Early in the day some currency traders went long the Yen, FXY, taking it above 119, causing disinvestment from Banks, KBE, and credit services, such as Nelnet, NNI ….. This sent the Russell 2000 Value, IWN, lower ….. Investors took a safe haven response in gold, GLD, which rose to trade above 124. The junior gold mining shares, GDXJ, rose 3.5% ….. Then other currency traders went long the Euro, FXE, sending European Shares, FEZ, European Financials, EUFN, and Spain, EWP, higher ….. Best Buy reported a 60% rise in income which sent Retail, PMR, Small Cap Consumer Discretionary, XLYS, and Semiconductors, XSD higher …. The currency traders also went long the Australian Dollar, FXA, and investment flowed into copper miners, CU, and Australia, EWA … And they went long the Swedish Krona, FXS, causing Sweden, EWD, to rise … Asian shares, DNH, rose on the higher Euro, FXE, and the higher Australian Dollar, FXA … And they went long the Swiss Franc, FXF, which induced Switzerland, EWL, to close up to resistance.
With the spigots of currency liquidity and carry trade liquidity wide open, monies poured into Tin, JJT, Food Commodities, FUD, and the Brazil Small Caps, BRF. The latter are the opposite of the US Small Caps, the Russell 2000, IWM, which are encumbered, by poorly performing US Financials. The Food Commodities, Brazil Small Caps, Switzerland, the Frontier Emerging Market, FRN, Hong Kong, EWH, and the Emerging Market Small Cap Dividend, DGS, have been the destination of investment capital ever since the EU Finance 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. When the global economic downturn comes, which is likely to be very soon, perhaps tomorrow September 15, 2010, the United States will be the first to experience the downturn, as well as the swiftness of the downturn, leaving countries like Peru, EPU, to be last, to experience the severity of debt deflation. America is going to ground zero for hardship and austerity.
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.”
Investment in the Euro, FXE, and the Yen, FXY, and emerging market currencies, CEW, sent the the US Dollar, $USD, and Dollar Bull ETF, UUP, strongly lower.
Needless to say, a higher Yen and lower US dollar continued to propel JYN higher.
There are those who are short the market, and to protect their investment, are committed to buying the Yen, FXY. They will purse a higher yen, until other carry trader investors relent, going long the Euro, FXE, and long the Swedish Krona, FXS, and the Australian Dollar, FXA, and the desired response of lower World Stocks, ACWI, and an S&P, SPY, is achieved. The chart of both, shows an Elliott Wave 2 up being completed; and an Elliott Wave 3-of-3-of-3 waiting to commence. Click on chart of ACWI to enlarge.
I believe that the rise in the Euro, FXE, today, September 14, 2010, to 129.59 will commence a Wave 3 of 3 of 3 Down; with a prior Wave 3 Down on April, 15 2010 at 135.47; and a prior Wave 3 of 3 Down on August 6, 2010, at 132.45. There had to come a definite rise in the Euro for the ultimate Wave 3 Down to commence; I believe that rise came in today.
The strong Euro today carried Junk Bonds, JNK, to a new high.
The chart of the major carry trades show completion, suggesting that a stock market downturn is at hand.
Chart of the AUD/JPY … FXA:FXY
Chart of the EUR/JPY… FXE:FXY
Some say higher interest rates, such as a rising rate on the 30 Year US Government bond, $TYX, heralds the end of a recession. On the contrary, rising interest rates introduce a flattening yield curve which will intensify our entrance into the double dip recession and commence debt deflation of bonds. Chart shows the 30 10 US Government Debt Yield Curve, $TYX:$TNX, to be flattening. It will be a triad of a flattening yield curve, rising credit default swaps, and unwinding yen carry trades that will wipe out fiat assets. That is why I’ve chose to be invested in gold bullion, $GOLD.
The duration on investment grade corporate bonds has fallen from 6.56 years to 6.43 Years as Shannon D. Harrington and Tim Catts of Bloomberg report on September, 13, 2010: “The duration of U.S. investment-grade corporate bonds reached 6.56 years on Aug. 31, the highest since at least 1996, Bank of America Merrill Lynch index data show. The measure, which began the year at 6.2 years, has since fallen back to 6.43. “I would not be applying fresh capital to the long end of the yield curve,” said Chad Morganlander, a money manager at Stifel Nicolaus & Co., which oversees $90 billion. “Any sign of economic vitality, without government assistance, would be deleterious.” Morganlander, who’s based in Florham Park, New Jersey, said he’s buying investment-grade securities that mature in five years or less. The chart of BLV shows “peak credit” came to the longer out high grade corporate bonds on August 26, 2010 at 87.25.
I relate that Fannie Mae has announced a policy of loss mitigation which imperils the Banking industry’s shadow inventory of homes and the squatters entitlement of payment free living.
IrvineRenter in article Government Expedites Foreclosures, Threatens Banking Cartel writes: “The end of the banking cartel is being signaled by coordinated efforts at a variety of governmental agencies to expedite the foreclosure liquidation.”
IrvineRenter references the John Prior REOInsider article FDIC sells another $760 million in REO which describes the FDIC’s Public Private Investment Partnership with Mariner Real Estate Management, MREM, a real estate investment and management firm based in Kansas. MREM is part of Mariner Holdings, a $7 billion wealth and asset management company. The portfolio includes roughly 1,100 loans and properties from 20 banks the FDIC has taken into receivership. The properties are located across 24 states. Earlier in August, the FDIC sold a similar $1.7 billion portfolio to PMO Loan Acquisition Venture, a partnership of other investment firms.
IrvineRenter relates: “These guys are going to keep what cash-flows and liquidate the rest.” I state that the relationship that the FDIC has with asset management companies is one of state corporatism; capitalism is an economic way of life of a bygone era.
IrvineRenter continues: “One of the barriers to liquidation is the write downs required by “solvent” banks (we all know most of them are not solvent). A huge problem within the GSE portfolios is that the services of delinquent loans are intentionally delaying foreclosure when the parent bank holds the second mortgage.The GSEs are going to start charging servicers who fail to properly follow their loss mitigation procedures” as related in Al Yoon Reuters article Fannie Mae Gets Tougher On Mortgage Servicers: “A compensatory fee not only compensates Fannie Mae for damages but also emphasizes the importance placed on a particular aspect of a servicer’s performance,” Fannie Mae said in an announcement to servicers. “In some cases, a compensatory fee will relate to the action a servicer took, or failed to take, in handling a specific mortgage loan,” it said. Fees will be applied in various instances, including failure to provide access to records and delays on completing foreclosures and selling foreclosed properties.”
IrvineRenter states: “These comments are aimed directly at the practice of avoiding foreclosure on properties that have second mortgages on the servicers books. This is the primary reason a service fails to foreclose and dispose in a timely manner.
The Reuters article continues: “More aggressive action by mortgage servicers could help ease burdens on Fannie Mae, whose losses on loans it guarantees or owns forced it into regulator’s hands in September 2008. It has required some $86 billion in taxpayer funds since then. Fannie Mae, which uses hundreds of servicers, did not specify any that might have prompted the announcement but has identified rising stress at the firms. A spokeswoman declined to comment beyond the announcement. “The growth in the number of delinquent loans on their books of business may negatively affect the ability of these counterparties to continue to meet their obligations to us in the future,” Fannie Mae said in its quarterly filing with the Securities and Exchange Commission last month.”
IrvineRenter relates: “If the GSEs are not forced to back down from this policy due to pressure from lenders, this change in policy and incentives will signal the end of the banking cartel because this will push product on the market whether or not the market is capable of absorbing it. That will push prices down.“
My belief is that the GSE loss mitigation policy will push prices down and extinguish bank capital as short selling and credit default swaps will quickly and progressively pressure the capital of banks downward, because they have a legitimate claim that the banks will now be taking losses on foreclosed properties that are pushed out of shadow inventory. The GSE announced policy of loss mitigation and loan management is the antithesis of FASB 157; it will effectively extinguish banks and transform them into property leasing organizations. Furthermore in addition falling bank, KBE, prices, and I expect PowerShares Real Estate, PSR, and Residential Real Estate, REZ, to fall. It’s the opportune time to sell them short as well as ProShares Ultra Real Estate, URE, and Direxion, DRN,
The GSEs loss mitigation policy announcement, documents that we have passed from the age of entitlement to mark property at manager’s best estimate, to the age of administrative announcement where property is marked at market. And, we have passed from the age of entitlement to living payment free, to the age of austerity.
In this new age of Government Administration, Government Administrators, that is Government Ministers, announce economic, banking, lending, housing, and investment policy; and the people and businesses follow …. “there is the new matrix” … “we ain’t in Kansas no more”.
Volatility is oversold, it is soon going to be time to go long, VXX.
Disclosure: I am invested in gold bullion