Who owns the U.S. Debt?

In an interesting story over at Business Insider, the owners of the U.S. treasuries are enumerated. I had always assumed that China was the number one purchaser of U.S bonds. It turns out that Uncle Sam is the majority holder. This is just like Japan who owns a majority of Japanese public debt. I learned of the Japanese holding in much the same way I learned of the U.S. percentages, In a time of crisis. The Japanese nuclear disaster highlighted their domestic vulnerability much like the U.S. debt ceiling crisis is shining a bright light on our vulnerability.

While China, Japan and the U.S. make up the top 3 creditors, we hold a lions share of U.S. debt:

The U.S. owes the U.S most

 

Here is a breakdown of all of the creditors to the U.S. :

Who we owe

source: Business Insider

 

The Wall Street Journal has a live blog of the debt debate that is worth checking out.

Question: What changes have you made in your personal finances as a result of the ongoing debt debate?

I have reduced my exposure to equities recently and have increased cash. I could miss out on some gain and dividends but the market uncertainty leading up to the artificial debt deadline could precipitate a big correction or crash. Nobody knows.

I do hope they sort this out soon, though, it is really a dangerous political sideshow that is doing grave harm to our reputation around the world.

-WR

Who? How Much?
Hong Kong 121.9
Caribbean banking centers 148.3
Taiwan 153.4
Brazil 211.4
OPEC 229.8
Mutual funds 300.5
Commercial banks 301.8
State, local and federal retirement funds 320.9
Money market mutual funds 337.7
United Kingdom 346.5
Private pension funds 504.7
State and local governments 506.1
Japan 912.4
U.S. households 959.4
China 1160
The U.S. Treasury 1630
Social Security trust fund 2670

What Is A U.S. Company?

 

As we head into the final furlong of the debt debate it may be perplexing that our economy seems to be doing so poorly in terms of housing, joblessness, consumer confidence and myriad other ‘coal mine canaries’. I thought it would be interesting to understand why the stock market seems to be riding so high.

What do the following organizations have in common?

3M
Alcoa
American Express
AT&T
Bank of America
Boeing
Caterpillar
Chevron Corporation
Cisco Systems
Coca-Cola
DuPont
ExxonMobil
General Electric
Hewlett-Packard
The Home Depot
Intel
IBM
Johnson & Johnson
JPMorgan Chase
Kraft Foods
McDonald’s
Merck
Microsoft
Pfizer
Procter & Gamble
Travelers
United Technologies Corporation
Verizon Communications
Wal-Mart
Walt Disney

If you answered that they are all American companies you’d be right, technically. There is a slight problem with these companies in particular though. They happen to be the 30 companies that make up the Dow Jones Industrial Average. When newsies say “The Dow is up” or “The Dow is down” what they are saying is the average price of these 30 companies stock has gone up or down. (The actual calculation is slightly more complicated, it is the sum of the prices of all 30 stocks divided by the ‘Dow Divisor‘, a magic number used to take into account company changes such as stock splits or spinoff companies but the effect is the same.)

So what’s the problem?

When you read or hear something like this: “U.S. blue-chip stocks are riding high and the Dow Jones Industrial Average finished its best month of the year.” You’d be inclined to infer that the health of the U.S. Economy is somehow tied to the Dow. You’d be wrong. While all of the companies are technically American organizations, many of them are actually multinationals with a majority of employees and sales abroad.

Things that make you say MMM

When a company such as 3M (Originally called the Minnesota Mining and Manufacturing company. You can’t get more apple pie and baseball than that) has only 34% of sales in the U.S you could say, “Hey, great. They are selling stuff on the global market.” When you come to find out that only 33% of their employees are in the U.S. then you might start to wonder if they should really qualify as an American company at all, much less be listed prominently on the DOW.

 

Caution:Rant

Perhaps this is why the DOW is sky high yet people can’t find jobs or buy houses around the country. Incidentally, how does the U.S. Federal Reserve lending $45 billion to european banks help U.S. citizens? Many bankers and the people inside our own Fed are increasingly proving to be dirty, despicable people. Banks got a big bailout yet won’t lend to small businesses or American people. Maybe we shoulda let them fail.

/Rant

Which other companies on that list should perhaps not be there?

What should we use instead to measure the overall health of American enterprise?

When Tim Geithner says “We’re almost out of runway” it might be time to be very concerned.

 

please let me know what you think.

 

Personal Finance Roundup

Here are some interesting tidbits from around the web-o-sphere. Regardless of your political persuasion, this is a powerful video:

And here are a few excellent personal finance posts:

The Simple Dollar has Ten Pieces of Inspiration

Money Saving Mom shows us how to Tweet and get 5 bucks worth of Amazon Video

What Can Harry Potter teach us about personal finance? Wise Bread has the scoop.

Should I Plan For A Market Correction?

Is a major market correction headed our way?

What should I do about it?

What is a market correction, anyway?

Why is it going to happen?

 

Well, I believe there are 3 big reasons why we are going to see a major correction sometime soon.

 

But first, let’s answer the big question. What exactly is a market correction? In pure ‘big finance’ terms a market correction is a drop of 5-20% in stock values in a relatively short amount of time. A quick market dip of sorts. Not quite as quick as the flash crash but not nearly as long as a true bear market. I like the term ‘correction’ here because it implies, usually rightly so, that stock prices are artificially high and need to be corrected to their fundamental values.

For an idea of what these fundamental values are and how to find them take a look at “The Intelligent Investor” by Benjamin Graham.

For our purposes just suffice it to say that there has been a rapid run-up in stock prices that are not driven by the values of the underlying securities. said differently. Stock indexes are high because of undue optimism, government fiddling and other stuff that is not based on the actual value of the companies whose stocks make up the index.

So what are the 3 reasons a market correction is imminent?

1. June 30 marks the end of QE2. QE2 is the government policy of quantitative easing that was essentially the Federal Reserve’s program to buy a ton ($600 billion= a ton)  of  bonds. this was supposed to grease the skids by holding down long term interest rate in effect making mortgages cheaper for people to get and reduce the cost of new projects for businesses. The big problem here is that if this hail mary pass gets fumbled, the result will be that inflation will kick in and kill the fledgling recovery. To use another metaphor, the Fed is pushing the economic jalopy one last time hoping that businesses and consumers will pop the clutch and drive off into the sunset.


2. The smart money is heading to safer ground. What are billionaires doing? they are putting their assets in currency (i.e cold, hard cash). This is a fear/wait and see what is going to happen response. Cash is not a good investment because inflation will eat it up. Everyone knows this. Billionaires know this and are still fleeing to cash. Why? Perhaps they know something.
3. How are house prices still going down? Impossible! Interest rates are at an all-time low and there is a glut of empty homes on the market. Home prices and interest rates are low, right? Not quite so fast. We are actually nowhere near the bottom in the U.S. housing market. Check out the Case Shiller.

Case Shiller

Home Values Index Case Shiller

The collusion and corruption that artificially inflated home values has only been barely touched so far. After 1999 home prices took off not because homes started to become so well built and wonderful (quite the opposite) It was because incentives were in place for banks to screw us and politicians to look the other way. Unfortunately, Our fine public servants and regulators seem to still be in bed with Wall Street. Sad. Home prices will need to get to pre-1999 levels before growth in this sector picks up again. The economics of this are rather simple. The only way a middle-class family can afford to buy a home with the new, stricter lending rules in place is to buy a cheaper one. Requiring 20% down, for example, is good policy since it puts the buyers skin in the game and requires financial discipline to achieve. The downside for now is that 20% of $400,000 is $80,000. Way more than most families have at their disposal. With job security looking shaky for many and dropping prices all around people are afraid to get in. Even folks with the requisite 20% down and interested in buying have an incentive to wait for the bottom.

So, as an investor, what are my options?

It really depends on how you personally read the tea leaves. If you think that there will in fact be a major overall stock market drop of 20% or more then rebalancing your 401k/IRA dollars into cash or cash equivalents in the short term might be prudent. There are 2 major things coming up that are sure to create uncertainty in the marketplace: QE2 ending in late June and the debt ceiling being reached early August. Shifting from equities to cash for a few months might not be a bad idea.

But what if stocks keep going up? What if you are wrong and the DOW goes to 15,000?
Rule # 1: As soon as you opt out of any investment it will take off like the Space Shuttle (or at least appear to). Right now stocks are close to an all-time high. If you stay fully invested in the stock market (assuming your positions are in index funds) you could possibly eek out another 2-4 %.

If the DOW climbs steadily to 15K then I’ll eat my hat.

 

If a correction happens it will be brief, don’t try to time the bottom since the bounce back up will be sudden. get back into equities and ride it all the way back up.

 

In the 2004 Berkshire Hathaway chairman’s letter, Warren buffet quipped, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.” (emphasis mine)

 

Thoughts?

WR

The Debt Ceiling Thought Experiment

Update: With some accounting magic, Treasury Secretary Tim Geithner reset the new Doomsday date to Aug. 2, 2011. Gives us a bit more time to pontificate.

Armageddon or Life as usual?

These are the cardinal extremes we hear will happen if Congress does not raise the debt ceiling by May 16th.

Will failing to pay the principal and interest on our loans create a death spiral for the U.S.? Some highly regarded economists seem to think so. I agree. For several decades the U.S. Treasury has issued a neat little financial vehicle called a savings bond. This has been recognized internationally as the safest investment in the world. When wars break out, natural disasters occur and political unrest seems to erode the stability of the local currency. The U.S. Treasury will provide an investment that is “backed by the full faith and credit of the United States government.

That sounds pretty great… Until it doesn’t.

Politicians are now playing chicken with the entire financial health of our country. It is absurd. I understand the ideologies at play and the mandate that some Tea Party Republicans believe they have from their constituency.

This, my friends, is not that.

The mandate was to achieve fiscal responsibility, not to plunge our nation into a double-dip recession or even a depression.

The specific results of the U.S. Government failing to fulfill it’s financial obligations is mind-numbing. I ‘ll try to paint a scenario:

May 16th hits with no action on raising the debt ceiling. So what?

First, investors will start to get cold feet and ‘quietly’ move away from Treasury bonds, redeeming them for cash. This starts to accelerate. Worldwide T-note dumping occurs.

Social Security checks stop getting mailed out. AARP reps on Fox and CNN are self appointed harbingers of the end of the world for seniors. Widespread Panic. Stocks plummet, Corporations hand out massive amounts of pink slips. The Great Depression: Part Deux is in full swing.

Recovery is not certain or swift. In fact a decade could pass before things begin to stabilize. Even then, The next time a US program wants to raise money it will have to pay higher interest to do so. The U.S. Dollar, once the worlds reserve currency, now sits alongside the Zimbabwean Dollar as a curiuos  relic of the past. Back when a U.S.A backed financial instrument could always be counted on.

 

The creditworthiness of the U.S. should never be some political poker chip that hack politicians can use to barter with. This is the bedrock of our entire society. Social Security, Medicare and many thousands of institutions that have placed their ‘safe’ money in U.S. treasuries would lose that faith and pull out. It is a confidence game.

Imagine that you have $1,000 dollars in U.S. Dollars. You are to be cryogenically frozen in about a week and revived in 30 years. (Think Han Solo in Carbonite).Here is your question:

Where would you invest your $1,000 ?

An individual stock? Apple? GM?

An index Mutual Fund? Vanguard S&P ? Fidelity ?

Real Estate? (Remember, you won’t be around for 30 years to unclog drains or find trustworthy tenants)

Would you buy silver or gold coins and bury them somewhere? (hope you remember where you put the map)

Would you bet on an emerging market? Asia? Latin America?

Now the big question: Would you buy U.S. Savings bonds or Treasuries?

 

What would you do?