As you know I have been concerned about the dollar, because of the government spending and printing.
A couple years ago in the Market Preview I wrote the greatest financial story that is NOT covered was in the beginning of 2007 China announced that it would NOT be renewing about $1 trillion in short-term U.S. treasuries. To me it was alarming – enough so the I was concerned about inflation.
A few months after I shared the story I was on a UBS conference call and asked a question about China not renewing their U.S. debt holdings, UBS told me they were NOT SELLING them and that is a big difference. He was right –selling them and not renewing them is very different. If they had sold them they would CRUSH the dollar very quickly – but I would argue that not renewing $1 trillion in short-term paper is the shadow that turns into the surprising blow that everyone ignores.
In 2008 China increased their physical gold bullion purchasing and now are at record levels. The physical price of Gold vs. spot price have spreads 50 to 100x their normal ranges. There is just very little physical gold to get your hands on. China being the largest purchaser worldwide.
China has also negotiated paying for oil in several cases in with other currencies – rather than the USD. Since they have come off the USD peg (pseudo) - they have increased their holdings in the EURO and other currencies.
All their actions over the last two years have indicated they are slowly moving off USD dependence (not trade – just holdings).
With a $1.7 TRILLION deficit and mounting debt (not including the Treasury loans at the discount window, nationalization of AIG, Freddie, Fannie, Auto companies etc.) - add that together with LOWER interest payments – there is little incentive to hold US Dollar (treasuries). The primary dealer market is down to its lowest levels, 16 from over 50. While Congress bad mouths the financial firms (and probably rightly so), behind closed doors they are pleading with the same firms to help the government auction off 100s of billions in bonds.
We are getting to a very crucial time.
These two Bloomberg stories are worth reading:
Weakness mounts in foreign demand for U.S. Treasuries
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEqOaXlSHhdM
Fed may have to buy Treasuries (Circle of debt continues)
http://www.bloomberg.com/apps/news?pid=20601009&sid=aCm8GXk1Smkk&refer=bond
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