Trade War With China Spells End of Chinese Buying U.S. Treasuries
With all of the constant focus on the immediate ramifications of the U.S.-China trade war, investors easily lose sight of the longer-term threat to the United States. This past week, the world's largest Hedge Fund CEO, BlackRock's Larry Fink turned a spotlight on the real problem. He is worried about what he correctly calls a “looming danger” in the trade war outcome, but not for the immediate effects on growth and markets. Fink is worried about the issue hardly ever discussed— the negative longer term implications of this trade war for U.S. Treasury bonds.
This prescient warning from one of the leading minds on Wall Street is a serious wake up call for your own investment and retirement portfolios today. Gold makes sense in an IRA because you can not control the future viability and volatility of the critical U.S. Treasuries market at all. Now is the time to anchor your portfolio with a time-tested safe haven hedging strategy. You can start buying gold in monthly installments while the future of the government's ability to finance itself hangs in the balance. If you are uncomfortable with holding your treasure stateside, the IRS now allows you to keep your IRA gold in top offshore storage locations.
China Can Continue to Cut Back Aggressively On Treasuries Whenever it Wants
China has a quiet, distinctive advantage in the ongoing trade war with the U.S. It remains the largest foreign purchaser of American sovereign debt. They have long held the capacity to stop buying this debt whenever it suited them. They appear to have come significantly closer to this position last month.
Media reports in January disclosed that Beijing officials began recommending officially that the national government reduce and potentially even stop altogether buying American government debt. Larry Fink shared his fears on this topic, with:
“What worries me about the conversation between the U.S. and China — China has a $1.3 trillion pool of U.S. Treasuries, they've been accumulating U.S. Treasuries because of the trade deficit. Now as China reduces its trade deficit with the U.S., the likelihood of them reducing their need for U.S. Treasuries is large.”
This natural result from a smaller trade deficit is a factor that some market analysts have become aware of and are describing as a significant threat to financial markets. It appeared on the radar in earnest in 2018 as the Treasury's needs for financing began to rise substantially alongside American debt issues approaching all-time highs.
Who Will Substitute For Chinese Treasury Buying In the Future?
It begs the critical, unasked question: who will substitute in for the Chinese in the Treasury buying markets in the near and intermediate future? Fink has already warned you that:
“Over the next few years — and this is something we are not talking about enough and we need to be talking about this — we should expect over the number of years ahead, less ownership of U.S. Treasuries as their deficits shrink. But that's at the same time the U.S. deficit still seems to be growing at a trillion dollars. So it is long term a little more disturbing for me to see the implications of smaller Chinese purchases of debt with rising deficits. So the bigger question is: Who's going to be the substitute buyer to buy this?”
Economists Fear China's Trillion Dollar Weapon of Mass Destruction
Apart from the probability that China will naturally reduce and even stop buying Treasuries, there is the other possibility that they will decide to use their existing trillion dollar plus stockpile of these as a financial weapon of mass destruction. Economists have already sounded the alarm on this last spring. A few of them fretted that the Chinese could easily dump sell their enormous reserves of Treasuries in retaliation. This would naturally cause major financial destruction on international financial markets as well as jump up the costs for U.S. government borrowing.
Already, China has consistently reduced its catalog of United States' sovereign bonds, bills, and notes over the past months. In December of 2018, Beijing held $1.123 trillion of U.S. Treasuries. This was itself reduced from December of 2017‘s $1.184 trillion pile they owned, per data from the U.S. Treasury Department. This chart shows the negative trend from the last years:
Unfortunately as the chart above also shows, America can not count on its second largest owner of U.S. government debt to pick up the slack either. Japan has long represented the second buyer, but they are also significantly reducing their own portfolio of U.S. Treasuries these days. They have decreased holdings from $1.061 trillion in December of 2017 to $1.042 trillion in December of 2018.
China has purchased literally scores of Treasury bond holdings in the last few years out of a need to do something with its U.S. dollar holdings. As a prudent investor, they wanted to put their money to work in a safe haven instrument. U.S. bonds are still seen as the safest of financial investments available today.
Long Run, U.S. Treasury Is the Big Loser In This Conflict
Making this under considered problem more serious still, the global demand for the sovereign bonds from the U.S. is only likely to continue to decline in the near future, according to Fink's careful analysis. He warned:
“At the same time, the global bond indexes are now including more Chinese debt, and next year one of the big indexes is going to include up to six percent Chinese debt, which reduces U.S. demand by 2.6 percent of their debt. So all of these things are playing out. We're going to see some winners, we're going to see some losers — but long term, the U.S. Treasury bid is a loser in this.”
Rising U.S. Federal Budget Deficit Is The Source of the Problem
Ultimately though, the problem stems from an inability of the Federal government to control its spending. For fiscal year 2018, America's federal budget deficit increased to $799 billion. This represented the greatest amount in six years thanks to rising spending. In fact, this rising deficit could easily top a trillion dollars by the close of 2019, per the Committee for a Responsible Federal Budget.
Still worse news is that the Chinese tapering off their Treasury buying will happen at precisely the same time as the Federal Reserve (the largest domestic buyer of Treasuries) is busily unwinding its enormous overly bloated balance sheet it built up following the Global Financial crisis. This is the same Fed that has signaled its intentions to increase interest rates a few more times in 2019.
Meanwhile, the negotiators from the American and Chinese sides continue to hold urgent trade talks in a valiant effort to end the standoff between the two economic superpowers over fair trading practices that have caused a tit for tat tariff and counter-tariff imposition on one another's imports. Undoubtedly they will come to some sort of arrangement or argue successfully for more time to talk ahead of the March 1st deadline that the American President Donald Trump has set.
Yet whatever comes of this short term issue, Larry Fink is right to express his mounting concerns that:
“In years, I do believe this Treasury volume is going to be a big issue in the coming future. Or put it another way — the deficits in the U.S. could become a bigger issue.”
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