Wednesday, October 12, 2005

Cramer: Everything is going to hell

Jim Cramer (who taught me a lot of what I know about investing) is telling us to invest in gold, oil, and minerals, since they'll keep their value even after Bush destroys our currency. Now, if I know Cramer, he'll abandon this view in about two weeks, but the fact that he's even considering this is scary:

Our only hope that financial disaster won’t strike sooner lies with the Chinese, who actually fund our deficit by buying our Treasuries—$242 billion worth, or 12 percent of all foreign holdings. If the Chinese decide to be good communists and stop buying our bonds, the Feds will have to raise rates to attract new investors and the reaper will be at our doorstep with interest rates more akin to those of South than North America. Right now, it’s not a problem. But in a year or two or maybe less, I perceive that the government will throw a bond auction and nobody will show, including the Chinese, until rates shoot up dramatically... You can bet that when you cash out your nest egg of nice U.S.-based mutual funds and solid common stocks, your dollars will fit nicely into a wheelbarrow designed specifically to cart worthless currency to the bank.


Anonymous said...

I have always thought that Jim Cramer was at least a bit insane, so I am hesitant to take anything he says at face value. However, the fact that the Chinese are the ones financing our debt, and that if they stop we are screwed, is certainly no secret.

But I not worried about this happening at least in the short to medium term. If they stop buying dollars, it would wrek havoc on their markets as well as ours. They need markets for there goods, which means they need to sell to us, which means they need to keep their goods cheap in dollars. Financing our debt helps them keep the trade imbalance.

I am less worried about the collapse of the dollar than I was 10 months ago. Though investing in international equity is not a bad idea in the current market. Nor are the commodities he suggests.

Blue said...

I must say I don't really get the fears. Are the Chinese getting a good deal when they buy our dollars? I assume so. So if for some random commie-reason they stopped, wouldn't anyone else be interested in our good deal? (Particularly if China spends their money in another sector, crowding out investment there.) I mean, aren't efficient-organic-inevitable transactions what economics is all about?

If the US stopped buying oil from Saudi Arabia et al today because Andrew Sullivan was made head of Dept. of Energy (or something random), then Mideast oil production would collapse, making oil very expensive to produce, and then ruining our economy. Except of course, not only would we not do that, but a host of factors would rush in to fill the gap.

So why doesn't this logic apply to the seemingly unlimited demand for our debt?

(The only real threat I worry about is if the US does something so hugely discrediting that the reliance on our bonds as the most reliable bonds in the world is shown as untrustworthy. Then we're in trouble, but Chinese participation is irrelevant.)

Neil Sinhababu said...

The worry, I think, is that the loss of a 12% customer could signal loss of faith in American debt. You get a selling panic on US bonds. The perception that other big players in a market like something is worth a lot, and when that perception is punctured, total chaos can break out.

Anyway, I'm amused by the Sully-for-Energy idea.