“No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.”
– David Hume
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July 30, 2024 — Imagine you’re starting a business. And you have a choice. You can start in a medium-sized town with about 35,000 people. Or you can start in a city with over 8 million.
The answer should be obvious. You want to start in the bigger market. There are more opportunities for customers. More opportunities to find qualified employees. More competition from suppliers and lenders.
Scale up those numbers, to 335 million, and 8 billion, and you have the world population. Any business that can reach a global market with its services has more growth potential.
But today, let’s think about the opposite. A shrinking market. A company that, for whatever reason, is in retreat.
Sometimes, a retrenchment is necessary. But when global customers simply don’t like a product, it won’t catch on.
It happens more often than you think. While the Japanese love KFC – and have even made it part of their Christmas tradition – retailer Walmart failed there.
In Australia or Israel, you’ll have a hard time finding a Starbucks location. The brand just didn’t catch on.
And despite China’s 1.4 billion population who have substantial housing needs, Home Depot failed to launch.
There’s one American export that’s now in retreat: U.S. debt.
Back in the aughts, most notably in Demise of the Dollar, we forecast that China would one day not consume as much U.S. debt, as was the trend then.
Even a slowing rate of new Chinese Treasury debt, we suspected, would cause interest rates to rise in the U.S. Let alone selling them.
The trend that’s now in place is peculiar. Fewer BRICS investors want to own Treasury bonds. Yet, major financial players in the West – London, Luxembourg and Toronto – want to own more.
Specifically, “China’s holdings of U.S. government debt are around $768 billion,” writes Lau Vegys of Casey Research. “That’s the lowest they’ve been in over a decade.”
F0r the first two decades of this century, China consumed an increasing amount of U.S. debt.
That changed in 2018, partly because then President Trump launched a series of policies that were broadly branded, in the U.S. and globally, as a “trade war” with China.
By 2019, China ceded the position to Japan as the biggest holder of U.S. debt.
Following the Russian invasion of Ukraine, the trend away from U.S. in major BRICS countries intensified.
“But China really started backing off from U.S. debt in 2022,” Vegys observes, “when the U.S. hit Russia with unprecedented sanctions, including removing many of its major banks from SWIFT.”
Between Western economic sanctions on Russia in 2022 and now, China’s ownership of U.S. government debt dropped off a cliff.
Curiously, U.S. allies like Belgium and Switzerland have also been selling billions worth of Treasurys recently.
If the trend away from U.S. debt picks up speed, and if the banking system becomes split into polar opposites politically, it will spell trouble for the U.S. Treasury. One-third of its debt, or $8 trillion, is held by foreign countries.
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CONTINUED…
We specifically chose the word “demise’ of the dollar. Because, while many hyperbolic forecasts screamed the “death” of the dollar, the truth of the debt markets and their relation to the US dollar reserve status is more complex, sophisticated, and global than it was even two decades ago.
Behind the scenes we watch the bond market and specifically bond auctions. The math is simple. When buyers want less of a bond… issuers must raise the yield to attract new buyers.
That means more pressure from the markets on interest rates. At some point, it will be more than the Fed can control.
It’s a sport.
Fed watchers like to parse the Fed governor’s words every time they make a speech, give a press conference or when the minutes are released from their meetings every six weeks.
The blithering, compulsory commentary in the financial media usually speculates on the inflation rate, the reaction of stock market trades, or the complicated secondary mission of the Fed – full employment.
Rarely, unless you’re a data geek, do you hear about the arcane mundanity of the auctions.
The auctions matter, too. Who’s buying U.S. debt? How much? Short-dated treasuries or long?
For the past week, we’ve been looking at the decline of the Empire of Debt, but mostly from a historical perspective through the lens of our inscrutable populist politics, social confusion and decay and our unsustainable globalist ambitions.
Knowing what history teaches about failing empires, the debt markets are where the rubber meets the road. Following the debt itself, the bonds and who’s buying them, can help us forecast the trajectory of the empire just as well.
The “Black Swan” event here would be simply this: the Treasury throws an auction and major players don’t show up. The Fed and Treasury would lose control of interest rates altogether.
That would be a mess, given that U.S. Treasury debt has been considered a stable, risk-free investment for over 100 hundred years.
The Grey Swan… that which is still highly improbable but forecastable still… is the U.S. dollar demise picks up speed globally, and the U.S. loses its world reserve status. A trend that’s clearly at play already.
So it goes,
Addison Wiggin
Founder, The Wiggin Sessions
P.S.: Not long after Demise of the Dollar first hit the shelves in 2005, James Turk and John Rubino had released The Coming Collapse of the Dollar. The book naturally caught my attention.
Mr. Rubino and I are naturally competitive human beings… we met through connections… became friends… and today, low and behold, he’s a founding contributor to The Grey Swan Investment Fraternity.
John Rubino and I will sit down tomorrow for a Wiggin Sessions introductory chat to Grey Swan community.
The topics will range from the BRICS meeting in October in Russia; the impact of the AI bubble on Wall Street, trading and the economy at large; what a mess populist and progressive candidates have made of US national elections in 2024… and the likely impact the events this fall will have on our money. Stay tuned…
P.P.S.: How did we get here? For a complete review of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on to Empire of Debt — all three books are available in their third post-pandemic editions.
Empire of Debt: We Came, We Saw, We Borrowed is now available at Amazon and Barnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.
Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com
