by Doug Marshall, CCIM
Market Assessment
Published September 15, 2009

During America’s recent economic swan dive, we must admit that we have issued some dire warnings and predicted some difficult times.

But we’ve also come to the conclusion that we need to focus our attention these days on some key financial indicators instead of rambling all over the place about the bad news.

Right now, we believe, the key financial indicator to watch is the health of the dollar.

The almighty dollar has been for many investors the most important, reliable, and used currency in the world. The question is – what is the dollar’s long-term outlook?

To prognosticate accurately, one must think globally because the dollar really isn’t ours anymore. It belongs, in the purest sense, to whoever has the most of them. Um, that would be China (see chart below).

As we wend our way through the economic morass, America has counted on the ability for China and Japan, among others, to continue buying Treasuries at their typical rate.

Right now, though, that demand has slowed, especially for long-term Treasuries.

This is bad news for Washington. When investors got nervous about the crazed spending, borrowing, and printing of money from the Bush & Obama administrations, they backed off on the purchase of Treasuries, which is how Washington raises cash to fund their agenda.

Now, to make matters worse, China has actually begun selling, in net terms, their massive holdings of Treasuries.

And, according to Mike Larson of MoneyandMarkets.com, “One thing seems clear: that one of Washington’s most dependable sources of loans to finance our out-of-control deficits is drying up.”

Mr. Larson quotes the following figures in coming to this conclusion:
· In 2006, China and Hong Kong accounted for more than 50% of the increase in the amount of Treasury debt sold to the public.
· In 2008, their share had fallen to 22% of newly issued treasuries at the same time that the U.S. government increased its public debt by a record $1.2 trillion.
· In the first half of 2009, China and Hong Kong acquired only 9% of the more than $800 billion worth of Treasury bonds that were sold.
· In June of 2009, China actually reduced its note and bond holdings by $25 billion.

The sour appetite for Treasuries across the board is a concern to the Federal Reserve. Without a robust demand for U.S. Treasuries, treasury rates will have to increase to spark additional interest.

Higher treasury rates mean higher across the board rates for everything from auto loans, home loans, business loans, you name it.

So what would be the upshot of all this? At the least, higher interest rates would be inevitable as a result of China more and more leaving Treasuries where they sit on the table.

And in that process, the hope of vigorous economic recovery gets squashed.

Doggone ripple effect…!

Sources:
China Is Now A Net SELLER Of U.S. Treasury Notes And Bonds!, Mike Larson, moneyandmarkets.com (9/6/09)
U.S. Concerned on Debt Demand, Treasury’s Dollar SaysBloomberg News (9/11/09)