Bernanke or China? Who is right about a US Federal Government default?

According to Bernanke, Congress better lift the debt ceiling or the US will default.  Yet if the only way you can make payments on your debt is by borrowing more money, you are already in default.  So far, the US government, thanks to Mr. Ben and his QE1 and QE2 and his seemingly endless loans to the US treasury, has staved off “default”.  In China, the largest foreign creditor to the United States, financial experts are saying that the US is already in default because of intentional dollar devaluation which erodes the wealth of creditors.  Apparently, China reduced its net ownership of US treasury notes over the last quarter.  Expect that it will be harder to find lenders, and Ben will be the only one left in the treasury auction room.  That’s when QE3 will start.  Or riots in the streets, take your pick, Congress.  Eventually, the pressure to raise the debt ceiling will be too much for the politicians in Congress, and it will be business as usual–money creation ex nihilo, and the Bernanke put will save the stock market.

Canada’s currency manipulation: the inmates are in charge of the loonie bin (update 2)

UPDATE 2:  I asked Denis, my economist friend, how much of the US treasuries is owned by the Canadian government and how much would be owned by the private sector, and he suggest consulting the Bank of Canada balance sheet.  It is clear that the total assets on the balance sheet are 60.8 billion, which means that there is no way that the government of Canada could have lent $134 billion to the US, and that most of the ownership of these US securities must be in the Canadian private sector and can be explained by covered interest arbitrage.  Nevertheless, the reason why this arbitrage happens is because the Bank of Canada has kept the interest rates at low levels and is therefore to blame if the loonie is inflating like crazy.  Denis provided me with the following chart of interest rates:

UPDATE:  Thanks to the comment by blogger 101 Centavos, I finally asked my local Canadian economist if he could tell me what the number $134 billion means.  He says it is not the Canadian government alone that holds this debt, but all Canadian holders both sovereign and private.  I am going to try to reach him by telephone for clarification.  Meanwhile, in the words of the ever opinionated Emily Latella of Saturday Night fame, “Never mind”.

[Please note: the updates above are intended to substantially correct  what follows, which is the original post]

I am thinking about writing a blog for the American Thinker about the announcement that China would spend another 5.4 billion in the Canadian resource sector, this time to buy 5.4 billion of Encana’s natural gas holdings.  My view is that China’s purchases of Canadian resources is more about diversifying themselves out of US treasuries.  But  I found a table updated in November 2010, which shows that the Chinese have actually increased their US treasuries by $265.3 billion since November of 2009 (the chart only goes back that far).  Meanwhile, one stat jumped off the page.  In that same period, Canada has increased its holdings of US debt by $84 billion! I am shocked.

Canadians greatly fear the death of the manufacturing sector.  So now they will tolerate this.  But I am dismayed and shocked that our government is manipulating the Canadian dollar so that it will not rise against the US.  The immorality and the bad management of this situation is beyond words.

A couple years ago, I thought that given the bad fiscal policy of the US government would lead to the loonie soaring against the US dollar.  But now I see that rather than allow that to happen, the Canadian government is subsidizing the American lifestyle and the American bubble.  So that finally explains to me why the loonie remains at par and why price inflation is slow to happen in the US–why price inflation is happening in Canada the same as elsewhere in the world.

Hyperinflation is now here

Monty Pelerin makes some interesting observations about Gary Shilling’s investment advice, saying that it works when things are normal, but the global financial situation is anything but normal today.  Indeed, I believe that the signs of hyperinflation are now here, and I’m not the only one.  Even some of the mainstream papers are starting to see it (e.g., the Globe & Mail).  Indeed, I have virtually no fear now that my portfolio is going to plunge like it did in 2008–I have the Bernanke put to count on.  If asset prices go down, he’ll just monetize more debt and it’s back to races.

So I made this comment on Monty Pelerin’s article:

I follow a blog whose author likes Gary Shilling. His portfolio was static in 2009 and he didn’t bother telling us his returns in 2010. By contrast, our own portfolio is up high double digits (See DIY 2010 summary). Whose advice am I following? Jim Rogers, Marc Faber and Peter Schiff–long commodities, esp. gold and oil. This is an anti-inflationary portfolio and it is already up handsomely. I don’t think we have to wait for high inflation or even hyperinflation. I believe that hyperinflation is already here.

Look at the international situation. (BTW, I loved the video of Jim Grant that you recommended.) The Chinese and others who hold US treasuries are scared to death of the devaluation of the dollar, but they can’t dump them all at once or their hyperinflationary fears become instantly realized. So they are buying up assets, diversifying their holdings. Billions of Asia dollars have been sunk into the Canadian resource sector, while the Chinese have essentially ended their net purchases of US treasuries. So how does the Fed react to this? Buy, buying the debt, and monetizing (pun intended).

When the bubble finally hits the commodities market–and I don’t think there is a bubble yet by any stretch of the imagination since Americans can still afford gasoline and food–I think I will dump the commodities and purchase a farm. But until them, I’m still very long on Canadian resource companies, especially junior oils. The Chinese want what Canada’s got, and they are the most liquid players in town.

See also

New China Investment in Canada

Well good news to investors comes today from an agreement between Ottawa and Beijing to allow Chinese insurers access to the capital markets in Canada, which would bring in potentially billions of new dollars into the TSX and the Canadian bond market; this will undoubtedly help push up asset prices in our relatively small market, as the Chinese seek to diversify their holdings out of US Treasury instruments.  The Finacial Post says:

The China insurance pact comes on the heels of the decision by Ottawa to stop a proposed bid by Australia’s BHP Billiton Ltd. to acquire Saskatoon-based Potash Corp. The ruling sparked widespread worry among policy experts that Canada would find it difficult in the future to attract foreign investment, which is required to help boost innovation, domestic competition and lacklustre productivity.

The Financial Post suggests this is welcome news in the light of recent events. The Canadian journalist community had convinced themselves that the failed Potash bid of Australian mining company BHP would send a negative message to foreign investors.  However, according to a very thorough article in the Globe and Mail on the failed deal, the fault lies entirely with BHP, starting with their low-balling the initial bid, making it so that neither the Potash board of directors nor the province of Saskatchewan were much interested in the offer.  In other words, if you want Canadian assets, you better be ready to pay a premium for them, and that is as it should be.  The BHP bid of $130, though 20% above the price of the day of the offer, was ridiculously below POT all time high over $244.

In my view, this is another reason to be bullish on the Canadian oil and gas sector.  In China, there is a growing demand for energy and a diminishing stock pile, as the WSJ has pointed out (hat tip Devon Shire).  I believe that the Chinese insurers will seek out energy stocks as one of their main interests, as they know their own demand for the products will continue to force up the price.  Meanwhile, there are still deals to be made in the TSX.  For example, Petrobakken has made a serious dip since its quarterly report, as investors were disappointed with less than spectacular results caused  by wet weather which hindered drilling.  Penn West Energy and Pengrowth Energy are both dipping, having both been downgraded by TD Newcrest from Action Buy List, to Buy–based only on their recent, dramatic increase in share price.