Here is a collection of the worse logic going around about today' s financial crisis:


MarketWatch reports that weakness in prices favors bondholders who go long on Treasurys.

(emphasis mine) [my comment]

A safe place to ride out deflation
Weakness in prices favors bondholders going long on Treasurys
By Deborah Levine, MarketWatch
Last update: 3:00 a.m. EST Feb. 13, 2009

NEW YORK (MarketWatch) -- A decade of falling prices is perfectly plausible [Wrong] to at least one very successful investor, so he's sticking with long-term Treasury bonds. [Wrong]

Lacy Hunt, an economist and fund manager at Hoisington Investment Management in Austin, Texas, is convinced that once an economy goes from a period from extreme over-indebtedness to falling prices, as the U.S. has now, it ushers in a decisive shift in markets.

And in the U.S. case, bond bulls say, the high levels of debt held by government, businesses and consumers will spell the nation's undoing.

"Once we start a debt deflationary event, historically they tend to be very pernicious," said Hunt, who helps oversee the Wasatch-Hoisington U.S. Treasury Fund, which returned almost 38% last year. The fund has 10-year annualized gains of 7.56%, making it the best performing long-government bond fund over that period, according to Morningstar.

'I'm in the deflation camp because it could take a while. The only way for prices to go is down.' [Wrong]
— William Bellamy, co-manager of the TS&W; Fixed Income fund

"There are no quick fixes here, so we're in long Treasurys," said Hunt, whose fund manages about $4.5 billion in assets.

The Market Oracle reports that in this global recession, United States economy is in least worst shape.

Global Recession, United States Economy in Least Worst Shape
Feb 15, 2009 - 09:51 AM
By: Money_and_Markets

Jack Crooks Writes: Americans are beginning to realize the gravity of the current U.S. economic situation. After the new Treasury Secretary spoke earlier this week he left us with a very uncomfortable feeling: This problem is huge, and no one seems to have a real answer.

Still, the government feels it must produce an answer and prove that it is the ONLY entity that can fix this mess - via hundreds of billions (perhaps trillions) of U.S. dollars.

The effectiveness of recent proposals is uncertain; but the potential long-term consequences are great. If government aid creates a premature recovery, we'll be relieved of some pain … only to have other pains cast upon us. The outlook is downright ugly. [Correct]

But even though the severity of the U.S. recession is growing worse by the day, the U.S. may actually be in the least bad shape when compared to other economies. [Wrong]

In fact …

Here Are the Two Areas that I Think Will Suffer the Most! [Wrong]

China — Overdependence on Western demand …

China has become a huge global player. Unfortunately for them, the Chinese depend largely on the role of Western consumer demand. [Wrong]

And the numbers show how that dependence is now smacking the daylights out of their economy: [Wrong]

*** In January, China's exports sank by 17.1% year over year — the second straight month of declines.
*** At the same time, China's imports absolutely plunged — down more than 43% from January 2008.
*** More than 20 million lost jobs add to the potential for social unrest.
*** The real estate market is easily in the worst shape it's been in since at least 2005.

Being the surplus nation it's become, China will need to somehow replace Western demand in order to soften the painful readjustment to output and production that lies ahead [Correct, by boosting Domestic demand (which it is successfully doing)]. This readjustment will not only hurt China's growth rate, but it will seep into those markets reliant on Chinese demand. Which leads me to …

Europe — Concealing underlying struggles…

If there's anyone still behind the curve, it's the Eurozone economy [Wrong]. By that I mean the European Central Bank is still lagging in their downward monetary policy adjustments.

Inflation is currently not a problem [Wrong, inflation is the problem in coming months]; but growth is. In fact, fourth-quarter GDP contracted 1.5% — the worst on record for the single-currency group of countries.

While a quicker move toward a zero rate of interest won't solve their problems, I believe that the ECB should take interest rates further in that direction [Wrong, the ECB should leave rates alone]. Holding off with these key moves seems an attempt at concealing the underlying struggles Europe must eventually face.

Among them lies a very vulnerable banking system [Correct]. Considerable exposure to emerging market debt is one of the biggest concerns, especially when you consider the heavy liabilities already weighing on these banks. This credit and lending situation will certainly hamper any hopes of recovery in the near future.

Turning to European governments likely won't reveal any support either. Germany is already having trouble passing through a stimulus package. And the short leash the government has for expanding an already high tax-to-GDP ratio will pose an ongoing obstacle.

No Shortage of Stimuli …

The U.S. isn't the only government scurrying to provide help. For example, China, Japan and South Korea are dishing out dough left and right in hopes of avoiding severe declines. So far, though, all have failed to bring about intended effects. [Do you read the newspaper? China' s efforts are working.]

The risk-environment seems to have changed for the foreseeable future. Consumer appetites have changed. Demand stimulation is almost certainly destined to fail [Wrong, demand stimulation will work for some places, like China]. A major readjustment period is upon us. [Correct]

In my experience, when it comes to currencies it's all about finding out who is sitting on high ground when the storm and downpour comes through.

And in this case, it seems the real task is to find out who will be the best swimmer. My bet is on the U.S. [and that is terrible bet.]

Seeking Alpha reports on why China can't dump US treasuries.

Why China Can't Dump U.S. Treasuries
February 13, 2009
By David Fessler

As if we needed something else to concern ourselves with, the Is-China-Going-To-Start-Selling-Treasuries worry mill is cranking up… again. It seems every once in awhile - and more so lately - the financial pundits begin to climb the China wall of worry.

And it' s not an unreasonable question: Last year, China became the biggest foreign holder of U.S. securities, when it plunked down almost $66 billion for them in October alone.

With that big of a stick, some believe that China could bring down the U.S. without ever setting foot here. [The US has already destroyed itself.]

Others feel it already is, by artificially setting the rate at which its currency is tied to the dollar. Still others feel that we are worrying needlessly, and we have nothing to worry about, as China has few other investment alternatives.

Will China continue to buy Treasuries? What will happen when it stops and starts buying something else? Or worse - what if it starts dumping U.S. debt?

The answers to these questions may surprise you [The answers to these questions doesn' t surprise me, but your answers do]. But first, let' s see if we can get our hands around the size of China' s problem.

The World' s Biggest Cash Pile

Make no mistake: it' s a much bigger problem for China than it is for us. [Wrong]

When you' re sitting on the biggest mountain of surplus cash in the world, what do you do with it? This is the roughly $2 trillion dollar question that Chinese central bank officials have to wrestle with.

And the problem just keeps getting bigger [You do realize that the “problem” you are describing is that China has too much cash? I for one would much rather have the “problem” of too much cash than the US' s problem of too much debt.]. For the first three quarters of 2008, China' s foreign exchange reserves increased by a whopping $377 billion. That' s $10 billion more than the same period in 2007.

Why does it continue to buy them? The simple reason is that is has to, because of its exchange rate policy. In order to keep the value of the Chinese yuan from appreciating versus the dollar, China' s central bank must buy U.S. dollars in massive quantities. And rather than just sitting on the physical currency - which pays zero interest - it buys foreign securities.

What percentage of China' s foreign reserves is held in U.S. Treasuries?

No one knows for sure, but analysts generally believe the figure could be as high as 70%. That would put China' s U.S. debt paper pile at around $1.4 trillion.

So what are China' s options if it wants to “diversify” its holdings?

The short answer is: not many… not many at all.

China' s Investment Options

All the gold in the world…

What about gold? That one' s easy: it' s estimated that all the physical gold in the world that' s ever been produced amounts to roughly 140,000 tons (worth about $4.5 trillion dollars using $1,000 an ounce). About 75% of that is either in coins or jewelry… not available to China, or to any other government.

The new gold available each year is miniscule: about 2,600 tons (almost $83 billion dollars worth) of new gold is being mined and refined annually, increasing the total supply by 2% per year.

You can see that China' s problem - if it wants to invest in gold as a diversification strategy - is that there isn' t enough available for sale. 30,000 tons are held in various government central bank vaults. Privately held bullion amount to about 20,000 tons.

[Wow, wonderful logic (very heavy sarcasm)! Because the supply of gold is small and horribly undervalued, gold would make a bad investment for China.]

Any major purchase of gold on the open market - which is where China would have to buy it - would drive up its price [Wrong, when central bank start buying gold, the dollar will lose most of its value. Gold doesn' t go up, it is other currencies that go down.]. To put this in perspective: China buys enough U.S. treasuries in one month to pay for all the gold mined in a year everywhere in the world.

So we can throw gold onto the “won' t pile”… [Question for the David Fessler: What happens if some other central bank starts buying gold? For example, what if Saudi Arabia started transferring their 500 billion dollar reserves into gold?]

*** Other foreign currencies…

As of the end of 2008, the value of all Eurodollars in circulation exceeded the value of U.S. dollars. Since then, the Euro has fallen 8% against the dollar. Other world currencies have suffered similar fates.

Assuming China sold their dollars and bought a basket of currencies, it would clearly have lost money on its investment. The reason is that the global economic crisis deepened, other countries have flocked to the dollar as the only safe haven investment… driving it up in value against all other comers. This will likely continue to be the case. Another one for the “won' t pile”…

*** Private Sector Bonds…

Way too risky. Most companies have been severely affected by the global economic slowdown. Their balance sheets have decimated credit ratings across the board, reducing much of the available corporate debt to well below investment grade.

Back to Square One

In summary…

1. Will China continue to buy U.S. Treasuries? Yes. [Wrong]

*** If fact, purchases of U.S. debt by China will likely continue to increase for the foreseeable future, as it continues its policy of propping up the Yuan. By fixing its currency to the dollar and by buying them, it keeps both strong, thereby protecting its investment.

2. What will happen when it stops and starts buying something else? Forget it.

*** There IS nothing else that' s as good of an investment as the U.S. dollar. [VERY, VERY, WRONG]

3. Would it start dumping U.S. Treasuries? Not a Chance. [You, sir, are an idiot.]

*** China central bankers might as well all strap on six-shooters and begin firing them at their feet. It would reduce the value of the Yuan, something China can' t afford. [Selling US treasuries = falling yuan. WONDERFUL LOGIC (heavy sarcasm)]

For better or worse, China and the U.S. are inextricably linked in an incestuous financial relationship. We need China to buy our debt to finance our annual federal budget deficit, and China needs to buy dollars to prop up its currency. [The single dumbest thing I have ever heard (small exaggeration)]

And it' s in both countries' best interest to see that things stay that way for a long time. [Wrong, it is in the US' s interest for things to stay that way for a long time]

Mike "Mish" Shedlock reports that Asia's Export Economies In Free Fall.

Saturday, February 14, 2009
Asia' s Export Economies In Free Fall; Protectionism On The Rise
[…]

US Pot Calls Chinese Kettle Black

Geithner put his foot in his big mouth in more ways than one. Someone better give him a lesson in diplomacy along with the lesson he needs in economics. Giethner is easily the worst of Obama's cabinet picks.

China is no more manipulating the Renminbi than the US is the dollar [Wrong, China is manipulation the Renminbi. If it wasn' t, the dollar would have already collapsed]. What else do you call micromanaging interest rates, guaranteeing bank debt, engaging is currency swaps with Swiss Banks, and giving trillions of dollars to banks? Everyone of those things impacts the dollar. Moreover, there is no talk from this administration about Japan's open threat to intervene in the Yen, or the Russian intervention in the Rouble.

I am not in favor of any of this of course, I am just pointing out the US pot is calling the Chinese kettle black. And when it comes to free trade, the US and the EU are among the world's biggest hypocrites.

Moreover, Obama and Geithner better be careful of what they ask. China has already lost 20 million jobs, and it may easily lose 50 million more. Currencies of export based economies like Australia and Canada have been smashed. If China floated the Renminbi like we are asking, it could easily follow, and indeed I expect it would. [Very Wrong]

This is the worst possible time for protectionist policies. That means you can expect to see more of them, especially from free trade hypocrites in the US, UK, and EU.

My reaction: In order to make it easier to write a rebuttals, I have decided to make a list of some of the bad logic going around:

1) The US is facing a decade of falling prices

2) The only way for prices to go is down.

3) In the global recession, the US's economy is in the least worst shape

4) China is utterly dependent upon international trade.

5) Trade numbers show how that dependence is now smacking the daylights out of their economy.

6) Inflation is currently not a problem.

7) China' s treasury holdings are a much bigger problem for China than they are for us.

8) China can't dump US treasuries

9) There is nothing else that's as good of an investment as the US dollar.

10) We need China to buy our debt to finance our annual federal budget deficit, and China needs to buy dollars to prop up its currency.

11) China is no more manipulating the Renminbi than the US is the dollar.

12) If China floated its currency, the Renminbi could easily get smashed like the currencies of other export based economies (Australia and Canada).

Conclusion: I will write a rebuttal to this batch of twisted logic either tonight or tomorrow.