China Increases U.S. Treasury Holdings

New data shows that China increased its holdings of U.S. treasuries by 3.1% in July (see graphs below). Up from a decrease in holdings of 3.1% in June. This is something to keep an eye on. If China stops buying U.S. treasuries we could see a significant increase in interest rates on U.S. bonds.

China Dismayed By U.S. Money Printing

According to Ambrose Evans-Pritchard of the UK Telegraph:

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

...

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price dip, putting a floor under any correction.

Read whole article here. This may help explain why China is now a net seller of U.S. government bonds. Even Alan Greenspan is now even warning about the potential for double-diget inflation due to U.S. monetary expansion.

The U.S. is addicted to borrowing, credit, and money expansion; if these trends continue the dollar will be worth significantly less. These trends can be reversed. I don't want to see the dollar one day worth the same as toilet paper.

China Is Selling U.S. Government Debt

In June 2009, China reduced their holdings of U.S. treasuries by 3.1% (see graph below).


Over the past year China has been growing their holdings of U.S. treasuries at an ever decreasing rate and is now reducing their holdings of U.S. government debt (see graph below).


This is a key trend to follow. If this continues interest rates on U.S. government debt could rise significantly as the U.S. needs to raise massive amounts of money due to huge budget deficits.

Data Source For Graphs: U.S. Department of Treasury

Friday Afternoon Linkfest: Required Reading

1. Warren Buffett gives a warning on U.S. debt.

2. Warning: China reduces holdings of U.S. government debt.

3. Andy Xie: New Bubble Threatens a V-Shaped Rebound.

4. 1 in 8 US Mortgages Falling Behind.

5. Barry Ritholtz on the latest existing home sales numbers.

6. FDIC is bankrupt. Read it here. Even though the FDIC is bankrupt it will not run out of money because Congress will most likely bailout the FDIC. Read it here.

7. Mexico decriminalizes small-scale drug possession. Glenn Greenwald on the drug decriminalization in Portugal. Read and watch here.

8. What Would Jesus Do? Ask Obama. The president's troubling use of religion to sell health care reform.

Brown Manure, Not Green Shots

Economist Nouriel Roubini sees unemployment rising to close to 11% by the end of the year and that this will have a knock-on effect for the rest of the economy. He also says that job losses are even worse than what's being reported.

He also had this to say about the housing market:

It's already estimated that by the end of this year, there will be about 8.4 million people with a mortgage who have lost jobs, and therefore have little income. Therefore, the number of people who will have difficulties servicing their mortgages is going to rise very sharply.

Home prices have already fallen from their peak by about 30%. Based on my analysis, they are going to fall by at least 40% from their peak, and more likely 45%, before they bottom out. They are still falling at an annualized rate of over 18%. That fall of at least 40%-45% percent of home prices from their peak is going to imply that about half of all households that have a mortgage--about 25 million of the 51 million that have mortgages--are going to be underwater with negative equity and will have a significant incentive to walk away from their homes.

He had this to say on the budget deficits:

...deflationary pressures are going to be dominant this year and next year.

But eventually, large budget deficits and their monetization are going to lead--toward the end of next year and in 2011--to an increase in expected inflation that may lead to a further increase in 10-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up by this wall of liquidity rather than fundamentals alone, this could be the double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011.

Read the whole article here.

Jim Rogers Plans to Short U.S. Treasuries

According to Bloomberg's Bob Chen:

The dollar and U.S. Treasuries are both likely to slide as soaring government debt in the world’s biggest economy undermines confidence in its assets, according to Jim Rogers, chairman of Rogers Holdings.

“The government is printing lots of money and borrowing even more; that’s not the basis for a sound currency,” he said in a telephone interview today from Singapore. “The idea that anybody would lend money to the U.S. government for 30 years at 3 or 4 or 5 or 6 percent interest is mind-boggling to me.”

Rogers, the author of books including “Investment Biker” and “Adventure Capitalist”, said he holds fewer dollars than a year ago and plans to “short U.S. government bonds someday.” A short bet involves selling a security you don’t own with a view to buying it back after the price has fallen.

Read the whole story here.

Market Manipulation?

Watch Video below. At 2:20 a floor trader talks about market manipulation by the government. Interesting...



Beware of investing in U.S. government bonds.

Bearish News For U.S. Government Bonds

Dresdner Kleinwort Securities has withdrawn from being a primary U.S. government securities dealer. Primary dealers deal directly with the Federal Reserve in buying U.S. government debt. They then can sell the securities to clients or hold it themselves.

They are REQUIRED to bid on U.S. government debt during treasury auctions. This seems to me to be a bearish sign for U.S. treasuries. However Jefferies & Co joined as a primary dealer last week. This somewhat mitigates the bearish news today.

I'll kept an eye on the situation to see if more primary dealers leave.
I found this information at MarketWatch. More to come on U.S. treasuries....