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Strengthening Yield Curve Heralds Debt Deflation


The Stockcharts daily chart of  the US Government 30 Year US Bond, $TYX, relative to the US Government Note, $TNX, that is $TYX:$TNX, shows a rise from its 50 day moving average in early May 2010 of 1.240 to today’s 1.280. Longer out interest rates are rising faster than short-term interest rates; thus longer out term debt is more falling quickly in value than nearer term debt. US Sovereign debt, if it is issued on the longer end, will become dramatically more expensive than on the short end; click on chart of $TYX:$TNX to enlarge.

In absence of a rising Euro, a rising yield curve is harmful to the credit sensitive small cap stocks, as is seen in the chart of RZV, ^TYX and ^TNX.

The Yahoo Finance chart of ^TYX and ^TNX shows interest rates bottomed out and have been rising since June 8, 2010; click on chart to enlarge. 

The rising $TYX:$TNX yield curve heralds the age of debt deflation. One of the most famous quotations of Austrian economist Ludwig von Mises is that “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.” 

The chart of 20 to 30 year US Government bonds, TLT, shows a double dark cloud cover candlestick, with trading today rising to resistance below that peak; click on chart of TLT to enlarge.

The chart of ten-year US Government Notes, IEF, shows a peak and turn lower, with trading today rising to resistance below that peak; click on chart of IEF to enlarge.

The chart of the US Dollar Bull ETF, UUP, shows a parabolic turn lower and trading today residing on the edge of a head and shoulders pattern; click on chart of UUP to enlarge.

Wealth can no longer be preserved in US Treasuries nor in dollar denominated assets, as the world entered into competitive currency devaluations on June 7, 2010 when the US Dollar, $USD, has turned parabolically lower, and closed today at $86.17.  

Numerous authors across the Internet have documented that gold, GLD, is in a cup and handle breakout. In the age of debt deflation, gold alone preserves wealth.

For institutional investors, who are adverse to investing in gold I recommend TMV, the Direxion 300% bear of the 30 US Government bonds, which is currently in an Elliott Wave 3 Up Breakout, but currently trading off a little today; click on chart of TMV to enlarge. 

Regional Banks, KBE, and the too-big-to-let-fail banks, RWW, were capitalized by the Federal Reserve’s QE, where they received US Treasuries in exchange for some of their distressed assets, like those held in mutual fund, FAGIX. The banks then placed their US Treasuries on reserve with the Federal Reserve earning 0.25% interest. Banks will suffer ongoing market place decapitalization as US Government debt, IEF, and TLT, turns progressively lower in value. It would be better for them if they withdraw their deposits and go long TMV and hold gold as TMV bottomed out on June 7, 2010 when the US Dollar, $USD, failed. 

Numerous authors, such as bloggers and even one at the NY Times, have documented that banks are using their FASB 157 entitlement to preserve real estate market values, especially in high FICO scoring neighborhoods and not foreclose on those who have used mortgage equity withdrawal and now have strategically defaulted. The days of living payment free for months and even years, that is squatting, will soon be over, as banks desperate for both cash flow begin demanding payment and if that fails, begin foreclosing.   Under this scenario, real estate, IYR, will fall quickly in value; click on chart of IYR to enlarge.

Today, the financially sensitive  Russell 2000, $RUT, closed at 666; its ETF, IWM, closed at 66.68; this goes back on the weekly charts to January 3, 2006.

Gold, GLD, is now outperforming silver, SLV,  which like the HUI precious metal mining stocks, GDX, have disconnected from the price of gold and fallen lower; this is the natural outcome of the commencing of the process of debt deflation; click here for a MSN chart showing that the gold mining stocks and silver disconnected from the price of gold on May, 12, 2010.     

Yahoo Finance shows a close of the euro yen carry trade EURJPY at 112.46 show a close of the euro-yen carry tradde EUR/JPY at 112.5

The lever on the S&P of late, has been the euro-yen carry trade. The S&P has been bouyant of the euro-yen carry trade, meaning it has been getting a lift or bounce up from the EUR/JPY.  So a move in the S&P, SPY, up from today’s 111.96, will come mostly, from the carry traders going long the EURJPY from 112.46. Likewise, a move down in the S&P will come from those financed by the 0.25% interest Bank of Japan loans, going short the Euro, FXE, relative to the Yen, FXY. 

Disclosure: I am invested in gold coins