Chillin' out till it needs to be funded
Let me start off on the backfoot with a block. Though S&P just did what was inevitable given the fast ramp up in US debt, its actions were retrograde given the effort put in the debt deal and perhaps that it was done precipitously is a valid excuse for China to lead with ” Stop spending on defense..” kind of spiel it pushed through the state agency Xinhua on Saturday.
As a matter of state policy however, it is inexcusable to come out swinging on a valid pitch esp as other investors from Korea, France and Russia were significantly supportive of their investments in US Treasuries. I must also admit i subscribe to the fact that US did not borrow any of this money when China decided to hold more than 10% of US Treasuries for its reserves. And that is the reason most others already find there will not be a substantial difference to their perception of US Treasuries
Even if they are active investors they should be careful in confusing their own fiscal interests and defense into the mix of fiscal policy of the United States. Their sell down of US Treasuries does hang over the US like a Damocles sword, but that is also a bit shortsighted. The same sell down will not materially shoot up US yields but will in fact depreciate the Dollar faster, and heighten discussions of an alternate reserve currency , the act itself taking the next 20 years.
Nevertheless, that is how panic strikes and global markets know they are done investing for the time being unlikely to get holders of cash into the ring for six months or more and it is a time to stay cautious about investments even in short positions on the Dollar and particularly the long positions in Commodities as the first acceleration is past and even if China’s gainsaying hurts, it will not cause Economic changes in the flow with macroeconomic stability even in low growth till something like a QE3 is forced upon us. On the bright side, retail spending is unlikely to stay muted for more than 1-2 months, as there is not much more unemployment that can be wrought on the US economy neither can house values keep on falling after the next $30 bln – 40 bln in settlements on mortgage documentation are done.
When time comes for the US to bat in this seventh innings, it must also refuse to be drawn into running itself ground out with inopportune mud-slinging and stay with what it has already begun, make cuts and keep Economic pressure on China even as it tops off the Yuan appreciation cycle. The US will not become a marginal player just because China is managing its tough innings, it needs to throw away the match for that.