Fake or Not – How to Trade China’s Bombshell Debt Remarks

Keith Fitz-Gerald Jan 12, 2018

When I started Total Wealth, I promised you a look at the best analysis, tips, and tactics needed to build wealth in today’s complicated financial markets. I also promised you specific trades, centered on breaking headlines, so that you would have the insight needed to profit… just like the pros.

Today, I want to keep that promise with a look at China’s bombshell debt announcement.

Bloomberg broke news Wednesday morning while most of the world slept that Beijing’s leadership is concerned about the attractiveness of the U.S. Dollar and, as a result, that it may cut back U.S. sovereign debt purchases, or curtail them all together.

Despite the unidentified sources that supposedly provided the information, global traders flipped in overnight markets for reasons that aren’t readily apparent… but which will be in a moment. U.S. markets, of course, opened lower, immediately out of the gate.

My take on Fox Business Network, when asked about it, was to “buy the dip” – just as the traders I was talking to around the world were doing the very instant I went on air.

Here’s Why This Matters & How to Trade the Situation

First: China’s threat is the real deal, just not a big deal.

That’s because China buys the most U.S. sovereign debt of any country in the world. At last count, China had $1.2 trillion on the books and purchases roughly of 19% of every Treasury auction. I think the number is higher given China’s past use of intermediaries to hold additional assets but that’s a story for another time.

What’s important is that China holds roughly 8%-10% of all publicly held U.S. debt, which puts China third in line behind the Social Security Trust Fund which holds around $3 trillion and the Federal Reserve which has about $2 trillion the books, thanks to purchases it made during the Financial Crisis as part of quantitative easing. U.S. citizens, by comparison, hold around $950 billion.

This makes a lot of folks squirm, but it’s absolutely normal.

The U.S. government has never defaulted on its debt, so our currency and treasuries, specifically, are a “must-have” for global traders who need it to balance out their other investments and to conduct trade… even though they ostensibly hate America’s guts.

Second: China has been curtailing purchases for some time.

That nation owned a staggering $1.317 trillion of U.S. debt in 2013, so the fact that they hold “only” $1.24 trillion – give or take – today is routine.

What catches most investors by surprise is that China has every reason to curtail U.S. debt purchases.

You wouldn’t invest in a company that’s losing money, losing market share, or otherwise upside down, any more than I would. So, it’s unrealistic to expect China to do the same thing on a national scale.

Practically speaking, there are two reasons cutting back is something China needs to do:

A) Beijing has implemented the “2025 Made in China” program, which means that it’s trying to balance exports with imports, so it won’t need as much foreign currency to balance trade. And;

B) Doing so boosts its currency, the Yuan (or the Renminbi, as it’s also known), in global markets just like a stock buyback boosts shares.

Third: China cannot stop buying U.S. debt.

It can slow down, it can temporarily pull back, it can curtail purchases – whatever euphemism you want to use here – but China cannot stop buying U.S. debt.

Doing so would crater China’s economy. A fire sale, or even a campfire for that matter, would also lower the value of every other treasury out there, so this would devastate the Chinese treasury.

At the same time, there isn’t another currency on the planet capable of absorbing the excess liquidity that would surface from such a course of action. The Euro isn’t deep enough and neither is the Japanese Yen. The Swiss franc or Bitcoin?… fugettaboutit.

So, now what?

China’s foreign exchange regulator asserts that the Bloomberg story is “fake news.” That’s moot.

Fake news or not, Beijing’s comments will continue to strain bond markets, which means you’re going to see upward pressure on U.S. interest rates. My guess is nearly 3% on the ten-year before this dies down; it’s at just around 2.5% as I type.

That’s actually good for your investments… great, in fact.

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What’s more, it’s one of the few instances where the world of high-finance being played out in international headlines has a direct impact on your money, which is good for you.

As you know, I’ve made the case for years that there’d be a massive melt-up in stock prices because of the unintended impact of too much money not too little liquidity… as was commonly held wisdom when the Financial Crisis hit. And subscribers in all of my services have had the opportunity to make out like bandits considering my team and I have delivered more than 100 triple-digit winners along the way.

More recently, I’ve noted that global traders – not the Fed – would set the pace for what happens next as well as a still far higher run ahead.

And, once again, I’ve been a lone wolf in the wilderness.

But… not anymore.

Legendary investor Bill Miller, who founded the multi-billion dollar management firm Miller Value Partners, told CNBC earlier this week that he thinks the markets could melt-up by 30% or more like they did in 2013.

The reason is one we’ve talked about frequently in the context of picking the best investments: people will finally begin losing money in bonds as yields rise. Something Miller also believes.

Not surprisingly, they’ll take that money out of bonds and put it in stocks… just like the Pony Express riders, back in the day, who would constantly switch horses to maximize the speed with which they delivered the mail.

The best way to play that?

Banks.

Banks are asset sensitive, meaning they draw their profits from stronger loan demand and economic activity. They can charge more, which means they have higher net interest rate margins and bigger profits.

My favorite bank stock is JPMorgan Chase & Co. (NYSE:JPM), which is trading around $109-$110 a share, as I type. CEO Jamie Dimon is as sharp as they come, and, I believe, the only CEO on Wall Street who truly understands how to make money in today’s complicated financial markets.

The company is well-managed and well-rounded, which means that it’s got a nice balance between commercial and investment banking that gives it plenty of stability and upside potential.

The company has beaten analyst expectations for the last four consecutive quarters by an average of 12.32%, and – I really like this part – the stock has received a whopping 40 upward earnings per share (EPS) revisions in the past 30 days.

Gross profits recorded for Q3 in late September were at $23.87 billion, which is an extraordinary 6% increase since Q4 at the end of 2016… and, as you already know, a growing profit margin always catches my eye as a good opportunity.

Plus, the company sports a healthy 2.03% yield with a modest 29.44% payout ratio according to Yahoo!Finance, which is always great for income starved investors.

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If you’d like a little more “juice,” consider buying JPMorgan Long Term Equity Anticipation Securities (LEAPS) options like the JPM January 17, 2020 $110 Call (JPM200117C00110000) option.

In closing, this isn’t a story that’ll be going away any time soon.

In fact, I think China’s going to carefully study how it’s latest pronouncement impacted trading activity, and make a few well-placed follow-up comments later this year – all of which it will use for maximum financial gain.

Which is exactly why I am suggesting you do the same thing.

Until next time,

Keith

P.S. There’s one other profit potential on the Total Wealth radar this week, but this information is too sensitive to be released to those who aren’t ready to take it seriously. This one tiny $2 million company is positioned for a 59,580% revenue surge (the last time something this big happened, John D. Rockefeller guided early investors to the opportunity to turn $10,000 into a rare and exceptional $15 million). Here’s what serious readers need to know. – The Total Wealth Research Team

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