Today, October 1, 2010, the currency traders took the Euro, FXE, strongly higher causing Gold, GLD, Oil, UCO, Tin, JJT, Silver, SLV, Metal Manufacturing, XME, Timber, CUT, Copper Miners, CU, and BHP, to rise significantly. Silver, SLV, has rocketed 13% in the last month. The chart of many ETFs, such as Austria, EWO, show ending diagonal triangle patterns; and the chart of Base Metals, DBB, shows a rising and darkened hanging man candlestick at the top of an ascending wedge suggesting a top in the current rally.
Bloomberg reports Emerging-Market Stock Inflows Rise to Seven-Week High. And, today that trend as money flowed strongly out of the US Dollar, $USD, and into the Indian Rupe, INR, the Brazilian Real, BZF, and emerging market currencies, CEW, causing India, INP, India Earnings, EPI, Singapore, EWS, Brazil, EWZ, Emerging Markets, EEM, Emerging Markets Small Cap Dividends, DGS, as well as Frontier Markets, FRN, Peru, EPU, Indonesia, IDX, and Thailand, THD, to rise strongly.
A rising Euro Yen carry trade, the EUR/JPY, seen in FXE:FXY, beginning with the September 15, 2010 intervention by the Bank of Japan in selling the Yen, FXE, has started competitive currency deflation. The first casualty of currency trade debasement is the US Dollar, $USD, which closed at 78.09.
HedgeHogsNet provides today’s chart of the EUR/JPY at 114.75
Chart of the US Dollar, $USD
The onset of competitive currency deflation will induce a sell off in global stock market, ACWI
US stocks, such as the Russell 2000, IWM, Nanotechnology, PXN, Wireless Holders, WMH, Semiconductors, SMH, Retailers, RTH, Solar, TAN, Nasdaq Internet, PNQI, Dow Jones Internet, FDN, Home Builders, ITB, Tax Managed Buy Write Opportunities, ETW, Nasdaq Biotechnology, IBB, US Real Estate, PSR, Industrial and Office Real Estate, FIO, Software, SWH, etc. falling rapidly, possibly before earnings reporting season begins September 7, 2010 as Tyler Durden
relates: “In this week's chartology from David Kostin, the Goldman strategist focuses on two key topics most pertinent to his client discussions: (1) The path of the US economy; and (2) whether profit margins will continue to establish new record highs. Kostin summarizes the divergence in views on the record corporate profitability (the micro bullish indicator) as follows: "No common ground exists regarding the outlook for profit margins.”
The ratio of small cap value shares relative to small cap growth shares ... RZV:RZG Daily ... confirms that competitive currency devaluation by currency traders is underway.
The ratio of the Russell 2000, IWM, compared to banks, KBE ... IWM:KBE ... reflects that the small cap US companies have been traded up to near high historic levels relative to that which sustains their existence. Soon it will not be Freddie On Elm Street, rather it will be Freddie On Wall Street, where the blood will flow till stock value is exhausted, as 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 Fed may announce QE 2 on November 3, 2010. If it does, it will be even more gold inflationary. Tyler Durden in article ... Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame ... communicates that fiat asset expansion is possible if the Fed does come out with a surprise QE 2.
Yes, QE 2 may come November 3, 2010, as the Federal Reserve may announce a plan to buy US Treasuries. The Fed may simply print Dollars and buy US Government Debt, specifically the short term Treasuries, SHY, and IEF, but not TLT, or ZROZ to prevent a deflationary collapse. This of course would send the value of the US Dollar, $USD, plummeting, and food commodities, FUD, and gold higher.
Gold, $GOLD, traded up today on the higher Euro, FXE, which closed at 137.25, and on the expectation of QE2, to close at 1319. This as the Yen, FXY, has crept back up through its use in currency pair trading to pre-intervention levels of 118.80. Yoshiaki Nohara and Ron Harui of Bloomberg report on October 1, 2010: “Japan sold 2.12 trillion yen ($25bn) in the month through Sept. 28, as the nation attempted to weaken its currency”. Tyler Durden provides chart of the USD/JPY which traded down to 83.24, moving the JYN, up to 70.83, as Bloomberg relates that gold usually moves inversely to the greenback, and holdings of the metal in exchange-traded products are at an all-time high.
In today’s news:
The New York Times reports: Cash-Strapped Spain Struggles With High Cost of Power: “On one side, angry coal miners are striking to force the government to save their jobs from a torrent of inexpensive imports. On another, the solar power industry, which was once booming, complains that it is being crippled by the mere prospect of an end to generous state subsidies. The natural gas and nuclear industries are having their own problems. Meanwhile, the shortfall accumulated since 2000 between the cost of power generation in Spain and what regulated rates bring in is expected to reach 20 billion euros, or $26.7 billion, by the end of the year — a bill the government, with its ailing public finances, can no longer afford. A new energy strategy to raise self-sufficiency at an affordable cost was to be delivered before the summer break. But the government, which is aiming to erase the tariff deficit by 2013, has not yet presented any sort of plan. Critics say that in trying to please everyone, Prime Minister Jose Luis Rodriguez Zapatero is pursuing conflicting goals.” Chart of Spain, EWP.
EuroIntelligence reports: “The Spanish finance minister Salgado introduced the budget for 2011 in parliament yesterday. El Pais gives some more details on the budget: non-financial expenditures are to fall by 7.9%, 33% cutbacks in investment and 40% in infrastructure, revenues to rise through improved tax collection (5.7%) and increased taxes (6.7%). Three of every five dollars is devoted to social expenditure, provisions for interest payments exceeds staff salary payments. One change with respect to the budget presented earlier is that the government had also to revise upwards its unemployment figures 20% for this year and 19.3% for next year. Deliberation in parliament will go into November, then if the senate does not veto, final adoption is scheduled for 21 and 23 December.”
EuroIntelligence reports: Sebastian Dullien and Daniela Scharzer write in their blog Eurozone watch that the European Commission’s proposals to deal with macroeconomic imbalances were widely ignored in the press. “If the proposal is passed, for the first time, macroeconomic imbalances will be explicitly included into a formal surveillance process, and fines of 0.1 percent of GDP might be levied on countries which prove uncooperative in resolving these imbalances. They argue that this new element could be crucial for preventing future debt crises in the euro area. If one applied the rules retroactively, the large current accounts imbalances would have been an official part of the policy framework.”
Shaun Richards reports: “Ireland’s national debt to GDP ratio this is now estimated to cross the 100% barrier. If we take the cost of funding at say 6% we can see a sort of trap here. Ireland will have to pay 6% of her GDP per year just to stand still if we consider this to be an interest-only mortgage and ignore any repayment. This is the danger of letting interest rates rise whilst governments dither and one of the reasons I suggested several weeks ago that she should call in the IMF/EU. As you know I consider GNP to be at least as important and for the second quarter of 2010 it was 81% of GDP (CSO of Ireland figures).Accordingly my maths can now be altered to 7.4% of GNP for an interest-only mortgage. I praised the Central Bank Governor’s report yesterday as it looked credible and markets seemed to think the same. If we look at Ireland’s ten-year government bond yield it dipped by around 0.1% to 6.63% so better but still grim. If we use the alternative measure as to how far out she can fund himself more cheaply than applying for European aid we edged out from 2013 to 2014. So overall there was a short-term gain and a reward for some honesty.Many will wonder and I am one of them that such honesty if it had arrived earlier would have been likely to leave Ireland in a better position than where she is now. Chart of Ireland, EIRL. Just to add to the situation this mornings Purchasing Managers Index, PMI, came in at 48.3 on a scale where a number below 50 indicates contraction.This is the first time in seven months that the reading has dipped below 50. Also input costs continued to rise sharply.”
MarketWatch reports: ISM index falls to 54.4 in September from 56.3 this as Bloomberg reports: “China’s manufacturing expanded at the fastest pace in four months in September; the purchasing managers’ index rose to 53.8 from 51.7 in August.”
Tyler Durden relates: “Meredith Whitney may be proven right that the municipal bankruptcies are about to make a full frontal appearance. Harrisburg has just requested a last minute rescue financing from the state Pennsylvania, as the alternative would be insolvency. Chart of municipal bonds” MUB.
Institutional Risk Analysis reports on Municipal Debt in the article: Citibank + SunTrust? Herbert Gold on the Great Coming Contraction in State Finances
Christopher S. Rugaber of the Associated Press reports: 40 States Bank On Rising Tax Revenue In 2011.
Chris Wiles writes on the Bennie Put: “Last week the Federal Reserve could not have been clearer in its Open Market Committee Statement that it wants more inflation. “Measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability," the statement said. By saying that the inflation rate is too low the Fed is signaling that it wants more inflation to hopefully reduce unemployment. Is it any wonder that gold has moved above $1,300 per ounce and the dollar continues to fall. Back in the day when Alan Greenspan was in charge, we had what was known as the Greenspan Put; whenever the economy or the markets got into trouble Greenspan rode to the rescue by cutting rates. This Greenspan Put led to asset inflation; real estate, bonds, equities, and commodities. It ended badly. Fast forward to today and we have the Bennie Put. Unfortunately for Ben he doesn't have the luxury of cutting rates since they are already at zero. No, instead his only real alternative is quantitative easing (QE2), printing money to buy treasuries, mortgages, or other assets.“
Tyler Durden relates: FRBNY's Bill Dudley: "I Conclude That Further Action Is Likely To Be Warranted". “Former Goldman chief economist and current FRBNY and PPT President Bill Dudley has guaranteed QE2: "I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long." ... The market has priced in QE 2 by driving the $UST2Y down; suggesting that the US Government will purchase the short duration debt, SHY, and possibly the intermediate term debt, IEF; but not the longer duration, TLT, or ZROZ. This week the 30:10 US sovereign debt yield curve: $TYX:$TNX, closed at 1.473, near its all time high. Suggesting that further steepening is unlikely. The coming flattening of the yield curve will be decimating to the longer out government bonds. We are at peak debt, that is peak credit, as is seen in the weekly Bonds, BND, closing at 82.37. We are at “peak investment liquidity” as seen in the chart of Junk Bonds, JNK, closing at 39.85. And the parabolic rise in the energy partnership ETN, JPMorgan Alerian MLP, AMJ, closing at 34.07 suggests “peak liquidity” as well.
The S&P, SPY closed at 114.6 today, October 1, 2010 .... Back on September 26, 2008, it crashed from 115.99 to 106.90 the next day. At that time, the yen carry trade, the EUR/JPY, FXE:FXY, manifested a dark cloud cover candlestick in its daily chart and a gravestone doji in its weekly chart ... FXE:FXY 9-24-2008 Daily and FXE:FXY 9-24-2008 Weekly.
Ariel of ChartLines writes of the current S&P, $SPX: “Negative divergences cropping up as stock market tests time & price symmetry on Bradley turn date window If you're uber-bearish then you're counting the rise we're seeing now as the C wave of a larger ABC "second wave up" that will roll over into a wave 3 down (maybe even a Prechterian wave 3 of 3!). I'm not really thinking that. Still, I am positioning defensively and look at the negative divergence I've marked on the $SPX chart.”
NiftyCharts relates: “S&P 500 Weekly chart has given a spinning top. Spinning to at the top of the trend is a sign of indecision. The colour of the candle is opposite to the prevailing trend of the market. “
ElliottWaveTraderIndex asks: Market Top?
IrvineRenter relates: The government can't seem to accept the fact that its policies over the last several years were a failure. They took good renters and made them into bad homeowners. People can either make consistent monthly payments or they can't. If they can't they shouldn't become homeowners. Years of experience has shown that about 64% home ownership rate is stable. The increase from 1994 to 2006 was largely due to subprime lending, and as it turns out, many of those people shouldn't have been given title to real estate.”
Tyler Durden relates: Title Companies Stop Insuring Foreclosed Properties. “Fidelity National has told lenders to halt foreclosures, and to stop sales of bank owned properties. The reason, and this should be no surprise to anyone, is "possible document flaws." Fidelity is merely the next of, well, all. And while the WaPo reports that the John Walsh, acting director of the OCC has reached out to seven lenders including Chase, Bank of America, Wells Fargo, Citi, PNC Bank, U.S. Bank and HSBC, to review their foreclosure processes in light of the Ally and JPM Chase situations, the news of the day comes from the NYT that Old Republic National Title has stopped insuring title to Ally-foreclosed properties "until further notice." From the NYT: As more defaulting homeowners become aware of the lenders’ problems, they are expected to hire lawyers and challenge the proceedings against them. And if completed foreclosures were not properly done, families who bought the troubled homes could be vulnerable to claims by the former owners. Apparently alarmed about such a possibility, one of the major title insurance companies, Old Republic National Title, has sent a bulletin to agents saying that “until further notice” it would not insure title to properties foreclosed upon by GMAC Mortgage, the country’s fourth-largest home lender and one of the two big lenders at the center of the current controversy. GMAC declined to comment, and Old Republic representatives did not return calls. As we have long expected, this merely means that as the foreclosure pipeline gets clogged beyond repair, and as mortgage losses accumulate at an exponentially growing pace, stocks of financial companies will likely surge as very soon their survival will become a binary bet on TARP 2.” ... I provide the chart of Mortgage Finance, KME.
Kathleen M. Howley of Bloomberg reports: “U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership. ‘Defective documentation has created millions of blighted titles that will plague the nation for the next decade,’ said Richard Kessler, an attorney in Sarasota, Florida.”
HousingWire reports: Moody's considering downgrades on billions in CMBS
Japan sees on going deflation as Bloomberg reports Japan Consumer Prices Fell 1% In August As Yen Strengthens, Economy Slows. This as the Nikkei 225, ^N225, closed 1.5% lower this week at 9404. And the ProShares 200% ETF of Japan, EZJ, closed lower on the week.
BBC reports: Ecuador Declares State Of emergency; Dubs Protests An Attempted Coup d'état.
Financial Times reports Brazilian Finance Minister Guido Mantega said this week that a “global currency war" has broken out ... ‘We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness”. The global currency crisis of 2010 and 2011 is at hand, and the United States, with its Russell 2000 small cap companies, highly dependent upon credit liquidity and bank lending to meet payroll, buy inventory and cut accounts payable checks, will be ground zero for austerity and adversity. During 2010 and 2011, the biggest topic will be how countries are competing to make their currencies less valuable, not more valuable and I believe that Ben Bernanke, currently at the helm of our currency, will choose to inflate the coming crisis away by printing money and buying US Treasuries.
Kate Randall of WSWS.org reports US Medicaid Enrollment Climbs To 48 Million and describes the moral hazard and limited benefits of Obamacare.
Emre Peker of Bloomberg reports: “Speculative-grade companies are borrowing to finance dividend payments to their private-equity owners at the fastest rate since before the credit crisis, taking advantage of investor demand for high relative yields. Banks arranged or started marketing $8.77 billion of high- risk, high-yield loans slated for shareholder payouts this quarter, bringing 2010’s total to $17.1 billion, more than five times the amount of the past two years combined.”
Isabell Witt and Karen Eeuwens of Bloomberg report: “Private-equity firms are borrowing the most in Europe since the collapse of Lehman … Leveraged buyout loans surged to $8 billion in the third quarter, the most in any three-month period since September 2008 … Strengthening global demand helped the region’s economy expand 1% in the second quarter, the fastest pace in four years. The default rate for leveraged borrowers declined to 5% in August from 12.3% a year ago, Moodys said.”
Keiko Ujikane and Jarrett Banks of Bloomberg report: “China’s ‘de facto’ ban on exports to Japan of rare earths, a group of 17 metals used in weapons, hybrid vehicles and laptop computers, may have a ‘big impact’ on Japan’s economy, Japanese Economy Minister Banri Kaieda said.”
Concluding remarks.
The US Dollar has fallen, perhaps it will be the loss leader meaning that it will take the lead as currency debasement as carry trade disinvestment really gets underway. One would think that export powers such as Germany Japan, South Korean, Taiwan, Malaysia, and Thailand would have been hurt by the falling dollar, but its been carry trade investment that has capitalized manufacturing technology in these countries and the jobs that were once in the US have been established world wide and will not be coming back, as the cost of labor is significantly lower overseas. Furthermore, Germany was able to largely ride out the global economic downturn by keeping the troubled Landesbanken Shadow Banking System under wraps and by having as the New York Times documents: “strong employment protection legislation. This has been supplemented with a “short-time work scheme,” which provides subsidies to employers who reduce workers’ hours rather than laying them off.” Also Germany did not have the housing bubble like we had.
Through waves of carry trade investing, and waves of free trade legislation, such as CAFTA and NAFTA, as well as through the announcement of the Security And Prosperity Partnership Framework Agreement, globalization has effected the loss of national sovereignty and the rise of global governance manifesting in regions of global government. Some globalist leaders deny the facts of a bloodless financial, economic and political coup: Geithner Says No Threat of Trade War With China or World Currency Conflict. But others communicate the call of the Club of Rome made in 1974 for ten regions of global governance; three have emerged so far. The North American Continent was announced at Baylor Baptist University by the leaders, Vincent Fox, Paul Martin and George Bush, with the Security and Prosperity Partnership of North America on March 23, 2005. The other two are the Asean Trading Group and the Eurozone. Flash News Today relates The Hindu report India To Participate In Asia-Europe Dialogue: On Monday, October 4, the leaders will convene “the eighth Asia Europe Meeting (ASEM) Summit in Brussels and will address “priority number one” — moving towards a declaration calling for more effective global financial and economic governance. This will be the first international outing for recently elected Australian Prime Minister Julia Gillard. Briefing news persons here on Friday, Secretary (East) Latha Reddy underlined the importance of the meeting by pointing out that this was the only forum for exclusive dialogue between Asia and Europe. The rationale [for setting up ASEM] is to balance the relationship between the three engines of growth. The United States and Europe have strong transatlantic links, while the U.S. talks to Asia through the Asia Pacific Economic Community. This was the missing link. The main theme of the meeting will be the international economic and financial crisis. It will also discuss climate change and ways to strengthen the multilateral trade system. The meeting will be chaired by President of the European Council Herman Van Rompuy.” I’ve written many times in the EconomicReview Journal that we no longer live in the age of sovereign nation states. National sovereignty is a principle of a bygone era.
In wrote in article, The Age Of Government Economic Administration Commenced The First Week Of September 2010, With The Fannie Mae Policy Announcement Of Loss Mitigation And The Ecofin Announcement Of An EU Financial Supervision Framework Agreement: September 1, 2010 marked the transition from “the age of neoliberal Milton Friedman and Alan Greenspan based credit liquidity” to “the age of the end of credit” ... And September 1, 2010, also marked ”the end of entitlements” and “the beginning of world-wide austerity”.
The Age of Government Economic Administration is seen in the Mike Mish Shedlock report that James Grant, editor of Grant's Interest Rate Observer, talks about the overhaul of U.S. financial regulation, and says we are on the road to Socialization of Credit. And relates that the US Government is providing credit seigniorage with Federal Guarantees for small auto dealer floorplan loans. “Inquiring minds are reading Bill aimed at giving auto dealers more credit is signed into law The federal government is keeping up its effort to stimulate the economy, while the economy is keeping up its resistance to those efforts. The latest effort to prod spending comes in a bill that, among other things, increases the federal guarantee for small dealer floorplan loans from the Small Business Administration from $2 million to $5 million. Part of the bill would also reinstate fee waivers that ran out in May, meaning loan applicants could save more than $50,000 in fess alone on a $2 million loan. The bill passed the House and Senate along party lines and President Obama signed it into law yesterday afternoon. This is expected to be the last jobs bill to leave Congress before the midterm elections in November.”
Also of note, The US Treasury reports that Timothy Geither has assumed duties as Federal Financial Regulator: Treasury Secretary Geithner, in his capacity as chairperson of the Financial Stability Oversight Council, will host the Council’s first meeting at the U.S. Department of the Treasury. The Council will provide, for the first time, comprehensive oversight over the stability of our nation’s financial system. It is charged with identifying threats to the financial stability of the United States; promoting market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the government will shield them from losses in the event of failure; and responding to emerging risks to the stability of the United States financial system. A session of the meeting will be open to the press, and will be streamed live from the Treasury Department’s website.
The End Of Entitlements is seen in the Mike Mish Shedlock report: Stimulus is running out and states will cut employees: “The layoff process for public employees in New York is so complicated, convoluted and potentially case-specific that it will likely take a large cadre of lawyers, civil service experts and others to manage. A clerk in the Department of Environmental Conservation could conceivably "bump" or displace a less-senior person in, say the Department of Health, although that depends on the labor contract and precise job title involved. Also, job titles from which people are being laid off generally have to be abolished, but that doesn't stop cross-agency bumping.”
Debt deflation will be actively reducing stock wealth. And the yield curve will be flattening reducing bond wealth. So total fiat wealth destruction will be getting actively underway, all thanks to the currency traders and government deficit spending.
The age of fiat wealth growth, that came through Milton Friedman, neoliberal economic policies, of “free to choose” investing and “floating currencies”, is over and done.
I see the day coming when the well connected will have an federal entitlement to credit, which will come through the Credit Seignior. At Jackson Hole, Fed chairman Bernanke remarked: “Central bankers alone cannot solve the world’s economic problems.”
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.
This person 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/Renting 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. NeuroSoftware provides The Real Estate Channel report The 7-Million Housing Shadow Inventory Could Trigger A Price Avalanche; but this article was written before the Foreclosure Shutoff; I believe there will be no major push for sales; but rather, after a time of market congestion, then The Financial Regulator will announce a program of REO leasing and renting.
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, and the mortgage bond ETF, MBB, tumble in value.
And I envision that in Europe, with a fall in the EUR/JPY from 114.75, there will be stock deflation, with the European Shares, VGK, falling below 49, and European Financials, EUFN, falling below 22.50.
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.
Chart of EUR/JPY courtesy of Action Forex.
I believe that Timothy Geithner or Elizabeth Warren, may be called upon in time of crisis, to assume the role of Financial Regulator overseeing investment, banking, lending, credit, seigniorage and house leasing as his experience and her many articles would qualify either of them for such a role in the US. As to who might arise in Europe as Seignior, I have no idea.
Disclosure: I am invested in gold bullion
Bloomberg reports Emerging-Market Stock Inflows Rise to Seven-Week High. And, today that trend as money flowed strongly out of the US Dollar, $USD, and into the Indian Rupe, INR, the Brazilian Real, BZF, and emerging market currencies, CEW, causing India, INP, India Earnings, EPI, Singapore, EWS, Brazil, EWZ, Emerging Markets, EEM, Emerging Markets Small Cap Dividends, DGS, as well as Frontier Markets, FRN, Peru, EPU, Indonesia, IDX, and Thailand, THD, to rise strongly.
A rising Euro Yen carry trade, the EUR/JPY, seen in FXE:FXY, beginning with the September 15, 2010 intervention by the Bank of Japan in selling the Yen, FXE, has started competitive currency deflation. The first casualty of currency trade debasement is the US Dollar, $USD, which closed at 78.09.
HedgeHogsNet provides today’s chart of the EUR/JPY at 114.75
Chart of the US Dollar, $USD
The onset of competitive currency deflation will induce a sell off in global stock market, ACWI
US stocks, such as the Russell 2000, IWM, Nanotechnology, PXN, Wireless Holders, WMH, Semiconductors, SMH, Retailers, RTH, Solar, TAN, Nasdaq Internet, PNQI, Dow Jones Internet, FDN, Home Builders, ITB, Tax Managed Buy Write Opportunities, ETW, Nasdaq Biotechnology, IBB, US Real Estate, PSR, Industrial and Office Real Estate, FIO, Software, SWH, etc. falling rapidly, possibly before earnings reporting season begins September 7, 2010 as Tyler Durden
relates: “In this week's chartology from David Kostin, the Goldman strategist focuses on two key topics most pertinent to his client discussions: (1) The path of the US economy; and (2) whether profit margins will continue to establish new record highs. Kostin summarizes the divergence in views on the record corporate profitability (the micro bullish indicator) as follows: "No common ground exists regarding the outlook for profit margins.”
The ratio of small cap value shares relative to small cap growth shares ... RZV:RZG Daily ... confirms that competitive currency devaluation by currency traders is underway.
The ratio of the Russell 2000, IWM, compared to banks, KBE ... IWM:KBE ... reflects that the small cap US companies have been traded up to near high historic levels relative to that which sustains their existence. Soon it will not be Freddie On Elm Street, rather it will be Freddie On Wall Street, where the blood will flow till stock value is exhausted, as 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 Fed may announce QE 2 on November 3, 2010. If it does, it will be even more gold inflationary. Tyler Durden in article ... Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame ... communicates that fiat asset expansion is possible if the Fed does come out with a surprise QE 2.
Yes, QE 2 may come November 3, 2010, as the Federal Reserve may announce a plan to buy US Treasuries. The Fed may simply print Dollars and buy US Government Debt, specifically the short term Treasuries, SHY, and IEF, but not TLT, or ZROZ to prevent a deflationary collapse. This of course would send the value of the US Dollar, $USD, plummeting, and food commodities, FUD, and gold higher.
Gold, $GOLD, traded up today on the higher Euro, FXE, which closed at 137.25, and on the expectation of QE2, to close at 1319. This as the Yen, FXY, has crept back up through its use in currency pair trading to pre-intervention levels of 118.80. Yoshiaki Nohara and Ron Harui of Bloomberg report on October 1, 2010: “Japan sold 2.12 trillion yen ($25bn) in the month through Sept. 28, as the nation attempted to weaken its currency”. Tyler Durden provides chart of the USD/JPY which traded down to 83.24, moving the JYN, up to 70.83, as Bloomberg relates that gold usually moves inversely to the greenback, and holdings of the metal in exchange-traded products are at an all-time high.
In today’s news:
The New York Times reports: Cash-Strapped Spain Struggles With High Cost of Power: “On one side, angry coal miners are striking to force the government to save their jobs from a torrent of inexpensive imports. On another, the solar power industry, which was once booming, complains that it is being crippled by the mere prospect of an end to generous state subsidies. The natural gas and nuclear industries are having their own problems. Meanwhile, the shortfall accumulated since 2000 between the cost of power generation in Spain and what regulated rates bring in is expected to reach 20 billion euros, or $26.7 billion, by the end of the year — a bill the government, with its ailing public finances, can no longer afford. A new energy strategy to raise self-sufficiency at an affordable cost was to be delivered before the summer break. But the government, which is aiming to erase the tariff deficit by 2013, has not yet presented any sort of plan. Critics say that in trying to please everyone, Prime Minister Jose Luis Rodriguez Zapatero is pursuing conflicting goals.” Chart of Spain, EWP.
EuroIntelligence reports: “The Spanish finance minister Salgado introduced the budget for 2011 in parliament yesterday. El Pais gives some more details on the budget: non-financial expenditures are to fall by 7.9%, 33% cutbacks in investment and 40% in infrastructure, revenues to rise through improved tax collection (5.7%) and increased taxes (6.7%). Three of every five dollars is devoted to social expenditure, provisions for interest payments exceeds staff salary payments. One change with respect to the budget presented earlier is that the government had also to revise upwards its unemployment figures 20% for this year and 19.3% for next year. Deliberation in parliament will go into November, then if the senate does not veto, final adoption is scheduled for 21 and 23 December.”
EuroIntelligence reports: Sebastian Dullien and Daniela Scharzer write in their blog Eurozone watch that the European Commission’s proposals to deal with macroeconomic imbalances were widely ignored in the press. “If the proposal is passed, for the first time, macroeconomic imbalances will be explicitly included into a formal surveillance process, and fines of 0.1 percent of GDP might be levied on countries which prove uncooperative in resolving these imbalances. They argue that this new element could be crucial for preventing future debt crises in the euro area. If one applied the rules retroactively, the large current accounts imbalances would have been an official part of the policy framework.”
Shaun Richards reports: “Ireland’s national debt to GDP ratio this is now estimated to cross the 100% barrier. If we take the cost of funding at say 6% we can see a sort of trap here. Ireland will have to pay 6% of her GDP per year just to stand still if we consider this to be an interest-only mortgage and ignore any repayment. This is the danger of letting interest rates rise whilst governments dither and one of the reasons I suggested several weeks ago that she should call in the IMF/EU. As you know I consider GNP to be at least as important and for the second quarter of 2010 it was 81% of GDP (CSO of Ireland figures).Accordingly my maths can now be altered to 7.4% of GNP for an interest-only mortgage. I praised the Central Bank Governor’s report yesterday as it looked credible and markets seemed to think the same. If we look at Ireland’s ten-year government bond yield it dipped by around 0.1% to 6.63% so better but still grim. If we use the alternative measure as to how far out she can fund himself more cheaply than applying for European aid we edged out from 2013 to 2014. So overall there was a short-term gain and a reward for some honesty.Many will wonder and I am one of them that such honesty if it had arrived earlier would have been likely to leave Ireland in a better position than where she is now. Chart of Ireland, EIRL. Just to add to the situation this mornings Purchasing Managers Index, PMI, came in at 48.3 on a scale where a number below 50 indicates contraction.This is the first time in seven months that the reading has dipped below 50. Also input costs continued to rise sharply.”
MarketWatch reports: ISM index falls to 54.4 in September from 56.3 this as Bloomberg reports: “China’s manufacturing expanded at the fastest pace in four months in September; the purchasing managers’ index rose to 53.8 from 51.7 in August.”
Tyler Durden relates: “Meredith Whitney may be proven right that the municipal bankruptcies are about to make a full frontal appearance. Harrisburg has just requested a last minute rescue financing from the state Pennsylvania, as the alternative would be insolvency. Chart of municipal bonds” MUB.
Institutional Risk Analysis reports on Municipal Debt in the article: Citibank + SunTrust? Herbert Gold on the Great Coming Contraction in State Finances
Christopher S. Rugaber of the Associated Press reports: 40 States Bank On Rising Tax Revenue In 2011.
Chris Wiles writes on the Bennie Put: “Last week the Federal Reserve could not have been clearer in its Open Market Committee Statement that it wants more inflation. “Measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability," the statement said. By saying that the inflation rate is too low the Fed is signaling that it wants more inflation to hopefully reduce unemployment. Is it any wonder that gold has moved above $1,300 per ounce and the dollar continues to fall. Back in the day when Alan Greenspan was in charge, we had what was known as the Greenspan Put; whenever the economy or the markets got into trouble Greenspan rode to the rescue by cutting rates. This Greenspan Put led to asset inflation; real estate, bonds, equities, and commodities. It ended badly. Fast forward to today and we have the Bennie Put. Unfortunately for Ben he doesn't have the luxury of cutting rates since they are already at zero. No, instead his only real alternative is quantitative easing (QE2), printing money to buy treasuries, mortgages, or other assets.“
Tyler Durden relates: FRBNY's Bill Dudley: "I Conclude That Further Action Is Likely To Be Warranted". “Former Goldman chief economist and current FRBNY and PPT President Bill Dudley has guaranteed QE2: "I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long." ... The market has priced in QE 2 by driving the $UST2Y down; suggesting that the US Government will purchase the short duration debt, SHY, and possibly the intermediate term debt, IEF; but not the longer duration, TLT, or ZROZ. This week the 30:10 US sovereign debt yield curve: $TYX:$TNX, closed at 1.473, near its all time high. Suggesting that further steepening is unlikely. The coming flattening of the yield curve will be decimating to the longer out government bonds. We are at peak debt, that is peak credit, as is seen in the weekly Bonds, BND, closing at 82.37. We are at “peak investment liquidity” as seen in the chart of Junk Bonds, JNK, closing at 39.85. And the parabolic rise in the energy partnership ETN, JPMorgan Alerian MLP, AMJ, closing at 34.07 suggests “peak liquidity” as well.
The S&P, SPY closed at 114.6 today, October 1, 2010 .... Back on September 26, 2008, it crashed from 115.99 to 106.90 the next day. At that time, the yen carry trade, the EUR/JPY, FXE:FXY, manifested a dark cloud cover candlestick in its daily chart and a gravestone doji in its weekly chart ... FXE:FXY 9-24-2008 Daily and FXE:FXY 9-24-2008 Weekly.
Ariel of ChartLines writes of the current S&P, $SPX: “Negative divergences cropping up as stock market tests time & price symmetry on Bradley turn date window If you're uber-bearish then you're counting the rise we're seeing now as the C wave of a larger ABC "second wave up" that will roll over into a wave 3 down (maybe even a Prechterian wave 3 of 3!). I'm not really thinking that. Still, I am positioning defensively and look at the negative divergence I've marked on the $SPX chart.”
NiftyCharts relates: “S&P 500 Weekly chart has given a spinning top. Spinning to at the top of the trend is a sign of indecision. The colour of the candle is opposite to the prevailing trend of the market. “
ElliottWaveTraderIndex asks: Market Top?
IrvineRenter relates: The government can't seem to accept the fact that its policies over the last several years were a failure. They took good renters and made them into bad homeowners. People can either make consistent monthly payments or they can't. If they can't they shouldn't become homeowners. Years of experience has shown that about 64% home ownership rate is stable. The increase from 1994 to 2006 was largely due to subprime lending, and as it turns out, many of those people shouldn't have been given title to real estate.”
Tyler Durden relates: Title Companies Stop Insuring Foreclosed Properties. “Fidelity National has told lenders to halt foreclosures, and to stop sales of bank owned properties. The reason, and this should be no surprise to anyone, is "possible document flaws." Fidelity is merely the next of, well, all. And while the WaPo reports that the John Walsh, acting director of the OCC has reached out to seven lenders including Chase, Bank of America, Wells Fargo, Citi, PNC Bank, U.S. Bank and HSBC, to review their foreclosure processes in light of the Ally and JPM Chase situations, the news of the day comes from the NYT that Old Republic National Title has stopped insuring title to Ally-foreclosed properties "until further notice." From the NYT: As more defaulting homeowners become aware of the lenders’ problems, they are expected to hire lawyers and challenge the proceedings against them. And if completed foreclosures were not properly done, families who bought the troubled homes could be vulnerable to claims by the former owners. Apparently alarmed about such a possibility, one of the major title insurance companies, Old Republic National Title, has sent a bulletin to agents saying that “until further notice” it would not insure title to properties foreclosed upon by GMAC Mortgage, the country’s fourth-largest home lender and one of the two big lenders at the center of the current controversy. GMAC declined to comment, and Old Republic representatives did not return calls. As we have long expected, this merely means that as the foreclosure pipeline gets clogged beyond repair, and as mortgage losses accumulate at an exponentially growing pace, stocks of financial companies will likely surge as very soon their survival will become a binary bet on TARP 2.” ... I provide the chart of Mortgage Finance, KME.
Kathleen M. Howley of Bloomberg reports: “U.S. courts are clogged with a record number of foreclosures. Next, they may be jammed with suits contesting property rights as procedural mistakes in those cases cloud titles establishing ownership. ‘Defective documentation has created millions of blighted titles that will plague the nation for the next decade,’ said Richard Kessler, an attorney in Sarasota, Florida.”
HousingWire reports: Moody's considering downgrades on billions in CMBS
Japan sees on going deflation as Bloomberg reports Japan Consumer Prices Fell 1% In August As Yen Strengthens, Economy Slows. This as the Nikkei 225, ^N225, closed 1.5% lower this week at 9404. And the ProShares 200% ETF of Japan, EZJ, closed lower on the week.
BBC reports: Ecuador Declares State Of emergency; Dubs Protests An Attempted Coup d'état.
Financial Times reports Brazilian Finance Minister Guido Mantega said this week that a “global currency war" has broken out ... ‘We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness”. The global currency crisis of 2010 and 2011 is at hand, and the United States, with its Russell 2000 small cap companies, highly dependent upon credit liquidity and bank lending to meet payroll, buy inventory and cut accounts payable checks, will be ground zero for austerity and adversity. During 2010 and 2011, the biggest topic will be how countries are competing to make their currencies less valuable, not more valuable and I believe that Ben Bernanke, currently at the helm of our currency, will choose to inflate the coming crisis away by printing money and buying US Treasuries.
Kate Randall of WSWS.org reports US Medicaid Enrollment Climbs To 48 Million and describes the moral hazard and limited benefits of Obamacare.
Emre Peker of Bloomberg reports: “Speculative-grade companies are borrowing to finance dividend payments to their private-equity owners at the fastest rate since before the credit crisis, taking advantage of investor demand for high relative yields. Banks arranged or started marketing $8.77 billion of high- risk, high-yield loans slated for shareholder payouts this quarter, bringing 2010’s total to $17.1 billion, more than five times the amount of the past two years combined.”
Isabell Witt and Karen Eeuwens of Bloomberg report: “Private-equity firms are borrowing the most in Europe since the collapse of Lehman … Leveraged buyout loans surged to $8 billion in the third quarter, the most in any three-month period since September 2008 … Strengthening global demand helped the region’s economy expand 1% in the second quarter, the fastest pace in four years. The default rate for leveraged borrowers declined to 5% in August from 12.3% a year ago, Moodys said.”
Keiko Ujikane and Jarrett Banks of Bloomberg report: “China’s ‘de facto’ ban on exports to Japan of rare earths, a group of 17 metals used in weapons, hybrid vehicles and laptop computers, may have a ‘big impact’ on Japan’s economy, Japanese Economy Minister Banri Kaieda said.”
Concluding remarks.
The US Dollar has fallen, perhaps it will be the loss leader meaning that it will take the lead as currency debasement as carry trade disinvestment really gets underway. One would think that export powers such as Germany Japan, South Korean, Taiwan, Malaysia, and Thailand would have been hurt by the falling dollar, but its been carry trade investment that has capitalized manufacturing technology in these countries and the jobs that were once in the US have been established world wide and will not be coming back, as the cost of labor is significantly lower overseas. Furthermore, Germany was able to largely ride out the global economic downturn by keeping the troubled Landesbanken Shadow Banking System under wraps and by having as the New York Times documents: “strong employment protection legislation. This has been supplemented with a “short-time work scheme,” which provides subsidies to employers who reduce workers’ hours rather than laying them off.” Also Germany did not have the housing bubble like we had.
Through waves of carry trade investing, and waves of free trade legislation, such as CAFTA and NAFTA, as well as through the announcement of the Security And Prosperity Partnership Framework Agreement, globalization has effected the loss of national sovereignty and the rise of global governance manifesting in regions of global government. Some globalist leaders deny the facts of a bloodless financial, economic and political coup: Geithner Says No Threat of Trade War With China or World Currency Conflict. But others communicate the call of the Club of Rome made in 1974 for ten regions of global governance; three have emerged so far. The North American Continent was announced at Baylor Baptist University by the leaders, Vincent Fox, Paul Martin and George Bush, with the Security and Prosperity Partnership of North America on March 23, 2005. The other two are the Asean Trading Group and the Eurozone. Flash News Today relates The Hindu report India To Participate In Asia-Europe Dialogue: On Monday, October 4, the leaders will convene “the eighth Asia Europe Meeting (ASEM) Summit in Brussels and will address “priority number one” — moving towards a declaration calling for more effective global financial and economic governance. This will be the first international outing for recently elected Australian Prime Minister Julia Gillard. Briefing news persons here on Friday, Secretary (East) Latha Reddy underlined the importance of the meeting by pointing out that this was the only forum for exclusive dialogue between Asia and Europe. The rationale [for setting up ASEM] is to balance the relationship between the three engines of growth. The United States and Europe have strong transatlantic links, while the U.S. talks to Asia through the Asia Pacific Economic Community. This was the missing link. The main theme of the meeting will be the international economic and financial crisis. It will also discuss climate change and ways to strengthen the multilateral trade system. The meeting will be chaired by President of the European Council Herman Van Rompuy.” I’ve written many times in the EconomicReview Journal that we no longer live in the age of sovereign nation states. National sovereignty is a principle of a bygone era.
In wrote in article, The Age Of Government Economic Administration Commenced The First Week Of September 2010, With The Fannie Mae Policy Announcement Of Loss Mitigation And The Ecofin Announcement Of An EU Financial Supervision Framework Agreement: September 1, 2010 marked the transition from “the age of neoliberal Milton Friedman and Alan Greenspan based credit liquidity” to “the age of the end of credit” ... And September 1, 2010, also marked ”the end of entitlements” and “the beginning of world-wide austerity”.
The Age of Government Economic Administration is seen in the Mike Mish Shedlock report that James Grant, editor of Grant's Interest Rate Observer, talks about the overhaul of U.S. financial regulation, and says we are on the road to Socialization of Credit. And relates that the US Government is providing credit seigniorage with Federal Guarantees for small auto dealer floorplan loans. “Inquiring minds are reading Bill aimed at giving auto dealers more credit is signed into law The federal government is keeping up its effort to stimulate the economy, while the economy is keeping up its resistance to those efforts. The latest effort to prod spending comes in a bill that, among other things, increases the federal guarantee for small dealer floorplan loans from the Small Business Administration from $2 million to $5 million. Part of the bill would also reinstate fee waivers that ran out in May, meaning loan applicants could save more than $50,000 in fess alone on a $2 million loan. The bill passed the House and Senate along party lines and President Obama signed it into law yesterday afternoon. This is expected to be the last jobs bill to leave Congress before the midterm elections in November.”
Also of note, The US Treasury reports that Timothy Geither has assumed duties as Federal Financial Regulator: Treasury Secretary Geithner, in his capacity as chairperson of the Financial Stability Oversight Council, will host the Council’s first meeting at the U.S. Department of the Treasury. The Council will provide, for the first time, comprehensive oversight over the stability of our nation’s financial system. It is charged with identifying threats to the financial stability of the United States; promoting market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the government will shield them from losses in the event of failure; and responding to emerging risks to the stability of the United States financial system. A session of the meeting will be open to the press, and will be streamed live from the Treasury Department’s website.
The End Of Entitlements is seen in the Mike Mish Shedlock report: Stimulus is running out and states will cut employees: “The layoff process for public employees in New York is so complicated, convoluted and potentially case-specific that it will likely take a large cadre of lawyers, civil service experts and others to manage. A clerk in the Department of Environmental Conservation could conceivably "bump" or displace a less-senior person in, say the Department of Health, although that depends on the labor contract and precise job title involved. Also, job titles from which people are being laid off generally have to be abolished, but that doesn't stop cross-agency bumping.”
Debt deflation will be actively reducing stock wealth. And the yield curve will be flattening reducing bond wealth. So total fiat wealth destruction will be getting actively underway, all thanks to the currency traders and government deficit spending.
The age of fiat wealth growth, that came through Milton Friedman, neoliberal economic policies, of “free to choose” investing and “floating currencies”, is over and done.
I see the day coming when the well connected will have an federal entitlement to credit, which will come through the Credit Seignior. At Jackson Hole, Fed chairman Bernanke remarked: “Central bankers alone cannot solve the world’s economic problems.”
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.
This person 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/Renting 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. NeuroSoftware provides The Real Estate Channel report The 7-Million Housing Shadow Inventory Could Trigger A Price Avalanche; but this article was written before the Foreclosure Shutoff; I believe there will be no major push for sales; but rather, after a time of market congestion, then The Financial Regulator will announce a program of REO leasing and renting.
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, and the mortgage bond ETF, MBB, tumble in value.
And I envision that in Europe, with a fall in the EUR/JPY from 114.75, there will be stock deflation, with the European Shares, VGK, falling below 49, and European Financials, EUFN, falling below 22.50.
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.
Chart of EUR/JPY courtesy of Action Forex.
I believe that Timothy Geithner or Elizabeth Warren, may be called upon in time of crisis, to assume the role of Financial Regulator overseeing investment, banking, lending, credit, seigniorage and house leasing as his experience and her many articles would qualify either of them for such a role in the US. As to who might arise in Europe as Seignior, I have no idea.
Disclosure: I am invested in gold bullion