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Kondratieff Winter Commences As Currency Traders Sell Off The Euro Yen And Other Carry Trades

|Includes:BND, CEW, CMF, DBC, DBV, EMB, EUFN, EWD, EWP, FEZ, FXE, FXY, GXF, JJT, JNK, MUB, PSCD, TMV, TYO, UNG, UUP, Vanguard Total World Stock ETF (VT), ZROZ

I … Currency traders sold out of their Euro Yen and other carry trades today August 11, 2010

The currency traders sold out of their profitable euro yen and other carry trades, which began to rally on June 10, 2010 when the EFSF monetary authority was announced and ended with the Federal Reserve meeting and Announcement yesterday, August 10, 2010, as concerns grew over sovereign debt and limited capability of the US Federal Reserve to deal with current economic challenges.

The Euro, FXE, fell 2.3% to 128.41. The Yen, FXY fell 0.02% to 115.99.

The  euro yen carry trade, that is EURJPY,  closed today at 109.83

Currency deflation is now in its second day of operation, with major currencies, DBV, falling faster than emerging market currencies, CEW. This dramatic currency deflation occurred previously in October 2009 and on April 26, 2010 as can be seen in the chart of DBV, CEW and RZV.

Five day chart of DBV; click on chart to enlarge

Three month chart of DBV; click on chart to enlarge.

The unwinding of carry trades is largely due to concerns over sovereign debt and household debt in the developed nations being a higher percentage of GDP. One can easily say the developed nations are over leveraged in debt; and that developed nations have excessively financed consumption.

The USD/JPY, slid to a 15-year low against the yen Wednesday, at 84.71 yen in London on August 11, 2010, the lowest since 1995, before recovering slightly to hover a little above 85 yen at 85.12 as seen in the chart of the USDJPY.

The US Dollar blasted 1.9% higher to 82.35.

The Euro, FXE, fell 2.3% lower to 128.41; and the Swiss Franc, FXS fell 2.6% lower to 135.51.

One can view the major currencies in this Finviz Currency Screener. 

II … Carry trade investment came out of the commodities

The chart of commodities, shows an unwinding of carry trade investment in commodities DBC, with Tin, JJT, Oil, USO, base  metals, DBB, copper, JJC,  Lead, LD, Timber, CUT, all falling lower, with the exception of Natural Gas, UNG, which rose 0.3%; commodity deflation in now confirmed; these can be viewed in this Finviz Commodities Screener.

III … Stocks, VT, fell as currency traders went short the EUR/JPY

Traders had no chance to short sell early in the day as stocks, ACWI, “gapped lower” at opening on the sell off of the euro yen carry trade. The recent stock rally began June 10, 2010, with the announcement of the EFSF monetary authority, and ran through August 10, 2010, ending with the US Federal Reserve meeting. The European Financials, EUFN, and Spain, EWP, were large gainers in the European Financial stress test rally, as is seen in the chart of EUFN, EWP, FEZ, together with RZV and RZG

Stock deflation is definitely underway, as stocks, VT, fell 3.6%; with the following leading the way down:

EWP, -6.3%, Spain

EWI, -6.2%, Italy

EWD, -6.0%, Sweden

FEZ, -5.9%, Europe

GXF,  -5.8%, the Nordic 30, which had been one of the strongest  fell heavily  

EWO, -5.2%, Austria

DNH, -4.6%, Asia

Australia, -4.6, Australia

EWU,  -4.3%, United Kingdom

EWY -4.0%,  South Korea

IWM -3.9%, Russell 2000

RSX -3.6%, Russia 

…… VT, -3.6%, World Stocks

EWJ, -3.4%, Japan

EWZ -3.3%, Brazil

BIK -3.3%, Brics

EWS, -3.2, Singapore 

EEM -3.2%, Emerging Market

TWN, -2.0%, Taiwan

EPU -2.4%, Peru 

THD  -0.8%, Thailand

Sectors falling heavily today included

EUFN, -5.8%, European Financials

XLF, -3.5%, Financials

EMFN, -1.4%, Emerging Market Financials

TAN -6.0%, Solar stocks

COPX, -5.7%, Copper mining stocks

SLX, -5.0%, Steel producing stocks

XLYS, -4.6, Small Cap Consumer Discretionary

XLI, -3.7% Industrials

SMH, -2.5%, Semiconductors

Today’s dramatic stock deflation is reflected in the fact that the small cap pure value shares, RZV, fell 5.2%, while the small cap pure growth shares, RZG fell. 4.2%. Volatility, VXX, jumped 7% higher to 22.84. 

My list of 25 ETFs to sell short and 7 ETFs to buy long for a debt deflationary bear market shows UBR fell 6%, UPV fell 9%, UVT  fell 8%, and ULE fell 5% rewarding short sellers.

IV … The yield curve, $TYX:$TNX, rose parabolically higher as investors bought the longer out US Government bonds, TLT, more than they bought the US Ten Year Note, IEF, which moved parabolically higher. The two interest rate bear market ETF fells. The 300% inverse of the 30 Year Bond, TMV, moved towards its previous low. And the 300% inverse of the 10 Year Bond, TYO, fell sharply lower; it appears it will be making a spike down low either today or tomorrow.  

V … Peak Debt is likely in, that is Peak Credit has likely been achieved, as Total Bonds,  BND, rose 0.07%. Corporate bonds, LQD, fell 0.01%, California Municipal Bonds, CMF, rose 0.46%, Municipal Bons, MUB, rose, 0.20%, Emerging market bonds, EMB, fell 0.12%, US Ten Year Note, IEF, rose 0.56%, and Junk Bonds, JNK, fell 0.97%.  One can view the chart of debt, BND, IEF, LQD, EMB, MUB, CMF, JNK and TLT or use the Finviz Screener of Debt to view today’s activity.

Soon bond deflation will be underway. Ultra low risk opportunity exists in short selling debt such as JNK, EMB, CMF, MUB, and ZROZ; or in purchasing the 300% inverse debt ETFs, TYO, and TMV, with a preference in the latter two of TMV as it is short sells the longer out US Government debt. The chart of emerging market bonds, EMB, shows a lollipop hanging man candlestick at the top of an ascending wedge all on falling volume.  

VI  … Gold and silver fell slightly lower; yet still have preserved their value relative to currencies, stocks,  and commodities …. gold has arisen as the sovereign global currency. 

Gold, $GOLD, fell 0.5% to 1,192 and Silver, $SILVER, fell 2.3% to 17.99. 

Gold, GLD, fell 0.3%, to 117.34 and Silver, SLV, fell 2.4%, to 17.53. 

Gold has arisen as the sovereign currency and sole standard of preserving wealth in a debt deflationary global economy where currencies, commodities, stocks and bonds are all falling lower in value. This can be seen in the chart of gold relative to stocks, GLD:VT and gold relative to major currencies, GLD:DBV and gold relative to emerging market currencies, GLD:CEW, and gold relative to debt, GLD:AGG rising in value since August 1, 2010.    

VII … The world entered into Kondratieff Winter today August 11, 2010 as currencies deflated and debt deflation manifested globally in a massive sell off of stocks and commodities.

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.”

Global Debt Deflation commenced on April 26, 2010, when the value shares failed to outperform the growth shares.

After the brief European Financial Stress Test Rally, Global Debt Deflation re-commenced again today, August 11, 2010. as  the currency traders went long the yen and short the global currencies as is seen in this MSN Finance chart of  FXE, FXA, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar, $USD, traded by UUP, to blast up. Today, the Yen was unable to finish at a gain, as it even succumbed to debt deflation, falling 0.02%, closing lower at 115.99; the chart show what appears to be a dark cloud covering; but it will take several trading days to confirm this.

With currencies, stocks, commodities all falling lower, the world has entered into Kondratieff Winter, which is the final of the four economic cycles. Eventually there is an extinguishment of currencies, wealth and lending. And money as it traditionally has been known, ceases to exist.

Yet in the nearer future, might a credit boss arise to issue and manage credit as the debt bubble implodes and the economy shatters ?

I believe that Credit Seigniors, will oversee the disbursement of credit both in the US and Europe as the debt bubble implodes and the economy shatters.

Here in the US, I envision, that out of a coming credit crisis, where there is no credit available, a Financial Regulator, will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve. Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have done servicing mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.

I also envision that this Credit Seignior, perhaps in public private partnership with American Express, AXP, and Capitol One Finance, COF, will provide seigniorage for credit. He will issue credit mostly to those companies which serve strategic national needs. 

In Europe, I see a new role for the President of the ECB.  I envision that in response to severe credit contraction and banking ill-liquidity, that he also will be Credit Seignior, as he accepts sovereign and other debt and issues credit to Eurozone member banks thereby keeping some degree of money liquidity flowing.

When the debt bubble bursts, the world will see “the end of credit” as it has traditionally been known, where credit comes from the seigniorage of sovereign nations issuing sovereign debt and financial institutions securitizing bonds. 

Governments will become seignior, that is they will exercise seigniorage and become the first, last and only provider of credit. Then only food stamps and strategic needs will be financed.

Disclosure: I am invested in gold coins