The Commodity Carry Trade (CCT) get used to this term because you are likely to hear a lot more about it over the coming months.
As we write, the U.S. owes about $12tillion, 66% of those debt owners are American. The rest are foreigners, chiefly the Chinese and Japanese. It’s China’s estimated $1,300,000,000,000 worth of U.S. debt that has us worried. The country is very serious about getting its money back… at a profit… adjusted for inflation.
After the Federal Reserve recently announced it would pull $1.2 trillion out of thin air to buy the Treasury Department’s debt, China got nervous (perhaps no surprise why the US Treasury Secretary was recently in China). China country cannot afford to lose its massive currency reserve to inflation. Few investors have caught wind of the dire situation, but Washington knows it. Listen to what Mark Kirk, a congressman from Illinois, had to say:
“It would appear, quietly and with deference and politeness, that China has canceled America’s credit card… We should track that, because up until last month they were the number one provider of currency to the United States and now they’re gone.”
It appears that China has had enough. It’s already slowed its buying of American debt and turned to the commodity market (in fact it did so some 7 months ago). It may just be the biggest shift in fiscal policy in modern history. Now instead of giving hundreds of billions of dollars to the US government, it’s now putting the money into the free market, buying something it can later sell to domestic industry.
As long as China buys American commodities, it can exchange its surplus greenbacks for something it can actually use.
We believe that there is considerable upside to come in commodity markets and that any weakness should be seen as a buying opportunity. Take a closer look at DBC below. Notice the huge pick-up in volume! This is a very bullish sign. It also appears that there is a “perfect” inverse relationship between DBC and the US 30 year which again confirms the words and actions of the Chinese.
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