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I am not an investment professional. I do not engage in stock or currency trading. I am a blogger and investor who believes the failure of credit has created an investment demand for gold, and that gold bullion is the sole means of wealth preservation.
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  • Rising Volatility And Falling Currencies Is Likely To Turn Stocks Lower 1 comment
    Jan 12, 2012 2:15 PM | about stocks: VT, VSS, DBC, USCI, VIXM, VIXY, UUP, FXB, EWY, EUFN, NBG, MIC, ENY, ENB, SEA, RZV, SPY, KRE, IYC, XME, ITB, XBI, XSD, MXI, COPX, KOL, MOO, IGN, PSCI, XRT, IGE, PSCE, XOP, XLE, OIH, IEZ, IYM, HAP, HL, SIL, WCAT, IBB, SBUX, DVY, DOO, PFF, PAGG, ROLL, BA, INTC, TAN, UNG, GDX, GLD, RBS, YAO
    Financial Market Report for January 11, 2011

    1) … World Stocks, VT, VSS, and Commodities, DBC, USCI, traded lower on rising volatility and falling major world currencies.

    2) … Volatility rose yesterday and today.
    Finviz VIXM and VIXY

    Yahoo Finance VIXM and VIXY

    MSN Finance VIXM and VIXY

    Google Finance VIXM and VIXY

    3) … Most of the world major world currencies traded lower on ongoing competitive currency devaluation stemming from contagion of the European sovereign debt crisis.
    The following currencies traded lower today, stimulating the US Dollar, $USD, UUP, to rise: FXE, FXC, ICN, FXB, FXS, SZR, FXF, BZF, FXRU,

    Bloomberg reports Pound Weakens to Three-Month Low Versus Dollar After Trade Deficit Widens. The pound fell to a three-month low versus the dollar after a government report showed the trade deficit widened more than economists forecast, fueling bets the central bank will need to add more stimulus to spur growth.

    The chart of the British Pound, FXB, shows such a break lower through support, making it unlikely that the UK shares, EWU, will continue to trade higher.

    Eurozone growth prospects are dampened by credit evaporation. Bloomberg reports Europe Banks Resist Draghi Bid to Avoid Crunch by Hoarding Cash. Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region. Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate. “It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.” Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg. That has stirred concern among policy makers that banks will cut lending and throttle growth in the euro region.

    Reuters reports Greek bond Swap Talks Going Bdly Banking Sources Say. Talks about private sector participation in a Greek bailout are going badly, senior euro zone bankers said on Wednesday, raising the prospect that European Union governments will have to increase their contribution. "Governments are mulling an increase of their share of the burden," one of the bankers, who is familiar with the talks, said. Upon being asked whether governments will have to put up more cash to make up a shortfall from lower than expected private sector participation, another senior banker said: "Nothing is decided yet, but the bigger the imposed haircut the less appetite there is for voluntary conversion." A third senior banker, who was asked the same question said: "Private sector involvement is going badly."
    (Hat Tip to Gary of Between The Hedges)

    And Gary of Between The Hedges relates Stuttgarter Zeitung reports German Finance Minister Wolfgang Schaeuble rejected joint euro-region bond sales as long as there are no rules in place to enforce coordinated economic policies in the area. The euro region mustn't create incentives for governments to abandon their deficit-reduction policies, Schaeuble said. Differences in the sovereign-bond yields of euro-area countries are indispensable to spur governments to limit their budget shortfalls and mustn't be leveled by the introduction of so-called euro bonds, he said.

    Gary of Between The Hedges further relates Expansion reports Spanish banks may be unable to generate more than 30 billion euros of the estimated 50 billion euros of extra provisions needed to clean up the banking system, citing people in the financial industry. El Confidencial reports Spain's new government will force banks to cut the values of foreclosed homes by as much as 50% as part of its plan to clean up lenders' balance sheets, citing people with knowledge of the matter. The banks, which will be given two years to make provisions for the losses, will also be required to cut the values of their urban land assets by 80% and value rural land on their books at virtually zero

    Fiat money is dying as a result of sovereign insolvency and banking insolvency in the Eurozone; with the result being failure of global growth. Insolvent sovereigns and insolvent banks, such as the European Financials, EUFN, especially the National Bank of Greece, NBG, means ongoing currency failure globally, persistent economic contraction, and continued diminished world trade.

    Sovereign insolvency will spread from the EU periphery to the EU core. The loss of debt sovereignty will be a catalyst for the formation of a European Super State based upon unified fiscal rules. Bank failures and EU Treasury auction failures, will be the defining issues of the year. These will cause leaders to meet in summits, waive national sovereignty, establish a unified federal authority, mandate a European fiscal union, and establish either the ECB or the Bundesbank, that is Buba, as the Euro’s Bank. Life in Europe will be characterized as a totalitarian collective. Totalitarian collectivism is the EU’s future. European Socialism will die in 2012. Diktat will provide seigniorage to replace the seigniorage of treasury bonds. Diktat will become a currency, that is a payment used in the exchange of goods or services. Gary of Between relates that Welt reports Europe's interbank market is frozen and the continent's banks are only lending to each other through the ECB due to a lack of confidence within the financial industry, World Bank President Robert Zoellick was quoted as saying. If European banks don't lend to each other, how can others in the U.S. or in China be expected to do it, Zoellick said.

    The seigniorage of fiat money is failing, and the seigniorage of diktat is rising in its place, as is seen in the rise of power of the EU ECB IMF Troika to appoint technocratic government in Greece and Italy. Diktat is rising as a currency to dominate mankind. Libertarian’s desire for Freedom and Free Enterprise are a mirage on the Neoauthoritarian Desert of the Real. And Choice is an epitaph on Neoliberalism’s tombstone.

    Aa world wide credit bust and global financial collapse is coming, and out of it, fate is directing that regional global governance will be established. Kings have ruled mankind throughout history; these have included Nebuchadnezzar ruling Babylon; Cyrus and Cyrus and Darius ruling Merdo Persia; Charlemagne ruling Rome; Tony Blair ruling Great Britain, Angela Merkel ruling the EU, and George Bush, The Decider, ruling America with Unilateral Authority. Soon ten kings will come to rule, each in his own regional power base. Most recently two iron kingdoms, the combine of the UK and European rule, and US Hegemony, have governed the world; their power is now flowing into a ten toed kingdom of regional global governance.

    Destiny, not any human action, will bring forth a revived Roman Empire, that is a German led Europe.

    Fate will open the curtains, and out onto the world’s stage will step the most credible leader. This Little Horn, or Little Authority will work behind the scenes in regional framework agreements to change our times and laws. Yes, the rule of law will be replaced by his word, will and way. In the supranational New Europe, national sovereignty will be seen as a relic of a bygone era. The people will be amazed by this, and place their faith and trust in him; they will give their allegiance to his diktat.

    The Banker regime of Neoliberalism came via the Free To Choose floating currency script of Milton Friedman; but these are now sinking, causing global disinvestment out of stocks and deleveraging out of commodities. The natural result of destructionism is the rise of despotism.

    The Beast regime of Neoauthoritarianism is rising in its place. It comes via the 1974 Club of Rome’s Clarion Club for regional global governance. This monster of statism and collectivism is rising from the profligate Mediterranean countries of Italy and Greece. The Beast’s seven heads are rising to occupy in all mankind’s institutions, and its ten horns are rising to govern in all of the world’s ten regions. The Beast system is coming like a terminator that can't be bargained with. It can't be reasoned with. It doesn't feel pity, or remorse, or fear. And it absolutely will not stop, ever until mankind is totally dominated and subdued.

    Banks will be nationalized in 2012; perhaps better said banks will be regionalized as Bloomberg reports Too-Big-to-Fail Definition May Be Expanded. Global regulators may expand the definition of a too-big-to-fail financial firm, signing up domestic lenders, clearing houses and insurers to capital rules designed for the world’s biggest banks. The “framework should be in place for domestically systemically important banks by the end of the year,” Mark Carney, chairman of the Financial Stability Board, said yesterday after a meeting of the group in Basel, Switzerland. Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and Goldman Sachs Group Inc. (NYSE:GS) were among 29 banks subject to the so-called capital surcharge on globally systemic financial institutions drawn up by the FSB in November. Banks will have to boost reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators. The new banks will be known as government banks.

    In a bank insolvent and sovereign insolvent world, regional stakeholders will be appointed to Stakeholder Committees, that is regional public private partnerships, PPPs. Public private partnerships, such as Macquarie Infrastructure, MIC, will take the lead in managing the factors of production. Canadian Energy Income Companies, ENY, and Canadian Oil and Pipeline Companies such as Enbridge, ENB, will for all practical purposes, be regionalized, that is something akin to being nationalized. There will be New Credit for the New Europe, it will be Stakeholder Credit coming from the Stakeholder Committee, as it meets in working group conference. This Stakeholder Credit will complement regional global governance to provide funding for the operations of industry critical to the EU’s security and stability. As for the people, the residents of the New Europe, the prevailing concept will be, let them eat diktat.

    4) … Will the shares and sectors leading in the Dollar trade, that is the safe haven rally, keep going strong, or have even these peaked out on global competitive currency devaluation due to Eurozone debt contagion?
    Financial Times reports Asia to Europe Container Traffic Down 5%. Container shipping lines that are already incurring big losses due to ship oversupply could suffer further from falling demand, after the latest figures for volumes on the most important trade route showed a sharp fall. Figures published on Wednesday by Container Trades Statistics, the body that compiles data on container trades into and out of Europe, showed that traffic from Asia to Europe fell 5.33 per cent between November 2011 and the previous year to 1.04m twenty-foot equivalent units (TEUs). European container imports from all sources fell 3.75 per cent compared with November 2010. (Hat Tip to Gary of Between The Hedges)

    An inquiring mind asks, is the rally in shipping shares, SEA, now over? ESEA, NAT, CPLP, DCIX,

    Will the bulls of the Small Cap Pure Value Shares, RZV, shares keep going strong? AIR, AXE, CELL, ENS, MOH, MTRN, NSIT, POL, PSEC, SAH, SNX, SKYW,VOXX,
    AIR, Aerospace Supply Chain Management
    AXE, Industrial Equipment Wholesaler
    CELL, Wireless Industry Supply Chain Management
    ENS, Industrial Electrical Wholesaler
    MOH, Medicaid Health Care Management
    MTRN, Metal Manufacturing
    NSIT, Server Infrastructure Management Services
    POL, Specialty Chemicals
    PSEC, Asset Management
    SAH, Automobile Dealership
    SNX, Business Services
    SKYW, Regional Airline
    VOXX, Personal Electronics Products

    Will these industry leading S&P Sectors keep going strong? KRE, IYG, XME, ITB, XBI, XSD, MXI, COPX, KOL, MOO,

    Will these agriculture equipment manufacturers keep going strong? AGCO, LNN, DE, TSCO, NC, CASC,

    Will these industrial electrical equipment manufactures industrial equipment shares keep going strong? ETN, ROK, AME, ENS, TNB

    Will these metal manufacturing firms, XME, keep going strong? NUE, STLD, RS

    Will these networking shares, IGN, keep going strong? FFIV, NTGR, CSCO, AKAM,

    Will these education companies keep going strong? APOL, DV, ESI, BPI, STRA

    Will these small tool manufacturers keep going strong? LECO, SNA, SSD, SWK

    Will these small cap industrial shares, PSCI, keep going strong? WTS, HEES, PH, ROLL, AIT, BRC, CLC, DCI, PLL, FAST,

    Is the rally in these railroads now over? KSU, UNP, CSX, NSC, GWR,

    Is the rally in credit companies now complete? AXP, NNI, COF, NICK, MA, V, AMT, ADS, CATM, ARCC, GPN, AEA, WRLD, RCII,

    Is the rally in automobile dealerships now complete? KMX, SAH, ABG, CRMT, LAD, GPI,

    Is the long, long, long rally in retail stores, XRT, now over? CHRS, BODY, ROST, TJX, ZUMZ, BBW, ORLY, PETM, BEBE,

    Is the risk trade in silver mining SIL shares now history? HL, PAAS, CDE, SSRI, MVG, Silver has now proven itself to be a speculative risk asset and not a precious investment metal as Reuters reports Hecla cuts 2012 silver production outlook.

    Is the growth trade in energy and natural resource investing IGE, PSCE, XOP, XLE, OIH, IEZ, IYM, and hard asset, HAP, resource investing over shares over? XOP,WCAT, PSCE, DNR, PXD, EOG, NBL, SM, ROSE, CVX, CLR, GPOR, EXXI,

    With currencies falling world wide, will energy, natural resource, and hard asset investing now start to prove unprofitable? Will on going carry trade disinvestment turn these S&P Global Material, MXI, shares lower? BHP, CLF, AA, SCCO, POT, CF, RIO, BTU, VALE, ZINC,

    Is the rally in foreign utilities now over? EDN, EOC, EBR, SBS, CIG CPL,

    Is the rally in building, construction, and environmental shares over? CX, URS, NX, USG, NCS, TRN, MTW, GLDD, RBN, SXI, CLNE, AEGN, DY, PRIM, BECN, GVA, CAT,

    Is the rally in biotechnology, IBB, over?

    Will inflation destruction be taking these chemical manufacturers lower? DD, ALB, ASH, WLK CYT, NEU, RPM,

    Is the safe have rally in Starbucks, SBUX, and a whole host of other US companies now now over? KMP, NICK, DTE, APOL, NEU, FTI, DY, FAST, ROLL ,CLH, SIX, KMB, GPC, WXS, LECO, MTH, TREX, LII, CCO, IP, LPX, TRN, MON, AMGN, AXL, AME, ROP, RLJ, DXPE, CRMT, AGP, AMT, CASC, NNI, KSU, CRI, RAI, MTX, BLK, MIC, MTW, EXP, TBI, INTC, ALK, HIBB THO, WTW, CTAS,

    Does the death of fiat money mean an end to profitable dividend investing, DVY, DOO, and an end to the rally in US Preferred, PFF, shares, as well? Are investment opportunities in global agricultural, PAGG history? Will shares of global growth leaders RBC Bearings, ROLL, Boeing, BA, Intel, INTC, be turning lower? Is today’s strong rally in solar stocks, TAN, going to be quickly reverse?

    Of note, a falling price of oil, pushed natural gas UNG, through the floor and into the basement. The profitable days of the energy partnerships, AMJ, are over, DPM, KMP, EEP, EPD, MWE, TLLP, EEP, OKS, MMP, PAA, APL, The WSJ reports Glut Hits Natural-Gas Prices. U.S. energy companies are pumping so much natural gas out of the ground that prices are plummeting, and the cheap gas isn't likely to evaporate anytime soon. Natural-gas prices fell 5.7% Wednesday to their lowest level in over two years, good news for people who use gas to heat homes and for companies that use it to power factories. For U.S. energy companies, however, the domestic natural-gas market is looking increasingly out of whack. Despite a 32% drop in prices last year, onshore production rose 10%, and it is expected to rise another 4% this year, according to Barclays Capital.

    The investment demand for gold came through US Central Bank and Japanese bank carry trade lending. But now with the Feds monetary policies, specifically ZIRP, QE 1, QE 2, and Dollar FX Liquidity Swaps, having worn thin and turning toxic. Will gold mining stocks continue to disconnect from the price of gold, and turn lower once again with falling world currencies and other stocks? I believe so; this is communicated in the chart of the gold shares, GDX, relative to gold, GLD, GDX:GLD, turning lower.

    Please consider that In a world of failed currencies, possession of gold bullion will prove to be the best performing and safest investment.

    5) … In today’s news
    The WSJ reports Bolton to Back Romney. Former U.N Ambassador John Bolton is set to endorse Mitt Romney and will join his top team of foreign-policy advisers, according to people close to the campaign.

    Bloomberg reports Pakistan Army Warns Clash With Gilani Government May See 'Grievous' End. Pakistan’s government fired its defense secretary as the army warned of “grievous consequences” from the sharpest civilian-military power struggle since army rule ended in 2008. Neoliberalism featured wildcat finance, a Doug Noland term; but Neoauthoritarianism features wildcat governance where leaders bite, rip and tear one another; and only the most fierce rises to be top dog.

    Debt Contagion from the European crisis is destroying the UK’s global political hegemony that has existed since the late 1700s. The WSJ reports RBS Set to Reveal Job Cuts. Royal Bank of Scotland Group PLC, the government controlled U.K. bank, is preparing to unveil a restructuring Thursday that is expected to shed thousands of jobs and reshape the bank as a largely retail focused operation. The two iron pillars of UK and EU rule and US hegemony that have ruled the world, is crumbling. Destiny is crushing the sovereignty of these empires and transferring their power to regional global governance. Regionalism is the new focus in globalism.

    Zero Hedge reports China Enters The Danger Zone, SocGen Presents The Four Critical Themes. As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency. Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names. They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.

    Mamta Badkar of The Business Insider presents Barclays Skyscraper Index which shows a correlation between construction of the next world's tallest building and an impending financial crisis. In fact the report even suggests that the rate of increase in height could also reflect the extent of that economic crisis. The building of skyscrapers comes through excessive creation of credit, resulting in the construction of banks which collapse as their investments in growth industries, such as railroads prove unprofitable. The creation of credit stimulates a boom and bust cycle in precious and base metal mining industries. The expansion of lending blossoms only to see investments in foreign countries fail “The Asian Economic Crisis of 1997 to 1998, that came via currency devaluation and speculation in stock and property, coincided with the completion of the Petronas Towers in 1997. At 1,483 feet, the Petronas Towers were the tallest buildings in the world and heralded a crisis in that region”. And the “Dot-com bubble, 2000 to 2003 saw the construction of the 1,671 foot tall Taipei 101 began in 1999 and was completed in 2004. The duration coincided without the recession in the early 2000s and the tech bubble” And “India just finished building two skyscrapers and has 14 skyscrapers currently under construction.” The Skyscraper Index is the “Hot New Indicator For Predicting Doom And Collapse”.
    (Hat Tip to Gary of Between The Hedges)

    The current boom and bust economic cycle will result in regional global governance being installed in the world’s ten regions where sovereign rules govern via diktat. Over the decades, time, and time again its been loose central banking policies, coupled with lack of regulation, has enabled the financial system to take on mispriced risk, while providing lucrative banker compensation. Mispriced risk results in banking collapse and social turmoil. Bob Chapman writes The problem of expectations brought by a serial Ponzi scheme is not ever going to go away. It leads to hyperinflation and collapse. The risk of failure is always paramount, especially considering the historical perspective, which has almost always ended in failure. The presence of derivatives today has complicated matters even further, when most of the sellers are running naked with no collateralization backing their sales.

    The WSJ reports S&P: China Bank Loss Deferal Hurts Confidence. China's authorities are likely to allow local banks to postpone their recognition of losses on some local-government loans, but such a move would be damaging to the sector's reputation and could result in greater losses ultimately, Standard & Poor's Ratings Services said on Thursday. In a report, S&P credit analyst Ryan Tsang said that regulatory forbearance could lower local banks' credit losses by as much as 80 billion yuan (US$12.7 billion) to 100 billion yuan per year for the next three years, assuming that loans worth as much as 3 trillion yuan are eligible for such treatment. But he cautioned that doing so would be a "backward step" for the country's banking sector. S&P estimates that around 30% of loans made to Chinese local-government financing platforms could go bad over the next three years in the absence of public support. "In the short term, extending the debt maturities to facilitate payments would...reduce investment volatility and avoid a surge in nonperforming loans," Mr. Tsang said. "But it is also likely to undermine investors' confidence for some time to come, underscore the developing nature of the regulatory framework, and highlight the [China Banking Regulatory Commission's] lack of independence from the government”.

    The WSJ reports Syrian Leader Vows 'Iron Fist'. Assad blasts the Arab League and says he won't exit, in address opponents see as prelude to deeper violence. Neoliberalism featured the Spirit of the Cat in the Hat where bankers waived wands and created ponzi credit; but Neoauthoritarianism features the Spirit of Wilding where leaders waive clubs threatening punishment. The scope of ponzi finance has expanded over the decades and it bill is now coming due with the result that debt servitude will be enforced upon all in regional global governance.

    Bob Chapman writes on a possible Federal Reserve, Fannie Mae, Freddie Mac, REOs to Rentals, Public Private Partnership program in the wings. A pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials. There currently are about a quarter of a million foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are coming. The foreclosure processing delays of last year created a mammoth backlog of properties yet to be processed, which are just now being re-started. One of the initiatives of this program is for the federal government to be in the position to mitigate and manage any new wave of foreclosures, sources say.Late-stage delinquencies still in the pipeline number close to two million, according to a new report from Lender Processing Services. Foreclosure starts outnumber foreclosure sales by two to one and "the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted," according to LPS.

    Knowing this all too well, the Treasury Department, Federal Reserve, HUD, FDIC, Fannie Mae and Freddie Mac, with their conservator, the Federal Housing Finance Agency (FHFA) at the helm, are engaged in a collaborative effort to face this new wave of foreclosures head on and figure out a way to keep these properties from sitting on the books of the government and sitting empty in the nation's neighborhoods. As the Federal Reserve alluded to in its white paper on housing last week, "A government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios." REO's (Real Estate Owned) are bank-owned properties, or, in this case, properties owned by the government-sponsored enterprises and the FHA. Three Fed governors pushed for similar plans in speeches last week, as well. A pilot sales program will be starting in the very near future, according to administration officials. They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties. "I think there is a fair amount of money in the wings waiting to buy, investors doing cash raises to buy properties on a large scale," says Laurie Goodman of Amherst Securities. "But that means they have to build out a rental organization; it means they build out a management company, because if you're accumulating a hundred homes in Dallas that's very different than running a multifamily building."

    The emergence of regional cooperatives and regional trading exchanges, communicates that regionalism is the new dynamic in globalism. These feature regional trade agreements and payments made in local country currencies as a means of establishing non-dollar payment for commodities, goods and services. Regional cooperatives are diminishing US Hegemony. Jim Willie, CB, writes in The USDollar Paper Tiger During the 2002 to 2005 period, the Shanghai Cooperative Organization aroused a considerable amount of publicity. It was originally a cultural exchange group between Russia and China, led by the surviving republics of the Soviet Union. Its agenda grew to include security matters. Then later still, commercial trade and commodity supply entered the picture, as the resource rich nations lacking in economic development banded together. The added twist was the inclusion as guest SCO members such nations as renegade Venezuela, Iran, and others. The SCO defiance began to escalate right about when the organization faded from view. It never faded away, only from view, as it coalesced into a powerful movement behind the scenes.

    SCO became a hidden movement to build fortifications in opposition to the USDollar. Its main thrust has been gold accumulation in the shadows. The key to comprehension on SCO matters is to realize that all countries in the Shanghai Coop are working vigorously to bypass the USDollar, and all are increasing their gold reserves. They work in much more secrecy, probably at the direction of Kremlin and Beijing leaders. They have learned that avoiding direct confrontation and sanctions is the path to take. The proposal to end usage of the USDollar in bilateral Russian-Iran tade came from Moscow, not Tehran. One can be absolutely certain that Kremlin leaders are as stiff spined as they are motivated to challenge the USGovt and Wall Street leadership. They remember all too well the Yeltsin years and the Western oil company role. The proposal to switch to the Russian Ruble and the Iranian Rial was raised by Russian President Dmitry Medvedev with his Iranian counterpart, Mahmoud Ahmadinejad, at a meeting in Kazakhstan. It was staged without herald as an continuance of the Shanghai Cooperation Organization. Iran has replaced the USDollar in its oil trade with India, China, and Japan.

    At the cusp of developments is a potential deal that could bring an important linkage between crude oil and commodity trade settlement outside the USDollar, with provision for funding the European bank rescue fund, the European Financial Stability Facility. The concept was raised by the intrepid indefatigable Tyler Durden (bloodied but resilient) of the Zero Hedge crew. The bypass of the USDollar in trade is likely soon to be engrained in the financial system. The American trumpets continue to promote the notion that all global trade is done in US$ terms, when the reality is far different, and the trend is in the opposite direction, as in global revolt. Iran and Russia have replaced the USDollar with their own native currencies, thus solidifying trade ties. Tehran's Ambassador to Moscow Seyed Reza Sajjadi claimed that the proposal for replacing USDollar with Ruble and Rial was raised by Russian President Dmitry Medvedev in in Astana Kazakhstan during a sidelines meeting of the Shanghai Cooperation Organization (NYSEARCA:SCO) meeting. He added that many Iranian entities are using Ruble currency for their trade deals. The Kremlin leaders stand against unilateral sanctions on Iran conducted outside the UN Security Council, their position in diplomatic circles, which WashingtonDC avoids. The USGovt has a long track record of making unilateral decisions, and attempting to impose sanctions on third party nations, all done without the blessing of global bodies. The Russians have clearly announced that they will not accept broad sanctions.

    In a gesture loaded with defiance, Japan and China have embarked on a trade deal that directly bypasses the USDollar in settlement. One more platform of the USDollar global fortress has been shown to be dismantled. Its hegemony is ending, although slowly. The mercantilist relationship held firm between China and the United States has shifted into reverse during the trade war in its third year, a trade war fully anticipated and forecasted back in 2005 and 2006 and 2007 in the Hat Trick Letter.

    With the new pact, Japan and China have made the arrangement public. They will promote direct trade in Yen and Yuan currency without USDdollar usage, in order to encourage the development of a market for the exchange, and to cut costs for companies. The real surprise was the announced plan for Japan to buy Chinese bonds in the current 2012 year. Confirmation came from a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing in late December. Considering the huge trade volume between the two biggest economies in Asia, the pact is significant. Look for continued Yuan appreciation, and all the problems it will cause to their export industry. Some shock waves are coming to the FOREX markets, where the USDollar is still seen as king in official circles.

    The year 2012 will prove to be highly disruptive to such a perception. The primary motive behind the bilateral trade deal is to reduce currency risks and trading costs. Currently, about 60% of trade transactions between the two nations are currently settled in USDollars, a practice to be reduced. China is largest trade partner to Japan, bigger than the United States, thanks to colossal direct foreign investment by American and European firms for a full decade. China already purchases Japanese debt securities. In turn, Japan holds $1.3 trillion of FX reserves, the world's second largest war chest. They wish to purchase Chinese debt securities. Nothing will stop this movement. The list of imminent investors in Chinese debt is growing, from Austria to Thailand to Nigeria.
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    Last week, the yen was driven back to the very top of the range with a modest “RISK OFF” trade in the global financial markets, that has so far only lasted three days. It was enough to take the (FXY) from $125.80 to $129.10, a big move for such a normally quiescent currency. So I am going to buy the Currency Shares Japanese Yen Trust ETF (FXY) March 2012 $129 puts at $1.60 or best.

     

    Because the yen has been stuck in such a narrow range for so long, the options are fantastically cheap. You can buy the March Yen puts with an implied volatility of only 8%, compared to 50% for the (UNG) puts, and a nose bleeding 80% for the (VIX) calls. Break out of this range, and these implieds, and put prices, go through the roof.

     

    If the yen moves back to the bottom end of this range, which appears on the charts etched in stone, then you should get a triple on the puts. If the rapid deterioration of Japan’s horrific fundamentals starts to accelerate, then you could get a downside breakout on the (FXE) and far larger profits that many hedge fund managers have been calling for.

     

    Those unable to execute trades in options can buy the Pro Shares Ultra Short Yen ETF (YCS), a double leveraged bet that the yen goes down. -

     

    The Mad Hedge Fund Trader
    1 Feb 2012, 06:09 PM Reply Like
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