I … The end of credit commenced as Ben Bernanke said on August 27, 2010: ”A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve’s holdings of longer-term securities.”
The August 27, 2010 ticker-tape chart of AXP, KBE, IWM, FEZ, TLT, shows American Express traded up early in the day as the world awaited “word of hope” from the US Federal Reserve Chairman Ben Bernanke from the Wyoming conference of international banking, financial and credit leaders meeting at the Kansas City Federal Reserve Bank’s annual symposium.
Then early in the morning, Federal Reserve Chairman Ben Bernanke said the central bank might make another big purchase of securities if the economy were to falter significantly.
Bond investors, reacted negatively to more news of economic contraction as well as news of potential monetization of debt and pulled money out of the Zeroes, ZROS, the 20 to 30 Year US Treasuries, TLT, and the US Ten Year Note, IEF, which turned Bonds, BND, lower. This caused stocks to rise, and the euro yen carry trade supported the market moving higher, as is seen in the combined chart of FXE and FXY, FXE:FXY, as the Euro, FXY, rose some but then fell to finish basically unchanged. The Yen, FXY, traded lower to 116. With the fall of the Yen, FXY, lower today from 117 to 116, competitive currency deflation has commenced. Currency traders also took the Australian Dollar, FXA, and the Swiss Franc, FXS, higher as well as can be seen in the chart of FXY, FXE, FXA, FXS.
II … Short selling opportunities were reset and defined as a tide of currency carry trades reinvigorated stocks.
The rise of the carry trades during the day continued to support a rally in safe haven investing in a handful of free-enterprise emerging markets as well as in diversified utilities which pay a high dividend.
Thailand, THD, rose; its opposite, Ireland, EIRL, fell lower again. Thailand is the libertarians utopia; while Ireland and Natural Gas, GAZ, have a lot in common. Ireland has an excess of toxic debt mortgage and real estate development debt and natural gas has an excess of supply.
Diversified Utilities rose, Nisource, NI, rose to a new yearly high at 17.47 and Consolidated Edison, ED, rose to an all time new high of 47.88. Nisource pays a 5.4% dividend, Wisconsin Energy pays a 5.0% dividend.
Six percent dividend payer Altria Group, MO, was down slightly on the day. It has been a stellar stock market performer along with the high paying diversified utilities. But there is a market top in even the dividend payers; with the ceiling being the hand of the currency carry traders: the chart of Altria Group, MO, together with the Yen, FXY, and the Euro, FXE, shows the higher yen capping Altria’s stock market value … MO, FXY, FXE
Because of the move up in the EURJPY and the AUDJPY, the market moved strongest in those sectors and countries which had experienced the most currency carry trade disinvestment including European Financials, EUFN, Spain, EWP, Homebuilder, XHB, Las Vegas Sands, LVS, Small Cap Small Value, RZV, and Small Cap Consumer Discretionary, XLYS.
The Proshares 200% inverse ETFs, ….. SSG, SJH, SMK, and EPV as well as TBT ….. offer the best of the 200% short selling opportunities. I see great rewards coming to those invested 200% inverse of the 20 to 30 Year US Government Bonds.
Sweden, EWD, rose 3.2% on a stronger Swedish Krona. In the month of August it had been a major stock loss leader with a 9.1% loss. Its currency, the Swedish Krona, FXS, has been under attack, having lost 3.4% in August, which is more than the Euro’s loss at 3.3%. The Mexico Peso, FXM, has been the next loss leader with 3.3%. I anticipate both Sweden and Mexico will resume loosing stock market value as carry trade investors get back to selling the Krona and Peso. Thus I see Sweden and Mexico as ideal short selling opportunities.
III … With the remarks of the Fed Chairman, the world passed through Peak Credit as interest rates rose.
Ambrose Evans-Pritchard in August 17, 2010 Telegraph article Time Is Running Out For The West writes that the US, UK, Germany, France, and Spain are all at risk of an “interest rate shock”, either because they must roll over a cluster of short-term debt (US, France, Spain) or because deficits are so large. Countries that “fail to demonstrate the level of social cohesion required to stabilise debt” will lose their AAA rating. “Intra-generational” conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards.
Today, August 27, 2010, the interest rate on the 20-30 Year US Government Note, $TYX, rose to 3.698%, and the interest rate on the US Ten Year Note, $TNX, turned up to 2.625%, causing both the 20 to 30 Year US Government Bond, TLT, and the US 10 Year Note, IEF, to turn lower.
The “end of credit” has likely commenced. It’s reasonable to expect significant bond deflation to commence soon. Municipal Bonds, MUB, California Municipal Bonds, CMF, Corporate Bonds LQD, Junk Bonds JNK, and Emerging Market Bonds, EMB are all viable short selling opportunities. Credit deflation will make Ford Motor Credit FCZ, Financial Preferred PGF, good short selling opportunities as well.
The 300% inverse of the 30 Year US Government bond, TMV, turned up. Significant gains are coming to those who start to make purchases 300% inverse of US Government Bonds. To complement this, I recommend an investment in the 300% inverse of the Financials, FAZ, and an investment in the 300% inverse of semiconductors, SOXS
As the euro yen carry trade, the EUR/JPY, that is FXE:FXY, as well other carry trades such as the AUD/JPY, FXA:FXY, turn lower, then funding for both stocks and bonds will be absent; and stocks will fall lower in value.
The chart of BHP Billiton, BHP, shows the 3 of 3 wave down aggressively at work in this basic materials production leader.
Bonds, BND, began rising in late April, 2010 when the European Sovereign debt crisis emerged; other reasons for the rise of bonds have likely been monetization of US sovereign debt by proxy banks in London and banks here in the US, and carry trade investing as well.
Beginning next week, the week of August 30, 2010, there likely will be debt deflation in both stocks, ACWI, and bonds, BND; with the greater deflation coming to bonds rather than stocks.
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.”
The chart of world stocks, ACWI, shows that an Elliott Wave 3 of 3 down commenced on August 10, 2010. The Third Elliott Wave is the most sweeping and dramatic of all economic and social waves; it builds wealth on the way up and destroys wealth on the way down. The third wave, which has just commenced, and will continue until all traditional stock wealth is destroyed.
Debt deflation has caused an investment demand for gold, GLD, and silver, SLV . These have risen from being metals to being sovereign currencies.
Commodities, DBC, moved higher on options trading and on higher interest rates, with Base Metals, DBB, including TIN, JJT, resetting it nicely for short selling. Agricultural Commodities, DBA, and Oil, USO up; Natural Gas, GAZ was down again today. Metal Manufacturing, XME, led basic material, XLB, higher, causing mining intensive, Australia, EWA, to rise.
Today’s rise in natural resources sparked a jump in solar stocks, TAN, which made for a good opportunity to increase a short position.
The HUI Precious metal mining shares usually make market turns lower with US Treasuries as is seen in the chart of $HUI:$USB. The junior gold mining stocks, GDXJ, rode today’s reactionary wave up to make a triple high; nicely resetting them for short selling. The Horizon’s inverse of the Canadian gold mining stocks, HIG.TO, manifested three black crows, resetting it too nicely for a purchase.
Semiconductors, SMH, fell hard today on the TheStreet report that Intel, INTC, said that its third-quarter revenue will be below the company’s previous outlook due to weaker-than-expected demand for consumer PCs in mature markets; but semiconductors and Intel recovered. The 200% inverse of Semiconductors, SSG, is in the middle of a massive 3 up wave; it simply is in resting and will explode, yes explode higher soon; and the same is true of the 300% inverse of Semiconductors, SOXS.
The chart of Semiconductors, SMH, for the last 90 days shows that disinvestment started to come out of them beginning on July 27, 2010.
The chart of Semiconductors SMH, since July 1, 2010, shows that the Elliott Wave 3 of 3 down, that commenced August 10, 2010, hit semiconductors much harder than basic materials, XLB. The PE of semiconductors will be rapidly falling toward the PE of Seagate, STX. I expect a lot of social suffering to strike in the cities of Silicon Valley, the heart of the semiconductor and personal computing and personal electronics industry. Cities such as Sunnyvale, CA, where Redfin reports homes, such as the one at 1062 Robin Way Sunnyvale, CA 94087, list for $799,000, that is $460/square foot.
It was in early July 1, 2010 as the Euro, FXE, rose to 113, that money flowed out growth shares, RZG, and into basic material, XLB, emerging markets, EEM, and European shares, FEZ as is seen in the chart of RZG, XLB, EEM, FEZ.
International Consumer Discretionary, IPD and International Dividends, DOO, rose to 50 day moving average, reflecting the rise in the Euro Yen Carry trade, FXE:FXY. The chart of URR, Double Long Euro, together with IPD, and DOO, … URR, IPD, DOO … shows consumer discretionary stocks as well as dividend stocks, rising and falling with yen carry trade investing.
Also, one can see in the chart of the Double Long Euro, the onset and activity of the European sovereign debt crisis. Wikipedia reports a brief summary of some of the main events in the Greek Sovereign debt crisis. In October 2009, a new Greek government is formed after the election, led by PASOK, which received 43.92% of the popular vote, and 160 of 300 parliament seats. On November 5, 2009, an update of government budget reveals an estimate deficit of 12.7% of GDP for 2009, more than twice the previously announced figure, and 4 times the initial (December 2008) estimate. On November 8, 2009 a budget draft aims to cut deficit to 8.7% of GDP for 2010; draft also projects total debt rising to 121% of GDP in 2010 from 113.4% in 2009. On December 8, 2009, Fitch Ratings cuts Greece’s rating to BBB+ from A-, with a negative outlook. On December 14, 2009, Greek PM Papandreou outlines first round of policies to cut deficit and regain investor trust. On December 16, 2009, S&P cuts Greece’s rating to BBB+ from A-. On December 22nd, 2009, Moody’s cuts Greece’s rating to A2 from A1. On April 11, 2010, EMU leaders agree bailout plan for Greece. On May 9, 2010 the 27 member states of the European Union agree to create the EFSF Monetary Authority.
I add that it was in April and May of 2010, that crisis arose over both the value of the Euro and the financial stability of European financial institutions, and as a result governance changed. Jolted by a continuing slide in the Euro, soaring sovereign debt bond yields, and soaring credit default swaps, the EU Finance Leaders and State Leaders convened the Eurozone May 2010 Summit and announced European Economic Governance, seigniorage aid for Greece and called for a Monetary Union with seigniorage authority to issue eurobonds, and in so doing they effected a bloodless coup where they waved national sovereignty and in effect created a region of global governance.
IV … Credit seigniors will arise out of a soon coming liquidity evaporation and liquidity crisis.
I believe that soon, out of a liquidity evaporation and a liquidity crisis, stemming from a fast fall in bond and/or stock values, that here in the US a Financial Regulator will be announced who will oversee lending and credit, as well as money market and brokerage accounts. He will be what I call a credit boss or credit seignior who funds economic operations with an emphasis on seeing that the strategic needs of the country are met and that monies for food stamps keeps flowing. I believe the government will become the first, last and only provider of liquidity and money.
I believe that here in the US, the 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 created and serviced mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, and Annaly Capital Management, NLY, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.
As I look at the year-to-date chart of total bonds, BND, and compare it to the Zeroes, ZROZ, and Stocks, VT … BND, ZROZ and VT I see the five percent gain in bonds that came via the flight to safety in US Treasuries; and I see the volatility that was inflicted on stocks by the fall and rise in Euro Yen, that is EUR/JPY, currency trading, coming to rest at a five percent loss in stocks. We are at the most historic point in investment history where the ZROZ are going to fall precipitously, rewarding those long TMV, which is the 300% inverse of the 30 Year US Government Bond as well as rewarding those long TBT, which is 200% inverse of the 30 Year Bond.
When looking at the Direxion 300% inverse ETFs, I believe the Treasury Bear, TMV, Financial Bear, FAZ, and Semiconductor, SOXS, … TMV, FAZ, SOXS, … offer the best short selling opportunities; TMV will provide absolutely stunning rewards.
And I envision that in Europe, a continuing fall in the EUR/JPY from today’s 107.50 to 108.50 area, will result in further stock deflation, seen in the ETF, FEZ, falling below 33.20. Then a liquidity crisis will emerge, where there will not be enough buyers for sellers of stocks as well as bonds, causing small business failures and banks to become sorely decapitalized, resulting in the president of the ECB arising to be an “Eurozone credit seignior” and provider of liquidity to Europe.
I also believe that “framework agreements” will be announced in Europe providing for fiscal federalism, giving a whole new meaning to the term European Economic Governance.
Yes, I foresee a greater fiscal union in Europe.
Fiscal federalism will result in the Eurozone evolving into a region of global governance where national sovereignty will be a concept of a bygone era; and state corporatism will be recognized as sovereign; and austerity as a way of life.
V … The Argentine Seignior: Christina Fernandez de Kirchener
The Economist Magazine in article Happy Go Lucky Christina, features Christina Fernandez de Kirchener. I consider her to be Argentina’s credit seignior.
VI … Today August 27, 2010, was a pivotal day in investment history as the US Government Bonds sold off, as investors called interest rates higher on Ben Bernanke’s remarks in a conference from the state of Wyoming
The world transitioned from “the age of neoliberal credit liquidity” and into ”the age of the end of credit”.
Higher interest rates means less money, higher food prices, stock and bond deflation, economic contraction, political devolution and global austerity. The czars of credit liquidity such as Alan Greenspan, will be replaced by financial regulators and credit seigniors who ration credit.
Kondratieff Winter started August 10, 2010 when the currency traders sold the EUR/JPY, seen in the chart of FXE and FXY, commencing an Elliott Wave 3 down in this investing funding trade sending world stocks, VT, lower to 43.27. ActionForex reported on the week ending August 13, 2010 stating: ”This week’s selloff and the cross-over of Tenkan-Sen below Kijun-Sen have dampened our previous mildly bullish view and price broke below support at 110.02, suggesting the correction from 107.30 has ended at 114.74 earlier, hence consolidation with downside bias is seen for weakness to 109.15/25, a daily close below there would signal recent downtrend has resumed and then weakness to 108.00 would follow but reckon recent low at 107.30 would hold on first testing.”
Significant disinvestment from stocks commenced August 10, 2010, when as the Economist reports the US Federal Reserve announced its decision to reinvest the proceeds of maturing mortgage-backed securities in its portfolio into Treasury bonds.
Today August 27, 2010,, the world transitioned from “the age of credit liquidity” into “the age of end of credit” with the sharp sell off of the US Government Bonds, TLT, which fell to 105.35, causing total bonds, BND, to fall lower to 82.38.
The Federal Reserve’s QE TARP Facility nationalized the banks: it transferred out US Government Bonds, TLT, to recapitalize banks, KBE, and the too big to fail financial institutions, RWW, and accepted in distressed securities, like those Fidelity Capital and Income, FAGIX. Then the banks placed the bonds on reserve which rest in Excess Reserves. I believe it unlikely that the banks will take the monies out of excess reserves. Thus as bond value falls as interest rates rise, the value of Excess Reserves will quickly fall. Furthermore, the Fed’s balance sheet will fall rapidly as it is composed mostly of assets like those in FAGIX. When one looks at the monthly chart of FAGIX, one can obtain a good idea of how rapidly the US Federal Reserve’s Balance Sheet will fall; this will induce a rapid fall in US Treasuries, TLT. We are at the point of maximum systemic risk.
Chart of FAGIX
Chart of TLT
Today, investors repositioned from going long bonds to going short bonds, as the Bernanke statement alarmed bond investors. This caused stocks to rise; the stocks that rose the most were ones that have had the most selling action causing short selling coverage and profit taking; thus giving traders the opportunity to enter short positions on both stocks and debt.
Wealth can longer be preserved by going long either bonds or stocks. Personally, being concerned about liquidity I am invested in gold bullion which are very liquid.
Steven K. Beckner of Market News International in ForexLive article IMF’s Lipsky: Need To Consider New IMF Liquidity Facility, writes that a top International Monetary Fund official suggested Saturday that the IMF needs to play an increasing role as a provider of liquidity in crisis situations.
John Lipsky, first deputy managing director of the IMF, also suggested an increased role for Special Drawing Rights, the Fund’s basket-currency unit as he addressed the Kansas City Federal Reserve Bank’s annual symposium. Lamenting large global financial imbalances and the shortage of dollar liquidity during the mortgage crisis and the more recent sovereign debt crisis, Lipsky said “it may be appropriate to have a standing IMF liquidity facility with well-known access rules.” He said a “systemic crisis prevention mechanism may be appropriate” as well.
An IMF liquidity facility would make credit readily available to all IMF members, rather than loans having to be arranged on an emergency, ad hoc basis, he said. Lipsky maintained that “the ongoing rapid growth of international reserves to some extent reflects the failure of international monetary system to resolve” liquidity needs.
But if countries are going to accumulate massive reserves, Lipsky recommended an “increase in the role of the SDR” — a basket currency unit created by the IMF. “An evolutionary process toward increased SDR use could be feasible and worthwhile,” said Lipsky, adding that it would “expand the pool of assets” available in a crisis. Lipsky also suggested that the IMF should “create more SDRs.”
In addition to enhancing the IMF’s resources and last resort lending role — essentially making it more of a global central bank — Lipsky said the IMF is seeking to play a greater role in coordinating and exercising surveillance over member countries macroeconomic policies, as mandated by the Group of 20. “The IMF’s economic and policy surveillance needs to be more rigorous” and include financial market surveillance, he said, adding that the IMF “should assist effective multilateral coordination.”
Former IMF chief economist Michael Mussa, now a senior fellow at the Peterson Institute of International Finance, pronounced himself “skeptical” that current international monetary arrangements were fundamentally flawed and led to the recent financial crisis. The crisis was “not primarily a problem with the functioning of the international monetary system,” he said. “The problems lie elsewhere.”
For those interested in short selling I provide my list of 18 ETFs to sell short and 12 ETFs to buy long for a debt deflationary bear market.
VI … In the news
The latest sign of trouble came today when Intel Corp. lowered its forecast for the third quarter, saying demand for consumer PCs has been weaker than expected. Because Intel’s microprocessors are used in 80 percent of the world’s PCs, its forecast essentially speaks for the health of the entire PC industry. Plus, its orders are based on how many computers the world’s biggest PC makers expect to make in the coming months, so weak chip sales now could foreshadow weak results to come from those manufacturers.
Barclays Capital analyst Ben Reitzes said another factor could cause PC makers to cut prices: In the past few months, the prices for parts such as hard disk drives and memory have fallen — to their lowest levels of the year in August. That gives PC makers the freedom to lower prices while maintaining profit margins. “This component environment could potentially now allow companies to invest in more aggressive pricing to stimulate demand into next year,” he wrote in a research note Friday.
Intel said it now expects revenue of $10.8 billion to $11.2 billion for the fiscal third quarter, which ends in September. That compares with a previous forecast of $11.2 billion to $12 billion. On average, analysts surveyed by Thomson Reuters had expected $11.5 billion.
Three-quarters of Intel’s revenue comes from its chips and other technologies for PCs. The forecast cut means that PC makers suddenly scaled back or canceled their orders with Intel during the quarter, reflecting the lower demand they’re bracing for in the coming months.
PCs already have low profit margins, and the recession squeezed them further by forcing price cuts to entice shoppers. The strategy worked, but dipping demand could mean that prices will fall even more.
Intel’s warning comes a month after the company reported its biggest quarterly profit in a decade. Intel’s downgrade to its guidance wasn’t entirely a surprise. Many investors simply didn’t believe that Intel would be able to hit the higher numbers because of signals from other PC-industry suppliers that PC sales were collapsing. Those fears were the main reason why Intel’s stock has fallen about 13 percent since Intel issued its original guidance on July 13
Cuba to allow golf course, resort and luxury condo developments and sale of agricultural products by individuals. Will Weissert of the Associated Press reports Havana that Cuba has begun allowing foreign investors to lease government land for up to 99 years, a step toward a future that could be filled with golf courses ringed by luxury villas, beachfront timeshares and vacation homes for well-heeled tourists.
But while overseas developers are cheering, some caution that the communist island has been down this road before, embracing foreign ownership with an eye toward bolstering tourism revenues — only to scrap those reforms when the economy improved and profit margins no longer seemed as important as maintaining state control of commerce.
A measure appearing the following day expanded self-employment, letting Cubans grow and sell small amounts of farm products out of their homes or special kiosks. Large agricultural holdings are state-controlled, but small farmers were already allowed to work their own land. The law will allow more Cubans to do so and let them sell what they produce, but will also make them pay taxes on their profits.
The moves are significant as President Raul Castro promises to scale back the state’s near-total dominance of the economy while attempting to generate new revenue for a government short on cash.
Far more optimistic was Robin Conners, president and CEO of Vancover-based Leisure Canada, which wants to build hotels, villas and two golf courses on a stretch of beach in Jibacoa, 40 miles (64 kilometers) east of Havana. “We see the times are changing, so to speak,” Conners said. The longer leases also mean lower interest rates on international banking mortgages, Conners said. “I think this is huge,” he said by phone while vacationing in Paris.
Investors in Canada, Europe and Asia have been waiting to crack the market for long-term tourism in Cuba, built on visitors who could live part-time on the island instead of just hitting the beach for a few days. The U.S. bars its companies from doing business with Cuba.
Andrew Macdonald, CEO of Britain’s Esencia Hotels and Resorts, said his company had planned to start construction last year on the Carbonera Country Club, a $300 million development outside the resort of Varadero. In addition to an 18-hole golf course, Macdonald’s plan calls for 800 luxury apartments and 100 villas.
The new law makes it clear Cuba is looking to boost profits, saying the step is necessary “for the sustainable development of the country and the international economy.”
While the longer-term leases could reshape international investment in Cuba, meanwhile, allowing more production and sales of agriculture products will likely have far greater impact on ordinary Cubans.
The law marks the first major expansion of self-employment since Castro said in an address to parliament August 1, 2010 that his government would reduce state controls on small businesses and private enterprise — a big deal in a country where about 95 percent of people work for the state.
Cubans already sell fruit, pork, cheese and other items on the sides of highways across the country, fleeing whenever the police happen past. The new measure legalizes such practices by letting Cubans grow whatever they wish and sell it, while bolstering state coffers with new taxes on their earnings.
VIII … Suggested Reading:
Louise Story, David Moss, Yves Smith of Naked Capitalism Does Income Inequality Help Cause Financial Crises
Stock Markets Face A Bloodbath, warns SocGen strategist Albert Edwards in Telegraph article
Disclosure: I am invested in gold bullion