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| Dear Daily Crux reader,
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Adapted from the June 1 and June 2, 2009, editions of The Gartman Letter TIM'S EMBARRASSING TRIP TO CHINAThis week, we must note how sad it is that the US Treasury Secretary must go to the largest buyers of US Treasury securities… Asia collectively, and China singularly… to prove the merits of investment in the US. Mr. Geithner is in Beijing this week to explain that further investment in the US is in China's best interest, and we are certain that the Chinese have listened intently to Mr. Geithner's pleadings. We're certain that the delegations he's spoken with have treated him with utmost respect, and nodded approvingly as he spoke, outlining the benefits of investment in US Treasury securities. Further, we've no doubt that the decision has long ago been made not to sell their holdings of Treasury debt but not to be an aggressive buyer of them going forward, for that is not in China's best interest. It is, instead, in China's interest to secure the raw materials it needs to foster further economic growth. It is in China's best interest to buy crude oil when and where it can; to buy copper, steel, coal, wheats, soybeans, cotton et al with the foreign exchange reserves it earns every day, but to avoid further aggressive purchases of Treasury debt. Mr. Geithner's is a lonely and embarrassing job it seems. His "product," debt securities, have lost their luster, and the things he cannot sell… copper, steel, coal, wheat, soybeans, cotton, crude et al… have seen their luster enhanced. His is an embarrassing job at the moment. …The saddest statement Mr. Geithner made this week when defending the Obama Administration's positions to Beijing was that the US budget deficit was indeed large but that "If we had not acted aggressively, our deficits would have been even higher in the future." That is hardly the statement that the Chinese authorities were looking for from the US Treasury Secretary. He did say that it was the Administration's intent... to go back to living within our means; that we bring our fiscal deficits down to a sustainable level; that we unwind and reverse these exceptional measures we've taken in the financial sector, …But he did not give hard data to prove that case. We suspect that the Chinese authorities were looking for the hardest of data. Instead they got rhetoric and promises. That, we fear, was insufficient to assuage their growing concerns. How sad it is that the strongest military power in the world… that the world's reserve currency nation… that the nation that was the wellhead of free market capitalism…is forced to go to a nation as young as is modern China, hat in hand, begging for respect. China's "investments" in the US have been, heretofore, a vote of confidence in the US people and the US model for economic growth, but that confidence has been shaken over the course of the past five years, and has been manifestly and materially shaken over the course of the past five months. China's authorities are gravely concerned that the US is heading down the path of fiscal ruin, and although we do not envision an environment wherein China will openly sell its holdings of US Treasury securities, we can and we do envision and environment where China quietly refuses to rollover those investments and where those maturing dollars are used instead to buy the raw materials that China knows it shall need in the future. Simply put, China has been, is, and will be "swapping" Treasury securities for copper; Treasury securities for oil; Treasury securities for wheat, corn, and soybeans; Treasury securities for cotton et al. Were we the Chinese fiscal and monetary authorities, that is what we would be doing, and we are certain that that is precisely what the authorities will be doing for some very long while into the future. Thus, as we should all understand regarding how markets function, and as we've said countless times over the course of the past many years, it takes buying and lots of it to put a market up; it takes a mere lack of buying to put a market down. Treasury securities and the US dollar will have a lack of buying from our largest client for years into the future. Trade then accordingly. Good luck and good trading, Dennis Gartman The Gartman Letter is a daily commentary on the global capital markets subscribed to by leading banks, broking firms, hedge funds, mutual funds, energy and grain trading companies around the world. The Letter each day deals with political, economic and technical circumstances from both a long and short term perspective, and is available to clients and prospects at approximately 10:30 - 10:45 GMT each business day of the year. Mr. Gartman has been producing his commentary on a continuous basis since 1987, and has taught courses on capital markets creation and derivatives for banks, broking firms, governments and central banks all the while. Crux note: You can learn more about a subscription to The Gartman Letter here. It's a little pricey, but if you're controlling a large amount of money, it's well worth the cost. |
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