Debunking the Myth that China is Selling U.S. Treasury Securities
Politics / US Bonds Nov 30, 2011 - 02:39 AM GMTBy: Mike_Stathis
For a couple of years now, the extremists, gold bugs, perpetual doomers and others who know more about marketing than economics and investments have used numerous scare tactics as a manner by which to manipulate gold. These individuals like to mention gold manipulation by banks to explain the selloff, but never mention that the manipulation of gold by banks is a normal situation.
In contrast, they never admit that they are manipulation gold pricing through the use of propaganda, scare tactics, myths and even bold-faced lies. This later type of manipulation borders on securities fraud. It is an issue that the SEC must address.
Regardless which one of these prophets of doom you give your attention to, you are likely to hear 10% fact and 90% fiction; if you’re lucky.
The key to manipulation is to discuss a few things that most people are aware of so as to gain the trust of your subjects. Next, you spin the facts, throw in scare tactics and manufacture your own brand of reality, all of which leads you to gold as the only solution to save you from the financial apocalypse. One need not be an expert in criminal psychology in order to decipher these tactics. All it really takes is a basic understanding of reality plus a bit of common sense.
As I have discussed in the past, virtually every single one of the myths disseminated by these snake oil salesmen is completely wrong, from threats of hyperinflation and gold confiscation, to claims that gold hedges against inflation and that the Dow Jones Industrial Average is headed to 1000. I have laid out irrefutable support against these claims.
Once you investigate the training, track record and expertise of these individuals, you are likely to realize that they are nothing more than marketers lacking any credibility whatsoever. The list of these hacks is virtually endless and I have discussed several of them in the past.
Unfortunately, the vast majority of individuals who have chosen to pay attention to them trust what they say so they do not bother to investigate their credentials, agendas and track record.
Others lack the basic skills required to appreciate the erroneous nature of these hacks and their myths. This later case demonstrates just how unsophisticated most investors are.
Part of the problem is that humans by nature tend to believe anything that is repeated over and over. This basic principal of human behavior is utilized by the media every day. It is for that reason that many people have come to believe these ridiculously flawed myths propagated by gold bugs, without bothering to examine agendas and credibility. They feel that if something is repeated, especially by numerous individuals, it must be true, otherwise the media would not air them. The flaw in this assumption is that the media sides only with those who pay for advertisements and it certainly isn’t their audience.
Among the myths that have been spread by radio talking heads like Alex Jones, Max Keiser and Glen Beck, as well as gold dealers and their associates is that China has been selling U.S. treasury securities. Many of the gold bugs directly associated with gold dealers have also been preaching this myth. You know who they are. We have seen this myth in print and on television. It is of no coincidence that gold bugs associate with Jones, Keiser and Beck, for they are of the same breed of snake oil salesmen and profiteers.
This myth has been propagated in order to offer support for ridiculous claims that the U.S. dollar is headed to zero and Washington will be unable to finance its debt. This claim represents yet another factual error that has been designed to cause the sheep to flock to gold.
It remains a mystery to me how so many people could fall for these myths, all while not realizing that these hacks have agendas. I guess most people really are that naïve.
In past articles I have effectively debunked the numerous myths about gold, hyperinflation, the dollar and other related topics.
The following represents a partial list of these critical reads.
Dismantling John Williams' Hyperinflation Predictions
Deconstructing Meredith Whitney's Default Predictions
Understanding Manipulation of Gold by the Media
Understanding the Proper Use of Gold and Silver
Max Keiser, Alex Jones and Their Lackeys Scamming People AGAIN
Why Hyperinflation Isn't Coming To The U.S.
Manipulation of Gold and Silver Prices
Fool’s Gold [Part 1] [Part 2] [Part 3]
To date there has not been a single critic from the financial community who has so much as attempted to counter my claims. The reason is simple. They can’t because I am right. And they won’t because it would draw attention to something the media lacks; someone with unbiased credibility.
The mechanism by which these manipulators operate is not by one of debate but through flooding their myths to the sheep. This is the primary reason why the media has banned me. The media represents lies and promotes sell-outs, all of which are focused on lining their pockets at the expense of their audience. This premise is well-documented.
These gold sites post nothing but delusional accounts of economic data and analysis linking it to reasons to buy gold. You won’t see any debate on these sites because the purpose is to manipulate gold prices through dissemination of false, twisted and one-sided information. Whenever you see a one-sided slant to any site that seeks to profit from pitching something, you had better run like hell.
You sure as hell won’t see any of the articles referenced above on any of these sites because it might cause viewers to actually think.
Even in cases when I have posted these articles on the same sites as those who I have addressed publish, they have stayed clear of any response. The reason for this lack of response is simple. When you are outmanned the best strategy is to retreat. The last thing these individuals would want to do is draw attention to an unbiased financial professional because it would spoil their party of deceit and lunacy.
Since the November 2008 financial crisis, we have continued to hear that China has been selling U.S. Treasury securities. We have been told this myth by the media (mainstream and alternative) as well as the gold hacks. I am here to tell you that they are either lying or else they are morons; perhaps both.
Here, I am going to definitively show you once and for all that the commonly discussed myth that China is selling U.S. Treasury securities is simply not true. In fact, you are going to see the exact opposite.
Before I do that, you must understand a few things about sovereign securities.
First, U.S. Treasuries remain the safest investment in the world, regardless what the gold bug extremists say. To explain why this is the case (for those who cannot figure it out for themselves) would consume several pages of text. But let me be brief.
1) U.S. Capital Markets are the Envy of the World
Irrespective of some inherent flaws, the U.S. government and capital markets remain as the world’s most transparent and sound from a longer-term perspective.
One of the reasons why the U.S. capital markets are so sound is due to the strength of the U.S. economy. Recession or not, depression or not, the fact is that the U.S. capital markets provide the best risk-reward over the long term. And when it comes to U.S. government securities, one of the primary reasons for their safety relates to the dollar-oil link which I have discussed countless times in the past, beginning with my first discussion of these link in my 2006 book America’s Financial Apocalypse.
2) Bond Portfolios are Managed Daily Accounting for Short-term Declines in Holdings
If a sophisticated investor elects to purchase securities from the Asian or Latin American markets, he is not likely to intend to hold these securities for a longer-term period. Rather, such investments represent a cyclical investment strategy. In contrast, sophisticated investors who take a long-term approach to the investment process will focus on the purchase of U.S. securities.
Throughout the process of managing trade surpluses and deficits, nations will make adjustments to their foreign bond holdings. Such changes are the result of a host of variables. Thus, over any given short-term period, you are likely to see small fluctuations that are representative of these variables.
3) Short-term Asset Management Considerations are Meaningless
The only way to determine whether a nation has a net buying or selling strategy for sovereign securities is to examine the longer-term trend.
So let’s take a look at the period during the height of the financial crisis and see the dollar value of U.S. Treasury securities for China. We will also look at the second and third-largest holders of U.S. treasuries, Japan and the UK.
As the table below shows, in November 2008 when the financial crisis was at its peak, China held approximately $713 billion in U.S. treasury securities.
Over the next 12 months, China increased its holding of U.S. treasuries, with increasing positions in 7 of the next 4 months.
By November 2009, China owned nearly $780 billion in U.S. treasury securities, representing an increase of 9.4% in 12 months. Remember, this is the period when many were fearful of the U.S. banking system, even after TARP had been passed.
As the next table shows, China decreased its position by 6.6% from July 2009 through February 2010. However, this time period was insufficient to conclude a trend.
In fact, between February 2009 and February 2010, China increased its holdings of U.S. Treasury securities from $744 billion to $877 billion, representing an increase of 18.2%.
In the May 2010 issue of the Intelligent Investor, I pointed to the possibility that recent selling of U.S. treasury securities by China COULD represent a FUTURE TREND.
“As Washington continues to print money nonstop, it becomes important to consider the foreign creditors of the U.S. Of course, the number one foreign holder of U.S. Treasuries is China, as can be seen from the table.
However, this data does not reveal the full extent of Chinese dollars. Keep in mind that China also holds a much larger sum of dollars in the form of trade surpluses. In total, China holds around $3 trillion in U.S. denominated liquid assets.
Interestingly, as the table shows, China has been selling U.S. treasury securities (net) since September 2009. Over the most recent 6-month period, China has reduced its position by about 6%. This could be the beginning of a trend which would create severe issues for the U.S., namely much higher interest rates.
As I first discussed in AFA, China’s huge U.S. debt holdings position it in the driver’s seat to derail Washington’s efforts to restructure currency and trade policy.”
Notice that I raise the possibility of China selling U.S. treasury securities, as I first discussed in America’s Financial Apocalypse. However, for the time being China cannot sell these securities in mass because it would lose a good deal of value due to the undervalued Yuan.
More important, China holds U.S. treasuries in order to keep U.S. interest rates low so that Americans will have access to credit in order to buy junk they don’t need and can’t afford. Much of this consumer junk comes from China.
The following month, I followed up where I left off in May…
“Last month I discussed the fact that China has been gradually selling U.S. Treasuries. At this point, it is not something of concern, as some would have you believe. Foreign banks and investors are always buying and selling Treasuries due to a variety of reasons: changing interest rates, flight to safety, currency exchange rates, changes in liquidity, etc. However, it is something that I do watch because one can never know what the future holds.
The March data shows that China has increased its purchase of U.S. Treasuries for the first time in nearly a year. What is the reason for this? It is due to the rise in the dollar and the flight to safety. It would appear that China’s financial wizards are even more clueless than those on Wall Street since they waited so long for this.
If we assume that the rising dollar and flight to safety remain as the top priorities determining Treasury holdings for China, you should expect a trend of increasing purchases as Eastern Europe continues to implode.”
Looking at March 2009 through March 2010, China increased its holdings of U.S. treasury securities by 16.5%.
From June 2009 to June 2010, China’s holdings of U.S. Treasury securities decreased from $915.8 billion to $843.7 billion for a decrease of 7.9%.
From June 2010 (from the previous table) to September 2010 (the following table) China’s holdings of U.S. treasury securities increased from $843.7 billion to $1.152 trillion for an increase of 26.8%.
From September 2010 through September 2011, China’s holdings of U.S. treasury securities went from $1.152 trillion to $1.148 trillion for a negligible decrease.
Thus, if we examine the three-year period between November 2008 and October 2011, we see that China has increased its holdings of U.S. Treasury securities by a whopping 61%. In addition, Japan and the UK have increased their holdings by 53% and 219%, respectively. This period is sufficient enough to establish a clear trend.
The question is why don’t you ever hear any mention of this by the media and their hand-selected “experts”?
The fact is that as bad of shape as some feel the dollar is, the situation is much worse for the euro and other currencies when viewed from a long-term perspective. Any anyone who preaches that the dollar is headed to 0 and hyperinflation is right around the corner simply has no credibility whatsoever in my opinion.
Even Peter Schiff has been recently backing down from his previous claims of hyperinflation as he now realizes that it simply isn't going to happen. Instead of mention of hyperinflation and the dollar going to 0, Peter has been talking about double-digit annual inflation, which is a far cry from the 30-50% MONTHLY inflation exhibited during a hyperinflationary environment.
My bet is that Peter has been an avid reader of my articles explaining why hyperinflation is virtually impossible, and now he realizes that to carry on with this mantra only poses a greater threat to his credibility. Welcome to my corner Peter. I invite you to stick around for more guidance.
Now you might have noticed that Oil Exporters have decreased their holdings of U.S. treasury securities over the 3-year period. Is there a reason for this?
There certainly is. I have discussed the reason in previous articles so if you want to know the answer you’ll need to rummage through articles on my site. In fact, I will send the first person who can provide the answer to this copy of either America’s Financial Apocalypse, The Wall Street Investment Bible or America's Healthcare Solution (free shipping to continental North America; overseas winners must pay for shipping).
Once again, fluctuations over a one- or even 6-month period do not tell us much other than China (and every other nation holding U.S. treasury securities) is simply managing its bond holdings based on several economic variables.
In order to understand trends, one must first select sufficient periods that contain an adequate number of data points.
This discussion by no means is meant to imply that China will never sell U.S. treasury securities. The point is that you are being lied to. You are being manipulated. This is just one of many examples. If you thought China was selling U.S. treasury securities, if you think hyperinflation is coming to the U.S., if you think gold will keep rising with no end in sight, if you think gold protects against inflation, if you think the dollar is going to become worthless, I would suggest you wake up.
I can’t speak for everyone, but if I am to believe an individual, the fact that they are in the media is not a criterion I go by. In fact, whenever I see someone in the media, I know they are part of the establishment, so they cannot be trusted.
It would seem to me that rather than accept what the media says about its hand-picked guests on blind faith, a wise person would take the extra steps needed to verify their credibility. This means they would check for agendas and examine track records. To date, I have not seen anyone who appears regularly in the media who also holds what I would consider to be a credible track record.
A good portion of my track record can be found here. Other portions can be found in publications on the website.
What it all boils down to is credibility. Credibility is the direct result of a good track record combined with the absence of agendas. You certainly wouldn’t ask a real estate agent if it’s a good time to buy a house would you? Similarly, you should never purchase gold based on the views of those who make money selling or endorsing gold. If you are not able to understand this, I cannot help you. No one can.
The next time you hear one of the many of chumps, liars and manipulators make the claim that China is selling U.S. treasury securities, make sure to check the data. Any changes over a one-, two, or even six-month period should not be taken to represent a trend, especially when interest rates are held fixed.
I do not expect this “revelation” to be taken well by gold bugs or their victims. As has been the case when I have debunked several of the most prominent myths about gold, securities and the economy in the past, you are likely to see poorly thought-out excuses, misguided analogies and other retorts that simply have no weight in the world of reality, confirming the level of sophistication of these sheep, as well as the effectiveness of the propaganda campaign by the gold bugs. I suppose some people never learn.
By Mike Stathis
www.avaresearch.com
Copyright © 2011. All Rights Reserved. Mike Stathis.
Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.
The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.
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