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Posts Tagged ‘BRIC nations purchasing fewer Treasurys’

Turbo-Tim Takes ‘Indirect’ to a Whole New Level

Posted by Larry Doyle on June 25th, 2009 6:48 AM |

tim-geithnerIs it too much to expect increased transparency and integrity in the Brave New World of the Uncle Sam economy? Don’t expect to get a ‘direct’ answer from Turbo-Tim Geithner. Why?

Geithner just redefined ‘indirect’ buying in our U.S. Treasury auction process without a hint that this major piece of information was even up for review. Let’s look deeper into this sleight of hand. The Wall Street Journal sheds a little bit of light on this development in, Is Foreign Demand as Solid as It Looks?

The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world’s central banks are still willing to help absorb the avalanche of supply, mightn’t be all that it seems.

When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.’s budget deficit.

But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.

Why is this development so meaningful? Very simply, as the United States deficit explodes and Treasury auctions skyrocket, our funding needs will increase accordingly.

With BRIC nations (Brazil, Russia, India and China) threatening to purchase fewer Treasuries – if not outright sell our debt going forward – we become ever more dependent on finding other outlets for our bonds. If ‘indirect’ buyers, that is foreign entities, purchase fewer Treasuries, then it is not a stretch to envision our interest rates moving higher to attract other buyers.

Rather than waiting for a potentially unpleasant development, Geithner appears to have proactively used some artifice in redefining ‘indirect’ buyers to include not only foreign entities but also domestic buyers who place orders to purchase Treasuries through a primary dealer.

By broadening the definition, Geithner and team are able to disguise the true level of foreign buying.  When questioned on this redefinition, how did Tim respond?

Treasury officials didn’t respond to requests for comment.

So much for increased transparency and integrity. Why should we be surprised? Although healthy markets love transparency and integrity, tax cheats are not typically fond of these principles.


Grab Some Cover from More Incoming BRICs

Posted by Larry Doyle on June 17th, 2009 6:02 PM |

While all eyes domestically are seemingly focused on the financial regulatory reforms coming out of Washington, news of much greater long term impact is hitting us half a world away.

Take cover!! Shots from one BRIC nation after the other are coursing across our landscape. Don’t think for a second that Washington does not feel this heat. The mere fact that the media largely dismisses these stories is not surprising. In fact, the media’s approach of generally overlooking these developments is remarkably consistent.

Be careful . . . and let’s review the following:

1. Bloomberg reports: Russia, China to Promote Ruble, Yuan Use in Trade


2. The Washington Post writes: Beijing Orders ‘Buy China’ for Stimulus Projects


3. Yahoo News offers: China Sells U.S. Bonds to ‘Show Concern’


4. Breitbart provides: Time for ‘New World Order’: Brazilian President

There is little doubt that stories of this magnitude and measure were released in a very coordinated fashion. Recall that the BRIC (Brazil, Russia, India, China) Summit in Yekaterinburg just finished.

By the way, how do you think the U.S. dollar did today?

The Wall Street Journal highlights: Euro, Yen Make Gains Against Dollar


Breitbart adds: Dollar Drops on Reserve Currency Doubts

If our dollar were to continue declining in value, that is the precursor to inflation. For those who maintain that our economy is too weak with too much slack to spark inflation . . . welcome to stagflation. Who has thoughts about that?

InvestmentNews reports: Roubini Warns of Stagflation

In connecting these dots, I look at this onslaught of activity and coordinated news releases and think, “just because you’re paranoid, does not mean they’re not out to get you!”


More BRICs Through Our Financial Window

Posted by Larry Doyle on June 16th, 2009 2:49 PM |

In the process of rebuilding a home, let alone an entire financial industry and national economy, the last thing the United States needs are BRICs flying through our living room windows!! Well, get down and be careful because more financial shots from the BRIC (Brazil, Russia, India, China) nations are headed our way!

These salvos from the BRIC block started shortly after Turbo-Tim launched a barb in January about Chinese manipulation of their currency. The “incoming” escalated prior to the G-20 when Chinese Premier Wen Jiabao railed on the United States as having been the centerpiece of global economic problems. Jiabao then called for the development of a separate reserve currency in lieu of the greenback.

A few weeks back, I referenced trade discussions between Brazil and China in which U.S. dollars would not be used as the currency of choice. That shift was not highlighted by our national media outlets but is very meaningful. TCW strategist, Komal Sri-Kumar, highlighted this issue in writing The Dollar as World Currency: A Turning Point?

A week ago we witnessed Russian central bank Deputy Chairman Alexei Ulyukayev indicate that Russia will reduce its holdings of U.S. Treasuries.

Russia did temper that message by having a spokesman indicate that they still support the dollar as the world’s reserve currency. In my humble opinion, I take that statement as akin to “sending in the clowns” for a fabricated financial transaction. Why? The trend from BRIC nations away from the dollar is too strong.

We see more “incoming” again today, as Bloomberg reports BRIC’s May Buy Each Other’s Bonds in Shift From Dollar:

Brazil, Russia, India and China are considering buying each other’s bonds and swapping currencies to lessen dependence on the U.S. dollar as their leaders meet for a summit in Russia’s Ural Mountains

The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries. The first BRIC summit comes after Brazil, China and Russia announced plans to shift some foreign reserves into International Monetary Fund bonds, driving Treasuries and the dollar lower.

What we’re seeing is a continuation of discussions to find an alternative to the dollar, yet nobody is going fundamentally to alter anything yet.”

Medvedev is hosting back-to-back summits of developing economies in Yekaterinburg as he seeks to ease the world economy’s dependence on the U.S. dollar. Medvedev began talks this afternoon with Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva.

The Russian leader reiterated his intention to push for the creation of a “supranational currency” to challenge the dollar and encouraged China and called on other Shanghai group members to use each other’s currencies for trade.

“There can be no successful global currency system if the financial instruments that are used are denominated in only one currency,” Medvedev said. “Today this is the case and the currency is the dollar.”

We can manage the BRIC activity as it comes through our financial window at this point in time. The risk we run as a nation, though, is that at some point in the future, the BRIC activity may also include the equivalent of financial Molotov cocktails that spark a significant decline in the value of the U.S. dollar and a concomitant inflationary inferno.


Another “BRIC” in the Wall

Posted by Larry Doyle on June 11th, 2009 11:20 AM |

We have heard loud and clear from Chinese governmental officials about their concern over our growing fiscal deficit. Yesterday, Russia spoke out and announced their intention to diminish their holdings of U.S. Treasurys. Today, we see another BRIC (Brazil, Russia, India, China) nation announce intentions to increase holdings of IMF-issued debt at the expense of U.S. Treasurys. Bloomberg reports, BRICs Buy IMF Debt to Join Big Leagues:

Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said. The countries are seeking a stronger voice in international financial institutions such as the IMF, according to He Yafei, a vice foreign minister at China’s Ministry of Foreign Affairs.

Treasuries declined yesterday, pushing benchmark 10-year yields to the highest since October, after the government sold $19 billion of the securities and Russia said it may move out of U.S. debt to buy the IMF bonds. The so-called BRICs, an acronym coined by Goldman Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.

While those in the administration and select economists will discount these maneuvers by these nations, I beg to differ. The U.S. is very dependent on foreign investors continuing to purchase our debt. If these lead nations move away even marginally, I believe that provides incentive for other smaller nations to do the same. Why?

Nations around the globe are in dire need of financing. A surefire way for smaller antions to curry favor with these BRIC nations is to follow their lead in purchasing IMF-debt versus U.S. Treasurys.

The mere perception that these BRIC nations are purchasing fewer U.S. Treasurys is powerful. Perception very often becomes a widespread reality.


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