Asia will author its own destruction....

[coolhand]

Re: Asia will author its own destruction....

I am fascinated by the fact that China has been buying, securing supplies or otherwise gaining control of all manner of raw materials in 1Q09 (even US scrap steel exports to China were up 320% y/y in 1Q!!!) b/c all of these products are priced in dollars.

The blog below from GATA is interesting b/c it makes a point about something I've been thinking about for a few weeks: If China is a key/the sole determinant of where the dollar goes from here, isn't building up a massive stockpile of commodities (conveniently priced in dollars) an incredibly effective hedge?

I mean, lets say they start selling Treasuries - every $ that the remaining Treasuries held decline is offset by a gain on the commodity position...

Thoughts anyone?

Adrian Douglas: Have China watchers never heard of a decoy?

Submitted by cpowell on Sun, 2009-05-17 18:08. Section: Daily Dispatches 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-d...
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, 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.)
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.
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.
----
Adrian Douglas is editor of the Market Force Analysis letter (http://www.marketforceanalysis.com), which uses proprietary methods of determining market turning points. Subscribers receive bi-weekly bulletins. He is also a member of GATA's Board of Directors.

[lurker]

Re: Asia will author its own destruction....

The US relies on oil imports.

China relies on oil imports.

IMO the key is who gets the oil, or weans themselves off it. US treasuries, interest rates etc etc are a sideshow in the process of the US and China attempting to secure future energy needs. Iraq was one of our failed plays in this process.

[coolhand]

Re: Asia will author its own destruction....

if that's the case, thank God we're self-sufficient in food & have a kick-a$$ military!!

[lurker]

Re: Asia will author its own destruction....

if that's the case, thank God we're self-sufficient in food & have a kick-a$$ military!!

If you take away oil our military is not so kick-ass and our food production grinds to a halt.

[coolhand]

Re: Asia will author its own destruction....

true - but Americans are fatter than everyone else in the world, & if no one has oil, everyone's ag & military infrastructure will crap out at the same time.

Americans will starve last & then go pick up the pieces...

[ricket]

Re: Asia will author its own destruction....

true - but Americans are fatter than everyone else in the world, & if no one has oil, everyone's ag & military infrastructure will crap out at the same time.

Americans will starve last & then go pick up the pieces...

Not if they have a heart attack because they are morbidly obese...

[coolhand]

Re: Asia will author its own destruction....

voila! We just fixed the peak oil crisis, the health care crisis & the social security crisis in one fell swoop...

[charliebrown]

Re: Asia will author its own destruction....

were not self sufficient in food if we have no oil

[charliebrown]

Re: Asia will author its own destruction....

what a great post. now i am scared. your're right, it's exactly what i would do if i had a position of illiquid securities. although ...
if you're using the treas paper as collateral wouldn't some equally shrewd person smell somthing ?? especially if the amount of collateral is in the 100B+ range?

[unlucky]

Re: Asia will author its own destruction....

Here is a timely article in the FT that I think captures exactly the problem that China faces:

Asia needs to ditch its growth model

Future historians will mark 2008 as the year that the development model that has driven much of Asia’s rapid growth for the past two decades went bankrupt. While the next decade will represent a difficult transition towards a new development model, unfortunately many Asian countries are responding to the economic crisis with policies that may temporarily boost growth but that are only likely to make the transition more difficult.

[KGW]

Re: Asia will author its own destruction....

if that's the case, thank God we're self-sufficient in food & have a kick-a$$ military!!

U.S. military: Heavily armed and medicated
Prescription pill dependency among American troops is on the rise

In deploying an all-volunteer army to fight two ongoing wars, in Iraq and Afghanistan, the Pentagon has increasingly relied on prescription drugs to keep its warriors on the front lines.


Marine Corporal Michael Cataldi woke as he heard the truck rumble past.

He opened his eyes, but saw nothing. It was the middle of the night, and he was facedown in the sands of western Iraq. His loaded M16 was pinned beneath him.

Cataldi had no idea how he'd gotten to where he now lay, some 200 meters from the dilapidated building where his buddies slept. But he suspected what had caused this nightmare: His Klonopin prescription had run out.

His ordeal was not all that remarkable for a person on that anti-anxiety medication. In the lengthy labeling that accompanies each prescription, Klonopin users are warned against abruptly stopping the medicine, since doing so can cause psychosis, hallucinations, and other symptoms. What makes Cataldi's story extraordinary is that he was a U. S. Marine at war, and that the drug's adverse effects endangered lives — his own, his fellow Marines', and the lives of any civilians unfortunate enough to cross his path.

"It put everyone within rifle distance at risk," he says.

In deploying an all-volunteer army to fight two ongoing wars, in Iraq and Afghanistan, the Pentagon has increasingly relied on prescription drugs to keep its warriors on the front lines. In recent years, the number of military prescriptions for antidepressants, sleeping pills, and painkillers has risen as soldiers come home with battered bodies and troubled minds. And many of those service members are then sent back to war theaters in distant lands with bottles of medication to fortify them.

According to data from a U. S. Army mental-health survey released last year, about 12 percent of soldiers in Iraq and 15 percent of those in Afghanistan reported taking antidepressants, anti-anxiety medications, or sleeping pills. Prescriptions for painkillers have also skyrocketed. Data from the Department of Defense last fall showed that as of September 2007, prescriptions for narcotics for active-duty troops had risen to almost 50,000 a month, compared with about 33,000 a month in October 2003, not long after the Iraq war began.

In other words, thousands of American fighters armed with the latest killing technology are taking prescription drugs that the Federal Aviation Administration considers too dangerous for commercial pilots.

Military officials say they believe many medications can be safely used on the battlefield. They say they have policies to ensure that drugs they consider inappropriate for soldiers on the front lines are rarely used. And they say they are not using the drugs in order to send unstable warriors back to war.

Yet the experience of soldiers and Marines like Cataldi show the dangers of drugging our warriors. It also worries some physicians and veterans' advocates. "There are risks in putting people back to battle with medicines in their bodies," says psychiatrist Judith Broder, M. D., founder of the Soldiers Project, a group that helps service members suffering from mental illness.



Prescription drugs can help patients, Dr. Broder says, but they can also cause drowsiness and impair judgment. Those side effects can be dealt with by patients who are at home, she says, but they can put active-duty soldiers in great danger. She worries that some soldiers are being medicated and then sent back to fight before they're ready.

"The military is under great pressure to have enough people ready for combat," she says. "I don't think they're as cautious as they would be if they weren't under this kind of pressure."

Brought more than memories back
When Cataldi talks about what happened to him in Iraq, he begins with an in incident that took place on a cold January night in 2005, when he and five other Marines received a radio call informing them that a helicopter had disappeared. The men roared across the desert of western Iraq and found what was left of the chopper. Flames roared from the pile of metal. Cataldi, 20, was ordered to do a body count.

The pilot's body was still on fire, so he shoveled dirt on it to douse the acrid flames. He picked up a man's left boot in order to find the dog tag every Marine keeps there. A foot fell to the ground. "People were missing heads," Cataldi remembers. "They were wearing the same uniform I was wearing."

The final death toll from that crash of a CH-53E Super Stallion was 30 Marines and one sailor.

For days, Cataldi couldn't escape the odor of burning flesh. "I had the smell all over my equipment," he says. "I couldn't get it off ."

When he returned to his stateside base at Twentynine Palms, California, he knew he'd brought more than memories back from Iraq. He would cry for no reason. He flew into fits of rage. One night he woke up with his hands around the throat of his wife, Monica, choking her.

"It scared the crap out of me," he says.

He went to see a psychiatrist on base. "He said, 'Here's some medication,' " Cataldi recalls. The prescribed drugs were Klonopin, for anxiety; Zoloft, for depression; and Ambien, to help him sleep.

Later, other military doctors added narcotic painkillers for the excruciating pain in his leg, which he'd injured during a training exercise. He was also self-medicating with heavy doses of alcohol.
Those prescriptions didn't stop the Marine Corps from sending Cataldi back to Iraq. In 2006, he returned to the same part of the Iraqi desert to do the same job: performing maintenance on armored personnel carriers known as LAVs. He also took his turn driving the 14-ton tanklike vehicles, one of which was armed with a 25 mm cannon and two machine guns and loaded with more than 1,000 rounds of ammunition.

Marine Major Carl B. Redding says he can't talk about the medical history of any Marine because of privacy laws. He says the Corps has procedures to ensure that service members taking medications for psychiatric conditions are deployed only if their symptoms are in remission. Those Marines, he says, must be able to meet the demands of a mission.

But it's difficult to square those regulations with Cataldi's experience. His medications came with written warnings about the dangers of driving and operating heavy machinery. The labels don't lie.

One night, Cataldi took his pills after his commander told him he was done for the day. Five minutes later, however, plans changed, and he was told to drive the LAV. He asked the Marine sitting behind him to help keep him awake. "I said, 'Kick the back of my seat every 5 minutes,' and that's what he did."

http://www.msnbc.msn.com/id/30748260/ for the rest of the story.

Ya, we're doing real good. . .

[ThePythonicCow]

Re: Asia will author its own destruction....

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.

Bingo!

I found the above article quoted and commented on by Eric deCarbonnel at *****Have China watchers never heard of a decoy?*****.

Eric's comment on this article seems like a good one to me:

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.

However I have one critical question:

Who lent all that money to the Chinese and took Treasuries as collateral?

Whoever they are ... dang that could be a gorgeous shorting opportunity in the near future!

[GRG55]

Re: Asia will author its own destruction....

The US relies on oil imports.

China relies on oil imports.

IMO the key is who gets the oil, or weans themselves off it. US treasuries, interest rates etc etc are a sideshow in the process of the US and China attempting to secure future energy needs. Iraq was one of our failed plays in this process.

How the Chinese do it...





How the USA does it...









Once upon a time, when I worked for Big Oil [many years ago ], the company I was with had a good position in one of the South American oil producing nations. That country put up for auction the rights to a number of new exploration blocks. In these circumstances it is customary for potential bidders to conduct not only technical work in preparation for the rights auction, but also an analysis of the competitive situation...which other companies are likely to bid for specific blocks and at what levels.

When the results of the auction were announced an obscure little company that had never previously bid in an exploration rights auction blew away the industry bids and captured the best blocks. Many of us in the corporation realized that China National Offshore Oil Company [CNOOC] had permanently changed the dynamic of international petroleum exploration. This was long before China gained the status of "Factory to World", "The Waking Dragon", "Holder of the Fate of the US Dollar", or any number of other recently fashionable sobriquets.

[medved]

Re: Asia will author its own destruction....

U.S. military: Heavily armed and medicated

[................. whiny M$NBC rant deleted ........................]

Ya, we're doing real good. . .

Compared to what? Do you have information about other armies involved in active military action? Do you think they don't have the same problems? Then, think again. Compared e.g. to the Russian military American forces are very nice and mellow.

People that write these rants usually compare US to Utopia. I am sure, in this comparison Utopia wins hands down. Very nice country, I would like to travel there sometime. :rolleyes:

[KGW]

Re: Asia will author its own destruction....

Compared to what? Do you have information about other armies involved in active military action? Do you think they don't have the same problems? Then, think again. Compared e.g. to the Russian military American forces are very nice and mellow.

People that write these rants usually compare US to Utopia. I am sure, in this comparison Utopia wins hands down. Very nice country, I would like to travel there sometime. :rolleyes:

Face down in a desert, as an invader: no self-defense here. Reality is even better than denial, Mr. Bear.