Stocks, Bonds, And Currencies All Succumb To Debt Deflation While Gold Rises In Value
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.”
Lorimer Wilson in VeteransToday relates the Ron Hara SeekingAlpha report that the current policy of the United States, is a downward spiral into a bottomless economic abyss.
Chart reveals that debt deflation commenced April 26, 2010 when the currency traders sold the worlds currencies against the Yen, FXY, with the greatest toll on the Banks, KBE, the Russell 2000 shares, IWM, the European Shares, FEZ, and the Asian Shares, DNH. Those short with the Direxion 300% inverse of the Russell 2000 shares, TZA, have experienced financial reward.
Chart reveals that the Interest Rate on the US Government 30 Year Bond, $TYX, and the US Ten Year Note, $TNX, began rising on June 30, 2010, causing the US Government 30 Year Bond, TLT, to top out June 30, 2010, resulting in the Direxion 300% inverse of the 30 Year Bond, TMV, to rise from a spiked bottom of 40.41 on July 6, 2010 producing financial reward to short sellers.
The fact that the 30 year rate has not been falling as fast as the 10 year rate, has resulted in the yield curve, $TYX:$TNX, RISING, yes rising since April 28, 2010. In my opinion, it will rise more steeply once the 10 year rate really starts to turn up.
HatTip to CautiosInvestor who relates BIS Warns On The Current Levels Of Sovereign Debt: Just months ago the Bank of International Settlement, BIS, said “this leads us to conclude that the question is when markets will start putting pressure on governments, not if.”When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways? In some countries, unstable debt dynamics, in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels, are already clearly on the horizon. “It follows that the fiscal problems currently faced by industrial countries need to be tackled relatively soon and resolutely. Failure to do so will raise the chance of an unexpected and abrupt rise in government bond yields at medium and long maturities, which would put the nascent economic recovery at risk. It will also complicate the task of central banks in controlling inflation in the immediate future and might ultimately threaten the credibility of present monetary policy arrangements.”
Chart of PCY, CFT, TLT, IEF, AGG shows debt topping out world-wide.
Chart of PCY
Chart of CFT; note the marching three white soldiers, a bullish reversal signal, and the lollipop hanging man candlestick, yet another reversal signal.
Chart of IEF; note the three marching white soldiers, a bullish reversal pattern; and today’s bearish harami.
Chart of AGG; the chart of aggregate credit relates that “the end of credit is at hand”
Chart of the world currencies SZR, FXA, FXE, FXM, FXC, ICN, FXB, FXS, FXB, CYB, FXB, FXF, XRU, BZF shows deflation that occurred beginning on April 26, 2010, and the recent rally against the US Dollar, $USD. The chart of the US Dollar Bull ETF, UUP, sold off June 7, 2010. The Yen, FXY, has risen steadily from 105 to 114 on risk aversion as carry trade investors have bought yen to repay carry trade loans on stock investments world-wide; the Yen closed lower today, July 19, 2010, at 114.04.
Chart shows gold, GLD, has risen 4% in the last 90 days as investors have sought a safe haven investment; gold mining stocks, GDX, have proven to be speculative, and have disconnected from the price of gold; and silver, SLV. has fallen off sharply from the price of gold. It’s proven itself to be an inferior investment than gold. It has simply been riding gold’s coat-tail up on speculative day trading and yen carry trade investing. Gold has risen to be the sovereign currency and storehouse of wealth. Gold, as a currency will abide, whereas the others will be washed away by the tides of debt deflation. Stocks, VT, will be driven ever lower into the pit of abandon. And debt will be like a millstone about the neck of humanity.
In Other Current News
A number of home builders which had seen five days of rally earlier this month fell in value today: Chart of SPF, HOV, BZH, BHS, and LEN, shows their fall today; with SPF -1.5%, HOV -5%, BZH -3%, BHS -3% and LEN, -1.5%. These represent a good long-term ”short selling” opportunities for institutional short sellers.
Solar stock, TAN, which this year had been a lost leader up until the July rally, is holding onto resistance at $7.70; this is an excellent immediate “short selling” opportunity for institutional investors.
Corey Rosenbloom relates that Bank of America, BAC, shares fell sharply recently after releasing earnings on Friday. On Monday, shares crossed under the major Support “Line in the Sand” from the daily and weekly timeframe. One can see the effect of the Federal Reserve TARP program beginning in March 2009 running through March 2010. And then the selling off that started when a strike price of $19.00 was reached and then even more selloff at 17.50 when the currency traders called for debt deflation on April 26, 2010 as they sold the world currencies against the Yen, FXY. The Federal Reserve facility of Quantitive Easing had little to do with effective and lasting capitalization of banks. It had everything to do with a financial coup that swapped out toxic debts at banks for valuable US Treasuries, which the banks immediately put on Reserve with the Fed and did not loan out. So the banks, especially the too big too fail banks like Bank of America and Citigroup are now being market decapitalized and are now once again leading the markets and especially the small capitalized US Companies, that is the Russell 2000, IWM, lower into the pit of financial abandon. The Federal Reserve policies have created a monster of state corporatism, where the largest financial institutions are simply an extension of government.
Robert Wenzel of EconomicPolicy Journal provides the Peter Wallison quote from CNBC interview: “Obamacare for the financial industry. Basically the government is taking control of the financial industry…The Fed can take over any company that the regulators believe is systemically important…When the Fed does take control of any of these institutions, it controls their activities, their leverage, their liquidity, their capital, so what we are creating really is a partnership between probably the largest financial companies in this country and the government. If that isn’t control of the financial industry, I don’t imagine what could be” … “Regulation will impose tremendous costs on the financial industry, and consumers will feel those costs as will anyone who needs credit. As a result, we’ll have less credit around, less financial growth and less innovation”.
Disclosure: I am invested in gold coins