Why are other countries still buying our debt? | Making Sense with Ed Butowsky

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Hi, it’s Ed Butowsky with Making Sense. Each week we take the top headlines and explain what they are and how they impact your portfolio, so here we go. 

The Empire State survey of business conditions nose dived to minus 0.7 in January. This is down from the month before where it was positive 31.9. A lot of people say this has to do with the omicron virus and the ongoing supply chain bottleneck. It was the first decline in the index since June 2020, when the Federal Reserve had expected a 25.5 reading. Any reading below zero indicates worsening conditions, the index has been quite strong for most of 2021 even during the delta wave of the coronavirus before the recent tumble. The Empire State survey is the first economic indicator to show the full effect of the damage of omicron has done to the U.S economy. New York was hit earlier and harder than most of the other states but the highly contagious virus has spread rapidly to other parts of the country and causing similar problems. 

So as a result of this information you need to also think that the world economy is very slow in addition to New York being slow and the United States being slow. So even though we’re seeing a rise in interest rates don’t be so convinced that the rise in interest rates is going to continue for a very long period of time. We could see the opposite happen and we could see a pulled back in earnings for companies and this would be very damaging to the stock market. 

After October’s ugliness and before the carnage began in December November saw U.S treasury yields oscillate with last week seeing rates plunge on omnicron anxiety. So the big question is did global central banks continue to dump bonds into the late rally or did they flip flop back to buyers of the worst most liquid reserve asset. The answer is yes they were big buyers. Today the TIC data shows that foreign holders of U.S government debt rose to a record level of $7.75 trillion dollars. That means people are still countries are still buying the US debt even though it’s at a very very low yield, which drives me crazy. I can’t believe that they’re willing to buy US debt and receive such a low return on their money, but they continue to do it. But the big takeaway is that we have more international buyers than we’ve ever had before which means that we’re more susceptible to outside influences because if they don’t buy our debt our country goes bankrupt. This doesn’t have anything to do with what you should do with your money I just find it very interesting that there’s so much more money being purchased and so many more bonds being purchased by countries outside the United States at a very very low interest rate and we’re still very susceptible and very needy of other countries supporting our country. 

Global oil demand will exceed pre-pandemic levels this year thanks to growing Covid-19 immunization rates and our recent virus waves haven’t proved severe enough to warrant a return to strict lockdown measures. What this means is that we are going to have a bigger demand even though there’s lots of you know movements towards having lower usage of oil, the demand for oil is still great and is getting greater than it’s ever been. So that’s why you’ve seen oil prices rise because the demand for oil is there but the supply isn’t and when you have a short supply and a heavy demand you’ll see prices go higher. That’s why you should be looking at Conoco Phillips, Exxon Mobil, Chevron and buying UCO which is an ETF that has to do with oil prices.

This has been Ed Butowsky with Making Sense. If you want a complimentary portfolio evaluation please visit  www.edbutowsky.com or www.chapwoodinvestments.com, We do a very good job analyzing existing holdings and telling you if what you have is what you need. 

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