-2010 are expected to rise faster than the general inflation rate.”
“There’s going to be real food inflation in this country,” added C. Larry Pope, CEO of Smithfield Foods. “I think we need to tell the American consumer that things are going up. We’re seeing cost increases that we’ve never seen in our business.”
Ahh… Inflation, the hidden tax, continuing in a grocery store near you.
The Philadelphia Fed’s Manufacturing Index fell to minus 24 from minus 20 in January. Often seen as a precursor to the ISM’s manufacturing index — which we’ll see on March 3 — the Philly Fed’s index now lies at lows unseen since post-tech bust 2001.
In fact, the Fed division’s measurement of “six-month outlook” fell to minus 16.9. That’s the first negative reading since 2001 and the lowest since 1990. Traders have baked in a ISM report early next month… perhaps you should, too.
The dollar took that news on the chin… again. As the dollar index fell back to 75, the euro rose well into $1.48, about a cent short of its all-time high set in November. The pound and loonie recovered too, back up as high as $1.96 and 99 cents, respectively. The yen found its way back to 107.
Gold struck yet another record high yesterday, of $953 per ounce. The once and future money has gained over $40 this week alone. Since striking its new high, we note that the gold price has stayed in a tight rage between $945-950 in Asian and European trading overnight.
The stock market in the U.S. lost about 1.2% in yesterday’s trading session. The Philly Fed Index seemed to be the downer of the day… losers topped winners 3-to-1 on the NYSE. In spite of all the recent volatility and occasional market upswings, the Dow is now a mere 2.5% above its January low.
And for some broader perspective, check out this graph of the Dow priced in gold:
The Dow, priced in gold, has been a totally hopeless venture since the tech boom. In 2000, you would have needed 45 ounces of gold to buy one “share” in the Dow… today those 45 ounces would fetch you three times the number of Dow stocks.
We recall, working with Bill Bonner in 2000-2001, issuing the “Trade of the Decade: Sell the Dow, Buy Gold.” Eight years on, we’re feeling pretty good about that trade.
Across the Pacific, the Shanghai Composite fell again overnight, this time by 3.5%. We hear that many “lockup periods” among institutional shareholders — holding huge amounts of recent IPOs — will soon expire in China. Coupled with higher-than-usual share offerings from Chinese financial institutions, investors are bailing in fear that a flood of shares will soon hit the market with nary a buyer in sight.
Oil backed off a bit yesterday from its recent high of $101. Light sweet crude fell to $98 in New York yesterday on Energy Department reports of higher-than-expected crude inventories.
The U.S. government has reversed its decision to remove the economicindicators.gov site, reports the Commerce Department yesterday. “Given the feedback… received,” says the site, the government will continue to offer its listing of economic resources for free. As usual, we’ll attribute this victory solely to the power of The 5 and its readers.
Despite the government’s retraction, John Williams of shadowstats.com tells us he will still run an economic indicators site of his own, also for free. Like most other private ventures aimed at replacing a government-sponsored service, we suspect John’s will somehow be superior.
Check it out here.
“Have one of your researchers look up the Great Panic of 1907,” suggests a reader. “The current situation is very similar, but with more zeros in the numbers. Bank fraud, commodities corners, asset collapse. Unfortunately, J.P. Morgan is not alive to solve the problem this time.”
The 5 responds:
We mentioned the eerie similarities between 1907 and today back in September and January. Warren Buffett is probably the closest the U.S. has to a J.P. Morgan today, but while he may lend a hand in the muni bond arena, Berkshire Hathaway is a long way from having the funds to bail out the entire financial system. Buffett says as much in I.O.U.S.A..
“That reader was right,” writes a reader responding to yesterday’s debate. “THE money didn’t vanish. YOUR money vanished into someone else’s pocket. You had $70; now he has it. You were counting on somebody paying you maybe $100 down the road; now he wants to pay you 30 cents, which is the new value of your holdings. This is not ‘semantics’: it’s how to correctly state risk and outcome. Journalists are always asking what happened to THE money, probably because they never had any to lose.”
“The reader surmising that the vanishing $7.7 trillion,” another responds, “somehow ended up being transferred from banks to sovereign wealth funds must not have noticed that money flows only in the other direction.
“Make no mistake about it: SWFs get their money from U.S. consumers buying oil from Abu Dhabi and rubber dog crap or Pocket Fishermen from China. If you don’t like it, then stop buying gas for your car, plastics and other oil-derived products, and anything manufactured in China.
“I hear the Amish make killer wooden toys.”
“The reader who thinks somebody still holds the ‘other side of the trade,’” comments a third, “in the vanishing $7.7 trillion is also failing to consider the multiplying effects of leverage and credit. I’ll buy $1 billion of your paper by putting up $200 million (or so) of my cash in an asset-backed security, giving you $800 million, while at the same time, I’ll sell the $1 billion of paper for $1.1 billion and collect $220 million cash and take my buyers $980 million ABS.
“I’ll be sure to buy a credit default swap from somebody to be sure I get my money and I can pay my seller. The guy I sold to has probably sold again, and then again, etc., etc., until we get about $1 trillion. Pretty soon, all that “the other side of the trade” is holding as real value is the down payments on the deals, while all the credit portions of the deals vaporize.”
Have a nice weekend,
The 5 Min. Forecast
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P.P.S. “For most investors, the surest way to profit from the weakening U.S. dollar is to invest directly in strong currencies and their certificates of deposit (CDs)…” Who said it and why? Check it out here.