What Happens When Foreign Creditors Find An Alternative To U.S. Bonds?

Every time I talk about the risk of our foreign creditors selling off their U.S. Treasuries, I hear the same objection: These guys have no place else to put the money! They’ll ALWAYS buy our debt because our bond market is the most liquid, freest place to stash their money.

And you know what? In the immediate, short-term future, I agree. But the foundation for a LONGER-TERM trend change is being laid right now.

Washington doesn’t want to hear about it.

Our politicians are just sticking their heads in the sand and hoping the problem goes away.

But I urge you to chart a different course for a very important reason …

These changes won’t result in wholesale dumping of U.S. debt tomorrow. They won’t lead to a two or three percentage point overnight surge in 10-year Treasury Note yields. But over time, I’m convinced they WILL gradually lower demand for U.S. debt, pushing bond prices lower, and interest rates higher.

Why Our Foreign Creditors Are Looking for a Way Out - And What They’re Doing about It

It really boils down to a few simple points:

First, the U.S. government has adopted an unofficial policy of U.S. dollar debasement or, at best, an official policy of not-so-benign neglect.

Second, despite a U.S. federal deficit that’s at least three times larger than the worst in history, there’s no plan to bring it under control.

Third, the U.S. Federal Reserve is monetizing the debt with printed money, a classic cause of rising gold, rising commodity prices, and a declining currency.

Concern is rising sharply in places like China, and for good reason. The country has a $2 trillion-plus hoard of reserves. Experts believe that portfolio is overly concentrated in dollar assets - to the tune of roughly 75 percent. The problem? If the dollar keeps tanking, the value of those Treasuries, corporate bonds, equities, and other holdings will decline.

Cheng Siwei, former chairman of China’s Standing Committee, warns about the dollar’s inevitable hard landing.

Cheng Siwei, the former vice chairman of China’s Standing Committee, warned in the London Telegraph newspaper that concern is rising, and rising fast. He said:

“If [the Fed] keeps 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 U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies.”

No less an authority than the United Nations also said that dollar risk is on the rise. The UN’s Conference on Trade and Development said in a report this week that a new supra-national currency may be needed to reduce countries’ dependence on the slumping dollar.

Think this is all talk? Think again! China’s Ministry of Finance just announced that it would sell 6 billion yuan worth of government bonds in Hong Kong soon. That’s less than $900 million at current exchange rates, a pittance compared to the $100 billion-plus in U.S. Treasury debt that we’re selling every few weeks. But it’s noteworthy because this is the first issue of Chinese government debt targeted at global investors. The idea is to increase international confidence in China’s currency and China’s bond market.

Market Impact Already Being Felt - Have You Taken Steps to Protect Yourself?

I don’t know if you saw what happened to the U.S. dollar this week, but I sure sat up and took notice. The broad-based Dollar Index tanked through key technical support on Tuesday. The buck is now trading at its worst level against the euro since December, and its worst level against the Australian dollar in more than a year.

The U.S. dollar is now trading at its worst level against the euro since December.

Then there’s gold. As Claus told you on Wednesday, the yellow metal rocketed higher in recent trading, breaching the $1,000-an-ounce mark before taking a breather. There is NO better sign that investors are losing confidence in the dollar and the ability and willingness of the Fed to do anything about it.

As an individual investor, you simply have to position yourself to profit from this mega-trend. Buying gold is one easy step. You can also buy foreign bond funds to hedge against dollar risk. Or you can scoop up foreign stocks that generate the lion’s share of their sales and earnings in booming overseas economies.

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