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Monday, July 6, 2009
What happened to the Toxic Assets?
From September to December of 2008, everybody was an expert on toxic asset clean up. Recently, everybody has been an expert on cultivating green shoots. This is the folly of the media, they are able to distract the masses while causing amnesia. I know the jobs number was worst than expected and the economy is not showing the signs of growth I am looking for. But I was told (correctly or incorrectly) that the problem was housing and toxic assets. Well, foreclosures are rising, home prices are falling and the market is ignoring the PPIP. But maybe I am ignorant of the real facts, if that is the case my 5 long positions will be short positions as soon as Timmy lets us know who is participating in the PPIP.
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I am aware that the Chinese holds a significant amount of our debt and are not happy with the Federal Reserve/ Dept. of Treasury for printing trillions of dollars to help prop up the US financial system. China’s Premier has openly said that he is concerned about the safety of Chinese assets.
ReplyDeleteLooking at in a simple manner, China has a few options:
1.Openly sell the dollar, thereby destroying the value of its reserves and inviting open war with the US.
2.Quietly shift away from the dollar without openly attracting attention or threatening the US publicly.
The Chinese are not idiots. And they know that dropping the dollar standard would destroy a HUGE portion of their foreign reserves, since everyone and their mother would follow suit.
Indeed, abandoning the dollar for another currency (say the yen or euro) would serve no benefit from an economic standpoint. It would crush China’s Treasury denominated reserves as the dollar plunged. It would also be akin to trading one problematic investment for another: no major world currency is backed by gold or any asset of real value.
No, to my way of thinking, the Chinese are merely posturing with these statements, trying to draw attention away from the fact that they’re already begun pursuing option #2 (diversifying away from the dollar in private). Indeed, China has already begun moving into a new currency, one that is neither fiat nor flawed. And they did it in their usual manner: under the radar with great focus and determination.
That new currency is natural resources.
Throughout 2009, China has been buying up natural resources, commodities, and other real assets at a break-taking pace: copper imports hit a record 329,000 tons in February, only to be eclipsed by a new record of 375,000 tons in March.
The copper story is just the latest and most obvious display of China’s new currency binge. The Chinese have been buying up mines, metal ore (57 million tons of iron in April alone), and other resources for years now. The headlines were right under the world’s collective nose, but no one was thinking “diversification away from the dollar.” Instead they were thinking, “purchases needed to fuel economic growth.”
Truly, it wasn’t until the world noticed that China was still buying commodities in record amounts even after its economy took a hit that the media began to connect the dots.
Here’s a few dots to consider…
Feb.10, 2009: China buys Oz Minerals, the world’s second largest zinc miner for $1.7 billion
Feb. 12, 2009: China buys $20 billion worth of Rio Tinto, one of the three largest iron ore producers, giving it the potential to raise its stake to 19%.
Feb. 24. 2009: China buys 16% of Fortescue Metals an Australian iron ore company.
April 1, 2009 China buys $46 million worth of Terramin Australia’s lead and zinc supplies in Algeria.
April 15, 2009: China buy 51% of Ontario’s Liberty Mines: a nickel producer.
Unlike paper currencies, natural resources and commodities cannot be reproduced ad infinitum by central banks. Thus they are inflation proof. In addition, natural resources actually offer a direct benefit to China’s economy whereas an investment in a foreign currency (the dollar or otherwise) is merely a means of parking cash for a return.
Finally, and most notably, natural resources allow the Chinese to diversify away from the dollar without damaging their current dollar holdings: or their relationship with the US: if word got out that the Chinese were dumping Treasuries, the Treasury market would implode, destroying the value of China’s current investment.
Make no mistake, the Chinese have already begun diversifying away from the dollar. They just haven’t advertised the fact openly. Chinese students openly laughed at our Treasury Secretary Tim Geithner when he gave a talk there promising that “Chinese assets were safe” in the dollar. If Chinese STUDENTS can figure the Fed’s moves out, what do you think the Chinese GOVERNMENT is doing?
Hedging against the dollar with commodities is a great idea. Also, China has subscribed to purchase $50 billion worth of IMF SDR bonds (which are denominated in a multiple basket of currency). The truth is there is no safety in any asset class, so it is wiser to diversify against the uncertain. We have been commodity prices lose value as quickly as stocks, remember oil went from $140 to $35, along with soy beans, wheat, copper, steel,etc. China really should buy some yuan denominated bonds.
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