I … Inflation was the order of the day in anticipation of announcement tomorrow of the US Federal Reserves QE 2, as currency traders called yen based carry trades higher globally, which resulted in the US Dollar, $USD, traded by UUP, falling lower to 76.74. The USD/JPY traded lower to 80.49 which is reflected in the inverse ETF, JYN, rising just a tad to 73.40.
The Euro Yen Carry Trade, EUR/JPY, seen in the chart of FXE:FXY, took the European, VGK, ADRU, EZU, FEZ, shares, Austria, EWO, Spain, EWP, Italy, EWI Europe Small Dividend, DFE, the Nordic 30, GXF, BHP Billiton, BHP, and the Junior Gold Mining shares, GDXJ, Metal Manufacturing, XME, Steel, SLX, and Energy Services, OIH higher.
Chart of FXE:FXY
World stocks, ACWI, closed in a questioning harami at a new high of 45.32 which is just over its October 14, high of 45.13.
The New York Composite, NYC, rose to close at 69.43, which is above its October 13 high of 69.13.
The S&P, SPY, closed at 119.47, which is above its October 13 value of 117.92.
II … The spigot of investment liquidity coming from yen carry trade investing was turned full own.
The Australian Dollar Yen Carry Trade, seen in the chart of FXA:FXY, took Australia, EWA, and the Australian Small Caps, KROO, higher.
Chart of FXA:FXY
Chart of KROO
The New Zealand Dollar Yen Carry Trade, seen in the chart of BNZ:FXY, took New Zealand, ENZL, higher.
The India Rupe Yen Carry Trade, seen in the chart of INR:FXY, took Indian Earnings, EPI, higher.
The Canadian Dollar Yen Carry Trade, seen in the chart of FXC:FXY, took the Canadian Small Caps, CNDA, higher.
The Russian Rubble Yen Carry Trade, seen in the chart of XRU:FXY, took the Russian S&P Shares, RBL, higher.
The Brazilian Real Yen Carry Trade, seen in the chart of BZF:FXY, took the Brazil Small Caps, BRF higher.
The Swedish Krona Yen Carry Trade, seen in the chart of FXS:FXY, took the Swedish shares, EWD higher.
The Mexico Peso Yen Carry Trade, seen in the chart of FXM:FXY, took the Mexico shares, EWW, higher.
The South African Rand Yen Carry Trade, seen in the chart of SZR:FXY, took the South African shares, EZA, higher.
The Emerging Markets Carry Trade, seen in the chart of CEW:FXY, took Poland, EPOL, the Frontier Markets, FRN, emerging markets small cap dividend, DGS, and the emerging markets, EEM, higher.
The Swiss Franc Yen Carry trade, seen in the chart of FXF:FXY, took Switzerland, EWL, higher.
One can follow currencies in this Finviz Screener of Currencies.
Other shares zooming up included the Russell 2000, IWM, Austria, EWO, Copper Mining, COPX, Emerging Markets Financials, EMFN, Small Cap Value, RZV, Retail, RTH, Nasdaq Internet, PNQI, Down Internet, FDN, Internet, HHH, Chinese Small Caps, HAO, Gaming, BJK, Japan, EWJ, Singapore, EWS, Hong Kong, EWH, Asian High Yielding Securities Excluding Japan, DNH.
Many charts today, such as that of Chinese Small Caps, HAO, show three white soldiers, which is the strongest of all reversal candlestick patterns.
Semiconductors, SMH, which has risen 5% since October 13, rose 0.4%; Intel, INTC, fell 1.1%
One can follow fifty common ETFs which approximate the world shares, VT, in this Finviz Screener Of ETFs
Leveraged ETFs roaring higher included Russell 2000, URTY, Latin American, LBJ, Brazil, UBR, Emerging Markets, EET, Europe, UPV, Retail, RETL, Japan, EZJ, India, INDL, Semiconductors, SOXL, Small Caps, TNA, Japan, EZJ and Utilities, UPW. One can follow leveraged ETFs in this Finviz Screener of Leveraged ETFs
Commodities, DBC, rose manifesting a lollipop hanging man candlestick at the top of an ascending wedge. with the inflationary three-some, Cotton, BAL, Sugar, SGG, and Softs, JJS, rising strongly. Timber, CUT, rose strongly closing in a hammer candlestick. One can follow commodities in this Finviz Screener of commodities. Agricultural commodities, RJA, has risen 4.6%. Food commodities, FUD, has risen 3.2%, since October 13, 2010. Natural Gas, UNG, has fallen 4.6% since October 13, 2010.
The developed markets yen carry trade, DBV:FXY, and the emerging market currencies carry trade, CEW:FXY, took base metals, DBB, oil, $WTIC, USO, and UCO, International Utilities, IPU, and UPW, International Consumer Discretionary, IPD, International Dividend Payers, DOO, Exxon Mobil, XOM, Nuclear Energy, NLR, and Nanotechnology, PXN higher.
The chart of Nuclear Energy, NLR, manifests a glowing finish to the age of power plant development as well as to economic growth.
CenterPoint Energy, CNP, Wisconsin Energy, WEC, Westar Energy, WEC, and Northeast Utilities, NU have been stellar utility performers, as seen in the chart of CNP, WEC, WR, NU. These can be followed using this Finviz Screener Of Diversified Utilities. CenterPoint Energy, CNP, rose 1.3% today manifesting a hammer candlestick at the end of an ascending wedge. All of these should be in every short sellers portfolio as when they do fall, thy fall quickly.
The chart of CenterPoint Energy, CNP, shows a questioning harami at the end of an ascending wedge.
Germany, EWG, has risen 4.1% and Chile, ECH, 3.1%, since October 13, 2010. One can follow the emerging market performers such as Chile, ECH, in this Finviz Screener of Emerging Market Performers.
Chile, ECH, and Poland, EPOL, have often been cited as examples of Milton Friedman Free To Choose, economic viability and carry trade investing.
Chart of Poland, EPOL.
Japan, EWJ, has fallen 1.6% and Japan Small Caps, JSC, has fallen 2.5%. since October 13, 2010.
PTO, which is an ETF which replicate, net of expenses, the Ibbotson Alternative Completion Index, rose strongly. It uses a proprietary methodology to select underlying ETFs, ETNs and equity and fixed income securities covering a group of asset classes and investment strategies that the index provider expects to have a low correlation, or different performance characteristics, to traditional asset classes. The dark cloud cover candlestick in the chart of PTO suggests that the current rally is done and over.
III … The spigot of investment liquidity coming from the US central bank, that is the US Federal Reserve seigniorage, was turned full on; and is from my perspective now run dry — kaboom, gone with the anticiption of QE II.
Bonds, BND, rose 0.17% to close 82.61, just below its October 13, 2010 high of 82.62.
Pimco’s LTPZ, rose 0.58% and STPZ fell 0.04% and MINT, rose 0.04%.
Short Term US Notes, SHY, fell 0.06%. Mortgage backed bonds, MBB, rose 0.11%. The whole objective, unstated of course for QE 1 and QE2 has been to preserve the mortgage-backed bonds on reserve at the Fed and in US Banks and at PIMCO, and at the GSEs, Freddie Mac and Fannie Mae.
Chart of MBB.
Junk bonds, JNK, rose 0.54%.
One can follow bonds in this Finviz Screener of Bonds.
The World Government Bonds , BWX, rose 0.3%; The US Government 10-20 Year US Government bonds, TLT, rose 1.3%. One can follow sovereign debt in this Finviz Screener of Sovereign Debt.
The Interest Rate on the US 30 Year Bond, $TYX, fell to 3.934; chart shows it has reached consolidation and will either break out above 4.0% or will fall lower.
The Interest Rate on the US 10 Year Note, $TYN, fell to 2.594
The 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, traded at 1.517.
The US Dollar, $USD, traded by the EFT, UUP, close lower at 76.74.
Gold has a tendency to trade inversely with the US Dollar; since October 13, 2010, the gold ETF, GLD, has lost 1.0%; while silver, SLV, has gained 3.9%.
IV … The world is at a Tipping Point, that is a pivot point, where it is transitioning from prosperity into austerity as the Interest Rate on the US 30 Year Note, $TYX, is poised to rise above 4.0%. US Government Bonds, TLT, have broken down, and world government debt, BWX, has turned over.
Ben Bernanke’s plans for the US Federal Reserve to implement QE 2 has called the 2 Year and other short term US Government notes, SHY, as well as mortgage-backed bonds, MBB, higher, as the interest rate Interest Rate On The 2 Year US Government Note, $UST2Y, has fallen to 0.34%.
As the spigot of investment liquidity is turned off by the currency vigilantes and bond vigilantes, yen carry trades will unwind, and interest rates will rise causing disinvestment from bonds. The global financial bubble is about to be pricked by higher interest rates and falling currency values.
As QE 2 is applied, money will flow into gold, GLD, Silver, SLV, and Food commodities, FUD: yes inflation is coming and it will be coming to hard assets and food.
The printing of money by the US Federal Reserve will unleash inflation in the things people hold dear and the major currencies, DBV, and the emerging market currencies, CEW, will fall lower. Today the former rose relative to the latter as is seen in the chart of DBV:CEW.
Perhaps the major currencies, being more burdened by debt than the emerging market currencies, will fall faster in value. If so this means that the indebted nations, the US, Japan, Portugal, Ireland, Italy, Greece, and Spain will be at the epicenter for austerity.
Falling currency values means the end of entitlement to prosperity.
The chart of the small cap pure value shares, RZV, relative to the small cap pure growth share, RZG, RZV:RZG, shows that since the Interest Rates turned up on October 7, 2010, the value shares have been falling relative to the growth, suggesting that debt deflation is underway,
recommencing the debt deflationary bear market that commenced on April 26, 2010, that came with the onset of the European Sovereign Debt Crisis.
Historical evidence shows that monetization of debt by a central bank creates an investment demand for gold. I recommend that one be invested in gold bullion, $GOLD which closed today at 1357. For those not inclined, I provide a Chart List of ETFs And Stocks To Sell Short For A Debt Deflationary Bear Market
A new two-fold crisis is at hand, that being the currency and bond vigilantes are acting together to call interest rates higher. And the EU Leaders’ European Economic Governance Summit of October 2010 concluded with an announcement assigning Herman Van Rompuy to design a sovereign debt default mechanism.
The European Shares fell yesterday on news that Herman Van Rompuy has been tasked with preparing the legalities and procedures for a nation’s sovereign debt default. European Financials, EUFN, Europe Small Cap Dividends, DGS, Spain, EWP, Italy, EWI, Austria, EWO, European stock, VGK, all turned lower yesterday but up today. It is said that a star always shines brightest before it goes out.
Financial Times reports that European Central Bank President Jean-Claude Trichet warned that a future rescue mechanism for indebted countries, designed to shift responsibility to investors from taxpayers, could inadvertently push up their borrowing costs, citing European Union officials.
The Euro, FXE, closed up today at 139.75. The chart shows today’s value is in the middle of a broadening top pattern. As Street Authority relates: when you see the broadening top, the market will eventually drop.
Chart of the Euro, FXE.
The EUR/JPY, traded higher as can be seen in the chart of FXE:FXY
Irish and Portuguese credit default spreads established new records; and Ireland and Portugal’s borrowing costs hit record highs as the bond markets digested the outcome of the EU Eurozone Summit calling for a sovereign debt default mechanism.
The FT reports that borrowing costs for Ireland and Portugal hit record highs yesterday as investors assessed EU proposals to force them to take a greater share of losses in future bail-outs. “People do seem shocked about the idea of a future eurozone debt restructuring, but this should not have been a surprise unless you really believed that the German taxpayer would always underwrite everything,” said Erik Nielsen, Goldman Sachs’ European Economist.
Ambrose Evans Pritchard relates Angela Merkel consigns Ireland, Portugal And Spain to Their Fate
In an interview with Spiegel in article The Crisis Has Deeply Shake Us Chancellor Merkel has said, “We have to find ways to harmonise the competitiveness among European countries” but added, “This should not be done by simply targeting the average or gearing ourselves to the slowest. Instead, we should always learn from the best.” Merkel also refused to say whether she had consulted her coalition partner, the FDP Foreign Minister Guido Westerwelle, before making a deal with French President Nicolas Sarkozy on treaty change in return for watering down proposed economic sanctions for debt and deficit rule breakers.
The sovereign debt default mechanism is a 180 degree turn from the sentiment expressed in May 2010 as reported by Bloomberg reporters James G. Neuger and Gregory Viscusi in EU Backs Stiffer Deficit Sanctions, Rules Out Default Mechanism and as I reported that EU Finance Ministers Announce European Economic Governance And Call For A Monetary Union With Seigniorage Authority To Issue Eurobonds.
EuroIntelligence comments EU Leaders Trigger Another Bond Market Crisis: “We believe that the EU leaders remain complacent about the future of the eurozone, as they push their narrow national interests. We have been warning readers of a gulf between the German position on future crisis resolution in the eurozone and that of other EU member states, and that the fundamental conflicts of the first half of this year remain unresolved. The summit only agreed some minimum parameters for Herman van Rompuy’s next task force, but the difference of the positions on the crisis resolution mechanism remain extreme. Germany wants a bail-in mechanism to replace the EFSF, as a result of which European bond spreads have risen again. Investors understand that the German proposal will dramatically increase the probability of future sovereign default in the eurozone. The EFSF is not a solution to a crisis resolution, it is merely a temporary arrangement.” Yesterday, Irish 10 year-spreads move towards 5%, and Greeks spreads towards 9%, as investors ingested the implications of last week’s summit. Reuters quotes Lorenzo Bini Smaghi as saying that it was easy to talk about an orderly crisis resolution mechanism, but much more difficult to implement it, a criticism of the German approach. “In advanced economies the restructuring of the public debt would have to involve a much larger number of financial assets and liabilities, including those of the domestic banking system, vis-a-vis residents and non residents … It can be easily seen that there can hardly be anything ‘orderly’ in such a process.” …. This whole chain of events shows clearly that EU leaders continue to underestimate the complexities of a monetary union. The structure is simply not capable of handling default, while simultaneously ruling out bailout and exit. The resistance to the German plans in the European Council remains severe, and we simply cannot see Greece, Ireland, Spain, or Portugal agreeing to a crisis resolution mechanism, whose main effect would be to drive up their bond rates. It would be like turkeys voting for Christmas. Expect this to run well into next year. In fact, we would not be surprised if this debate were to continue right until the expiry of the EFSF in 2013.
Daniel Gros writes in EuroIntelligence article Liquidate Or Liquefy?: ”The obvious way out should be controlled rescheduling and/or restructuring in order to avoid turning parts of the euro periphery into ‘zombie countries’.
Brent Radcliffe in Yahoo, Ivestopia writes: “Defaulting on sovereign debt can be more complicated than defaults on corporate debt because domestic assets cannot be seized to pay back funds. Rather, the terms of the debt will renegotiated, often leaving the lender in an unfavorable situation, if not an entire loss. The impact of the default can thus be significantly more far-reaching, both in terms of its impact on international markets and of its effect on the country’s population. A government in default can easily become a government in chaos, which can be disastrous for other types of investment in the issuing country.”
On February 25, 2010, the Euro, FXE, stood at 111.35 and six trading days on March 5, 2010 later it plunged to 109.75. It was at this time that Drago Tzvetkov of the Atlantic Council wrote on the Threat of Sovereign Debt Default relating: The Atlantic Council’s Global Business and Economics Program hosted a conference call with Professor Leszek Balcerowicz on the Euro debt crisis. Balcerowicz, a former Finance Minister of Poland, shared his views on the measures needed to ensure Eurozone unity and assessed the current difficulties facing European nations as they attempt to rein in public spending and decrease their deficits.
The financial crisis has entered a new phase. What began as a series of mortgage defaults soon became a crisis of bank insolvency. The dire state of Greece’s budget and debt points to a more chilling aspect of the crisis: insolvency of sovereign nations. EU leaders have yet to outline a concrete plan. With fourth quarter GDP numbers in the Euro-zone looking dismal, unemployment high, and economic growth low, selling a “bail-out” plan will be politically unpopular. Dr. Leszek Balcerowicz analyzed three options for Greece and Europe to mitigate damage to Europe’s economy, and the Euro itself:
- Fiscal adjustment to prevent default: Greece needs to make “radical and deep” adjustments, including fiscal changes to cut excessive spending. This should be coupled with aid from the IMF, which should provide conditional crisis lending.
- A bail-out by EU governments: While acknowledging that this is not a long-term solution and that it is “not politically feasible” given German public opinion, Balcerowicz put the bailout option on the table. The negative risk of the resulting public resentment would sow further distrust of the Euro project.
- The departure of Greece from the Eurozone: Monetary independence would allow Greek authorities to depreciate the currency but ignore the fundamental causes of its budget distress, and add skyrocketing Euro-based debt to Greece’s woes. With no constitutional or legal mechanisms for leaving the Eurozone, the Greek public would not be willing to enter “politically unchartered waters.”
Recommending fiscal discipline as the only viable option, the former Polish Finance Minister and architect of the “shock therapy” that led the Polish economy communism to the global marketplace said, “Shocks from time to time are great educators. I don’t know of any country which would have suffered because of excessive fiscal discipline.” He emphasized that Greece should face the consequence of its actions and be expected to implement the necessary reforms.
So now today, November 2, 2010, on the Eve of QE II, Ambrose Evans Pritchard writes of The Fed’s Impending Blunder … Jeremy Warner writes, The US Federal Reserve’s Latest Bubble Threatens Mayhem, the prospect of more quantitative easing, QE, will be driving government bond yields to levels that price in a depression …
Tyler Durden writes, Paul Farrell On The One Thing Buffett, Gross, Grantham, Faber, And Stiglitz All Agree On: “Bernanke Plan A Disaster” …
EconomicPolicy Journal reports A “Conservative” D.C. Think Tank Calls for More Money Printing from Bernanke: The American Enterprise Institute in its Economic Outlook calls for more money printing by the Fed.
The two-fold crisis, of monetization of US Sovereign Debt by the US Federal Reserve, and the EU Leaders’ European Economic Governance Summit of October 2010 call for a sovereign debt default mechanism, is going to give license to the currency traders to start competitive currency deflation, that is competitive currency devaluation.
And Ireland will be a developing focus for the vigilantes, as Dara Doyle of Bloomberg reports Ireland May Have One Month to Stave Off Bailout: Credit-default swaps linked to Irish debt rose 28 basis points to 526, according to CMA prices. The cost of insuring Greek debt for five years was 850 basis points, the most expensive in Europe. German proposals to put in place a permanent debt-crisis mechanism at EU level are also adding to Ireland’s problems, says Harvinder Sian, a London-based analyst at Royal Bank of Scotland Group Plc. While German Chancellor Angela Merkel reiterated today that she wants to force bondholders to foot some of the bill of any future bailout of a euro member, some officials argue that could spook investors at a time when countries such as Ireland and Portugal are trying to cut deficits. “Up to last week, I would have said that Ireland could avoid a bailout by taking the measures needed to reduce the deficit,” said Sian. “Now, the measures being proposed by Angela Merkel are casting a shadow, not just on Ireland, but across the periphery.”
Today, November 2, 2010, the world has achieved peak fiat wealth. And the world has achieve peak investment liquidity. Lacking liquidity, junk bonds, JNK, distressed securities, FAGIX, and LBO debt, PSP, will now rapidly fall lower in value.
We are passing through Peak Credit and from the free-flowing investment liquidity, that came with Alan Greenspan, the czar of credit liquidity, opening credit wide for businesses, home debtors, HELOC loans with their mortgage equity withdrawals, and individuals; and Milton Friedman, instituting the floating currency regime, where the Bank of Japan, through its ZIRP 0.25% yen carry trade financing, and the US Federal Reserve QE 1 and QE2 ZIRP, have flooded the world with debt. The world is inundated with debt it cannot pay.
But, beginning now, the currency traders will institute debt deflation.
Debt deflation is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”
Ever-failing sovereign debt and falling currencies will mean ever-increasing austerity.
The corporate debt, PICB, and world sovereign debt, BWX, that the currency traders cannot destroy through falling currency value, must be and will be applied to every man, woman and child on planet earth.
I believe that eventually a Global Seignior, that is a top dog banker who takes a cut, will institute unified regulation of banking globally, as referred to, in the James Politi and Gillian Tett Financial Times article, NY Fed Chief In Push For Global Bank Framework, and that the Seignior will oversee all matters of debt and credit, and implement a global currency system.
And I believe that he will be complemented by a Global Sovereign, someone with strong rule, like that of Angela Merkel who will oversee global governance, as it is established in the ten global regions, as called for by the Club of Rome in 1974.
The Sovereign and The Seignior will likely rise to power through globalization and global corporatism, that is an ever-uniting of government and business.
The Global Seignior, will likely have a unifying vision for humanity and will implement a world-wide credit system to conduct economic transactions, as many nations will have lost their sovereign debt seigniorage. The Seignior will oversee banking, lending, and credit world-wide. He will implement a global currency system. All seigniorage will come and go through him.
Disclosure: I am invested in gold bullion