*****Have China watchers never heard of a decoy?*****

GATA asks whether China watchers ever heard of a decoy?

(emphasis mine) [my comment]

Adrian Douglas: Have China watchers never heard of a decoy?
By Adrian Douglas
Sunday, May 17, 2009

What amazes me is how financial journalism is at the level of sixth grade in terms of analytical thinking. Even so-called market analysts are not much better.

GATA put out a dispatch today citing this Agence France-Presse article published by the Sydney Morning Herald in Australia, "China Keeps Buying U.S. Bonds Despite Concerns":

http://news.smh.com.au/breaking-news-world/china-keeps-buying-us-bonds-despite-concerns-20090517-b757.html

This article is a prime example. It reports that China was recently expressing grave concerns about its massive U.s. bond holdings is still buying more such bonds.

The simpletons in the press and financial world don't have a clue. What are these sleuths looking for? A $500 billion sell order posted with a New York broker on some rainy Monday morning? Have they never heard of a decoy?

The U.S. Treasury reports each month on foreign holdings of U.S. Treasuries. The Chinese would have no more than 30 days to dispose of almost a trillion dollars in Treasury debt before their selling would be public knowledge. Do these China watchers seriously think that the China's diversification strategy is going to involve unloading U.S. debt on the debt market?

You don't have to dispose of an asset to realize its cash value.

Didn't these people learn anything from the mortgage crisis?
For bankers the best collateral in the world is U.S. Treasury debt. That is likely to change soon [Agreed], but if we deal with the facts of today, the Chinese are holding what bankers perceive is the most liquid and highest-quality collateral. Do you think that this characteristic of U.S. debt has escaped the notice of the Chinese?

I would bet that the
Chinese have been busy using their Treasury debt as collateral against FIXED-interest-rate loans. They will have used this money to buy real assets. We know they have bought at least 454 tonnes of gold. They are importing 70 percent more copper than they consume. They are filling up a strategic petroleum reserve. They have been going around the world making deals for raw materials and acquisitions of small-enough companies that they fly under the radar. (The Chinese learned their lesson from trying to buy Unocal.) [China has also been buying tons of soybeans]

The interest rate on these fixed-rate loans will be partially offset by the interest paid on their U.S. bonds. When the bonds go tapioca, the Chinese will have two options.
They can sell some of the assets they bought but at prices much higher than what they paid and so pay off the loans with worthless dollars, or they can simply default and lose their collateral of now-worthless U.S. bonds.

Just to obfuscate what they are doing, they make some complaints about U.S. debt one day and then buy some more a few weeks later.

Financial journalists should read the biography of Jesse Livermore to know how you can fool even the best traders.

The Chinese have a $300 billion sovereign wealth fund. If that is properly positioned in commodities, it alone will hedge China's entire bond portfolio.

The notion that the Chinese have accumulated this massive U.S. debt portfolio and only now are wondering what to do about it is so naive it doesn't warrant serious consideration. I have dealt with Chinese in business and they are the sharpest knives in the drawer. My guess is that China has already diversified most of its dollar holdings.

Now, like magicians, the Chinese keep the eyes of the China watchers fixed on the hat, because we all know that is truly where the magician has hidden the rabbit, right?

The Chinese have no interest in collapsing the U.S. Treasury market, but
if you think that the Chinese strategy to protect themselves against such an eventuality is to sit tight, buy more, and keep their fingers crossed that everything will work out fine, then you shouldn't go out in public alone. [another very good point]

The Chinese have vault-loads of intrinsically worthless Treasury bonds that they no doubt have used as collateral to buy intrinsically valuable assets. In contrast, Western central bankers had vault-loads of gold they have loaned or sold to buy intrinsically worthless interest-bearing government debt.

I bet Confucius would have had something to say about that.

My reaction: Great article. The implications of the above should be clear:

1) You don't have to dispose of an asset to realize its cash value.

2)
Chinese have been busy using their Treasury debt as collateral against FIXED-interest-rate loans.

3) China has been mobilizing its dollar-reserves by buying an enormous amounts of real assets:

A)
China has bought at least 454 tonnes of gold
B) China has been importing 70 percent more copper than they consume
C) China has been filling up its strategic petroleum reserve
D) China has been building up its grain inventory.
E) China has been going around the world making deals
for raw materials and acquisitions of small-enough companies that they fly under the radar

4) In contrast, the Federal Reserve has been accumulating debt of insolvent institutions:

A) Making uncollateralized loans to insolvent banks.
B) Swaping banking system's toxic assets (subprime CDOs squared) for dollars.
C) Buying US treasuries
D) Buying mortgage backed securities


Conclusion: There will soon be a dramatic shift in alignment in the balance of global wealth and power.

This entry was posted in Background_Info, China, Currency_Collapse, Federal_Reserve, Financial_Wizardry, Wall_Street_Meltdown. Bookmark the permalink.

14 Responses to *****Have China watchers never heard of a decoy?*****

  1. dashxdr says:

    I had seen that article yesterday myself on gata's site, and I thought it was very encouraging also.

  2. Anonymous says:

    Thanks Eric for posting this article.. I wonder if the tonnes of Au that the Chinease claim they have is lower than what they actually have.

    Wouldn't surprise me one bit if the actual amount is much much higher... especially in light of the fact that they wanna back thei currency with gold.

    and what they disclosed was just a hint

  3. Anonymous says:

    Wow, I hope the Chinese are as smart as this article and doing exactly that

    We don't know if China is using loan in USD to buy these assets. Maybe they're just using new trade surplus money

    But if they're smart, they'll get loans in soon to be useless USD and buy as much hard assets as possible quickly

    Theres actually is a way of getting off an angry inflation tiger without getting hurt while USA is still on it

  4. Numonic says:

    Totally unrelated but the conspiracy theorist in me says that the swine flu scare causing schools to close down is a ruse where as the truth is those schools don't have the budget to stay open and the parents of the children at those schools would be more accepting of the schools shutting down because of a flu spreading than because the school didn't have the money to stay open. I'm just talking out my butt here, i know nothing of the children who got sick so the flu scare might be real.

  5. Anonymous says:

    Some Americans are taking out loans and buying appreciating hard assets (like PM). The loans will be paid in a few years with worthless USD. It does not need an economist to figure that out.

  6. dashxdr says:

    "It does not need an economist to figure that out."

    I think the way economists are educated, an economist _couldn't_ figure that out.

  7. Anonymous says:

    Maybe Numonic...ya never know. The viral infection will kick in soon, just about the time that the market collapses including the bond market and the dollar.

    Depopulation is the solution to the madness that plagues this world (so the elitist think anyway). Starvation and disease will literally wipe millions, if not billions, from this earth in the next decade.

    Unless we do something. But that would mean shutting off our computers and giving a sh#t about something more than playing the market casino daily.

  8. Anonymous says:

    Whenever economic crisis appeared, there were virus and big wars. WWI, WWII…The Elitists = Killers.
    Which country always sets wars to invade the other countries? It’s because wars can switch the crisis to another issue and reallocate the financial mess.

  9. KellytheSinger says:

    I agreee with Numonic above.

    The Schools are using any excuse they can to close because they dont
    have the money to operate and are not
    allowed to say so.

    We should take our children out of the schools until the government
    funds the schools like they bailed out the automobile companies.

  10. Anonymous says:

    A Chinese burn up.
    Ah, So those sharp knifed devious currency manipulators could just be up to sly tricks spending their money on real world value commodities while pretending to save US money.
    But I do not believe this conspiracy stuff,
    In order to understand the oriental mind on must think like an oriental.

    What they are really about is gaining a cheaper supply of hell money to burn at funerals ,
    Don’t you know there are more than a trillion of them and if they buy a coke a day at a dollar a day etc…
    That’s US or western imperialist market thinking .
    But nothing is surer than death or taxes as Keynes said “In the long run we are all dead” so in the end game
    more than a billion Chinese will eventually die and need hell money to burn.
    The market potential is huge .so I think it’s a’ futures” market play to ensure a supply of worthless paper money.
    The best money printer of worthless money is bound to be the Fed.

  11. Anonymous says:

    Are there any links to data to support the assertions in the article about China buying hard assets and using US Treasury bonds as collateral? Where is the proof that this is happening? Anyone can say anything. Authors need to back up their assertions with links to hard data or proof.

  12. Hugo says:

    Anonymous, check the links of previous articles, and you will find all the links you are demanding. This page has everything well documented and you should look before demanding nothing, because it was easy to find.

  13. Scott says:

    I do not think the Chinese will get off that easily. They have invested mightily in serving foreign markets that will no longer be able to afford their goods. Immense quantities of real capital have been squandered and will have to be redeployed.

    This will take time. In the interim, there will be high unemployment and much suffering. Their coercive attempts at stimulus will result in even more squandered resources and prolong the downturn.

    Not to mention the vast money-printing they have long been engaged in which Eric has covered so well. A lot of chickens will be coming home to roost for the Chinese over the next several years.

    But I think only an idiot would argue that their long term prospects are worse than the West's. Assuming they can keep their act together.

  14. Anonymous says:

    And pray, where will 2 trillion dollars of cash come from to loan to the Chinese with Bond backing?

    Paradigm

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