Rates Hit New Record Highs; China’s Demise Part II – What To Do

    The Ten Year Treasury Yield hit its highest level since 2007!

    Here are some of the reasons:

    1. Waiting On The Fed. Bond prices fell and yields/rates rose, as investors are anxiously waiting to hear what Fed Chair Powell has to say at the end of the week from Jackson Hole. Investors fear that Powell may remain “hawkish” or determined to keep rates on the high side to fend off his perceived inflation.
    2. Massive Oversupply of Treasuries. This is what is really interesting, as China and Japan appear to be selling their enormous supplies of U.S. treasuries to get dollars so they can buy up their own currencies – due to their lagging economies. In addition, the U.S. is also dumping a huge supply of Treasuries on the market simply to raise money to cover our budget deficit, as I have explained a few times.

    Last week, I wrote this blog: China’s Collapse Is Here & It Will Be Brutal! In that blog, I explained that rates would fall if China experienced a deep financial collapse – but I missed something!

    Very Weak Currencies Are Very Scary!

    When countries are facing financial calamities, their currencies get much weaker because investors do not want to hold those currencies.

    This in turn causes countries to panic because if their currencies get too weak, their imported goods (like oil) get way too expensive, it becomes far too costly to service their dollar-denominated debts (which both China and Japan have), and they lose badly needed foreign investment capital.

    As a result, countries do everything they can to strengthen their currencies by reducing the overall supply of the currency (currencies are like any other asset; if there is too much of it, it is less valuable).

    And – the only way a country like China can reduce the supply of its currency is by using dollars to buy up Yuan (Chinese currency). So, China has to sell assets (like Ten Year Treasuries) to get dollars to buy Yuan.

    So, in the longer term, China’s economic problems will result in lower rates. But – China’s current problems are pushing up rates because they are selling 10 Year Treasuries to get dollars to buy Yuan – to stop the Yuan from crashing, to keep the economy from collapsing.

    Hence, we could see this effect continue until things get much worse in China.

    Joe Brown of Heresy Financial explains all this in this ominous video: An Urgent Warning to All Investors!

    As a quick aside, as the world economy gets worse and worse, investors still demand 10 Year Treasuries (no matter how much supply) because they are considered the primary “safe haven” liquid instrument for investors to hold when there is nothing else to hold.

    This is something Jeff Snider reminds us of often – and it could offset over-supply issues.

    What Should Everyday Americans Do If China Is Going to Collapse?

    The above subheading was a question I received from a blog reader last week, and my first thought was the 4th grade joke I repeat all too often in my blog: What do you get if you cross an elephant and a rhinoceros? Hell-if-I-Know! Get it? Still not funny?

    In any case, I can repeat what all of the macro guys I follow say.

    1. Move to cash. This is the most often repeated advice I have been hearing over and over for the last six months. Joe Brown repeats it in the above video in fact. You want to be in cash for several reasons: (1) by selling now, you avoid losses later on when asset prices drop; (2) you may need cash during downturns to meet your own needs should your income drop; and (3) you can use cash to snap up bargains that surface after asset prices collapse (think of the investors who bought houses en masse in 2010 – 2012).
    2. Diversify. The macro guys also recommend broad diversification strategies – into gold, stocks of all types, commodities and bonds. Interestingly, most of them appear to like U.S. equities the best still, despite our problems.

    Don’t go crazy though! None of the macro guys I follow recommend extreme positions though, e.g. no more than 10% of a portfolio in gold or bitcoin, maybe 20% in cash, etc. But – they never recommend going all in one direction or another because there is so much uncertainty.

    And again – I am just repeating what I read and hear; I am not giving financial advice and this should not be perceived to be financial advice.

    What to Watch for in China?

    The mainstream press always seems to be late to the party when it comes to any major development, and the WSJ is a great example. They published their first major article today (China’s 40-Year Boom Is Over), weeks after many pundits had already weighed in on social media.

    I recommend following guys like Joe Brown on YouTube, and Brent Johnson, Kyle Bass, and Jeff Snider on Twitter.

    You can also watch China’s currency, as it is conveyed in the “Dollar to Yuan” ratio. It has been bouncing all over, as China desperately tries to defend it. But – the higher the number, the weaker the currency. And – when it gets above 7.30, China and everyone else worries.

    As Jeff Snider reminds us often: “A weaker Yuan is not good.”

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