The VIX (or the “fear index” as many like to call it) has been trending downwardly. This downward trend has occurred after the VIX was able to record an absolute maximum of $89.53 on October 24, 2008. At that time, liquidity problems, sudden bankruptcies, and downward spiraling equity market all pressured investors out of risky assets. This […]

Just a little less than half of the total national debt is in foreign hands (46.7%). The Chinese are the largest holder, currently holding 10.5% of total U.S. debt, which amounts to $1.28 trillion. It is no surprise why the Chinese have been showing some discomfort with the current deadlock. China is the holder that stands to lose the most out of all creditors.

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The second largest holder on the list is Japan. Japan holds $1.14 trillion of US debt. Both Japan and China have the same goal. They want to maximize exports, thus desiring a strong US dollar. They buy Treasuries in order to help inflate the dollar and indirectly improve their trade balances.

After Japan, no other country has a strong weight in the list. The Caribbean center is the third, followed by a group of oil exporters, Brazil, Taiwan, and some European countries (including the UK). Notably, for those who didn’t know, the Caribbean center is an anonymous group of investors who own US securities but don’t want it to be known. It usually includes hedge funds and oil exporters.

Also included in the list is the whole position for the BRICS (Brazil, Russia, India, China, and South Africa). This is because I believe that we should be careful with their role in international trade, especially because this group has been very vocal at times against the current monetary policy followed by the Federal Reserve. To these countries, it has been perceived as a competitive devaluation. They currently hold 31.1% of US foreign debt, which represents a non-negligible 14.5% of total national debt.

The current strategic games played between Republicans and Democrats may be very effective for either party involved, but their effect on the international community has been neglected. For creditors, it doesn’t only matter if you end up servicing the debt, but also how you do so. If you scare a creditor, they won’t be likely to lend anything to you the next time. If they do, it definitely won’t be given at the same rate because they will perceive extra risk deriving from it.

It would not be the first time that some of the BRICS pushed for a substitute to the dollar in international trade. With the dollar exposed to unconventional measures of monetary policy and fiscal and political uncertainty, it is losing its appeal. When the problem is solved, China will certainly be happy to re-invest in US Treasuries, but they will also be searching for long-term alternatives. The oil exporters group, for example, has always been looking to conduct part of the oil business in Euro. The current uncertainty has left them pushing for it more than ever, as the possibility of the US dollar being damaged looms overhead.

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While President Obama searches for alternative strategies that would allow him to reopen the government without House approval, some foreign investors are becoming increasingly worried about what will happen next. For these investors, trillions of dollars are at stake. Even if approving funding solved the issue of the shutdown, it  still wouldn’t contribute any solutions […]

The Future

When all these things are considered and the consequences of the financial crisis the United States is, it becomes obvious that something needs to be done regarding the current debt level. Pretending debt isn’t a concern and that debt ceilings could be pushed infinitely higher without negative consequences certainly isn’t a wise way of dealing with the problem. Many European countries had to apply some austere policies in order to avoid the worst. It is becoming clear that America will have to do the same to some degree.The Federal Reserve won’t be able to buy Treasuries forever. At some point, interest rates will start rising and it would become increasingly harder for the government to repay what it owes.

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For the time being, we are assisting in the same war we saw in the past between Republicans and Democrats. Obama doesn’t want to see his healthcare program delayed any further and insists on keeping it as it is. However, Republicans are pressing the President and threatening with the possibility of shutting down government due to a lack of funding. The Senate voted in favor of keeping the government running  however, the House decided to allow a government shut down.

The risk of a governmental shut down is due to the fact that both the Republican and Democratic parties felt they could push blame and responsibility off on the other. However, the consequences of their inability to pick up responsibility before it is too late may end up being disastrous for the future of the USD. The international community will perceive the American dollar as weaker than it was in the past and may reclaim higher interest rates to hold Treasuries (by reducing demand). This would either push interest rates higher or tie the Federal Reserve to a QE4EVA program.

At this point it would be  best if Republicans and Democrats would find a balance, working together to find solutions rather than making the problem harder to solve by focusing only on their differences  and put an end to their fight. It is time to start looking at ways of fighting the current debt levels, That means not only cutting on some expenses, but also raising taxes. If Obamacare is to move forward, taxes will have to raise even more. There’s no other option if we want to service the debt.

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Just two years after experiencing one of the worst months in stock market history, the market has the possibility of reviving the period. Republicans and Democrats are continuing to fight each other while the country financially sinks. In August 2011, the debt rating for the U.S. was cut by S&P from AAA to AA+. This […]

The US government currently holds a huge debt pile. It amounts to 105% of GDP and will soon have to renegotiate an increase on the debt ceiling to avoid a default. As soon as the FED stops buying government debt, interest rates will dramatically increase and the government will press the central bank to continue buying debt. There are only two options available: reduce government debt through the adoption of an austerity package (as in peripheral Europe), or let inflation roll and alleviate government debt.

You already know what the decision will be. What can’t be known is the dimension of it. The best thing to do is to prepare a portfolio of stocks that do particularly well within inflation environments. Value stocks, which have stronger cash flows, are preferred over growth stocks, and precious metals are always a good hedge against inflation.

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The debate about the direction that monetary policy is about to take has been on the table for months. In fact, the tapering issue has been prominent since Ben Bernanke publicly stated that the FED would start cutting on the current asset purchase program, effective this year..The purpose of cutting this program is to completely […]

The Power Of A Bear Call Spread The current year has been very profitable in terms of stock market investment. Although there is are still over three months left to go, the S&P 500 is already rising around 19%. However , three months is plenty of time for the market to go even higher. On […]

While Ben Bernanke and all other FOMC members prepare another meeting to decide the future of monetary policy, the range of economic data to digest is huge. This could be a good sign that suggests a mild economic recovery. However, this recovery will lack enough enthusiasm to support the “tapering” decision that the FED would […]

Most novice traders usually trade options in a simplistic way. They examine a stock, evaluate if it’s going to rise or decline, and then they buy a call or a put option to explore the opportunity, preferable an out-of-the-money one to maximize potential profit and minimize initial debits. Unfortunately the prospects for a stock are […]

Since being elected at the end of last year, Shinzo Abe promised an ambitious economic plan to push the Japanese economy out of the zombie state it has been in for the last two decades. Through a stimulus package and by pressuring the Japanese central bank, Abe is willing to push inflation up to a […]

Now that most 13F filings for the second quarter of the year are available, it is time to take a look at them and check what hedge funds have been up to. Particularly interesting, is to check hedge fund holdings and trades regarding precious metals (in this case special gold) and how it closed the […]

From recession to a QE-boosted market The last five years have truly been difficult for the U.S. economy, especially since it has been struggling to fully recover from the latest recession that cut financial assets’ value in half and pushed unemployment from a healthy rate below 5% to an alarming two-digit number. Even if it […]