China Sends Obama a Clear Message

What would happen if your boss cut your salary, you had no savings, and none of the banks or credit card companies would lend you any money? You’d be in some deep doo-doo, wouldn’t you?

Well … that’s exactly the situation the U.S. is potentially staring at if foreign governments decide they don’t want to loan us any more money by buying U.S. Treasury and other government-backed bonds.

And who buys most of our bonds? China and Japan …

At the end of 2008, China owned $727.4 billion worth of U.S. Treasury bonds. And Japan was second, at $626 billion.

Japan has drastically curtailed buying U.S. bonds now that its economy is in shambles. But China has been — and continues to be — the most important lender to the U.S., essentially funding a big chunk of President Obama’s $787-billion economic stimulus plan.

The problem is …

China is Re-Thinking the Wisdom
Of Holding So Much U.S. Debt

Chinese Premier Wen Jiabao is worried about the stability of China’s huge portfolio of U.S. government bonds.

Chinese Premier Wen Jiabao, speaking at the closing press conference of China’s National People’s Congress — China’s annual legislative session — dropped this verbal bomb on the Obama administration last week:

“To be honest, I am definitely a little worried. We have loaned huge amounts of money to the United States, so of course, we have to be concerned. We hope the United States honors its word and ensures the safety of Chinese assets.”

I highly doubt that those remarks were impromptu. They are a clear message to the Obama administration that it needs to stop spending like a drunken sailor if it expects the rest of the world to buy U.S. government bonds.

The line of Chinese policymakers, economists, and scholars voicing concerns about investing too much of their country’s $2 trillion surplus in U.S. debt is growing longer and longer. Many are urging diversifying out of U.S. bonds and into more tangible assets such as natural resources and gold.

The reason is simple:

There is an expectation that U.S. bonds are headed for a big drop in value because we are simply printing too much money to fund our stimulus spending spree.

In fact, the Chinese are already starting to move out of U.S. bonds …

Last summer, China’s big state-owned banks — such as the Bank of China and the Bank of Communications — began dramatically reducing their holdings in Fannie Mae and Freddie Mac debt.

It turns out the Chinese made a pretty savvy move … Fannie Mae and Freddie Mac bonds have gotten annihilated since then.

Now, the Chinese are concerned that U.S. Treasury debt could suffer as well.  

So what can you do if you think the Chinese and Premier Wen Jiaboa are right?

Four Safe Hiding Spots
To Consider:

Safe Hiding Spot #1 —
Shorten-up on maturities …

Long-term bonds are the last thing you’ll want to be holding if Obama’s administration keeps spending like a drunken sailor.

If you’re a fixed-income investor, you could shorten the maturities of your bond portfolio. The Obama administration can’t spend, spend, spend without creating a big inflationary problem down the road. That means long-term bonds are the very last thing you want to be holding when inflation takes off.

Safe Hiding Spot #2 —
Funds that profit from
rising interest rates …

As the mountain of debt shoots to the moon and the safety of U.S. obligations comes under attack, the Treasury will likely have to boost interest rates to get investors to buy its bonds. And there are mutual funds that could make you richer along the way. For example, the Rydex Inverse Gov Long Bond Strategy (RYJUX) fund and the ProFunds Rising Rates Opportunity (RRPIX) fund are meant to profit from rising Treasury bond interest rates.

Safe Hiding Spot #3 —
This fund offers protection
against a tumbling U.S. dollar …

Another high-profit strategy is to bet that the U.S. dollar is headed for trouble. The Merck Hard Currency (MERKX) fund invests in the currencies of countries with the strongest economies and budget surpluses and could do very well if the U.S. dollar falls. Subscribers of my Asia Stock Alert already own this fund.

Safe Hiding Spot #4 —
Non-dollar debt …

I believe the most lucrative strategy of all will be investing in long-term, non-dollar denominated debt of countries with prudent fiscal and monetary practices. International bond funds, like the T. Rowe Price International Bond (RPIBX) or the American Century International Bond (BEGBX), could be big winners.

To sum it up: If I could make one and only one prediction for the next year, it would be that the U.S. dollar is going lower. A lot lower.

And if I’m right, any of the above safe hiding spots should do very, very well.

Best wishes,

Tony

P.S. For the latest on the tremendous, money-making opportunities available in Asia, sign up for our new free e-zine, Uncommon Wisdom, with daily updates and recommendations to preserve and grow your wealth.

The best part? A subscription to Uncommon Wisdom won’t cost you one red cent! Click here to subscribe.

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.