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I am not an investment professional. I do not engage in stock or currency trading. I am a blogger and investor who believes currency deflation has created an investment demand for gold, and that gold bullion is the sole means of wealth preservation. The chart of gold, $GOLD, reveals that with... More
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  • Stocks Fall Lower And Bonds Rise As Currency Traders Sell Yen Based Carry Trades 0 comments

    I … Carry trade investing unwound today October 4, 2010 as Lynn Thomasson, Whitney Kisling and Inyoung Hwang of Bloomberg report of fears of lower earnings forecasts: “For the first time in more than a year analysts are cutting their forecasts for Standard & Poor’s 500 Index earnings, jeopardizing gains from the biggest September rally since World War II. Companies in the S&P 500 may report profits rose 23 percent on average during the third quarter, according to forecasts tracked by Bloomberg. That’s about half the 49 percent growth during the second quarter and the 52 percent increase from January through March.”

    The EUR/JPY traded down to 114.2 from its previous value of 114.7 on Friday October 1, 2010, as seen in HedgeHogsNet chart of the EUR/JPY having attained completion. 

    The fall in the Euro Yen carry trade is seen in the chart of FXE:FXY.

    The Swiss Franc, FXS, the Euro, FXE, and the Australian Dollar, FXA, are the three currencies leading the way lower; the Yen, FXY, is trading lower as well. The fall in the Swedish Krona Yen carry trade is seen in the chart of FXS:FXY

    The Euro, FXE, closed at 136.38 down from 137.25. And the Yen, FXY, closed at 118.64 down from 118.80.

    I believe competitive currency deflation, that is competitive currency devaluation, commenced September 15, 2010, when Prime Minister Kan of Japan, and the Bank of Japan, sold the Yen, causing a fall in its value from 119.13. And that now a global currency war is underway and that unfortunately, the US Dollar, $USD, is the first casualty.  I believe that the US will be ground zero for economic hardship, adversity and austerity. And that social and economic life will be substantially better in the frontier nations such as Malaysia, EWM, Thailand, THD, and Peru, EPU. And life will likely be significantly better in Singapore, EWS as well.  

    Major currencies, DBV, have turned lower; as have emerging currencies, CEW. The ratio of major currencies relative to emerging market currencies, CEW, DBV:CEW, shows that global competitive currency deflation is the operative investment principle of the day.Weekly chart of DBV:CEW

    Competitive currency devaluation is confirmed in the ratio of small cap pure value shares, RZV,  relative to small cap pure growth shares, RZG, RZV:RZG, manifesting a lollipop hanging man candlestick, suggesting that the rally in this ratio is over.    


    The US Dollar, $USD, after having being beaten down by the carry traders investors in the recent rally, finally rose today to 78.44; as did the US Dollar bull ETF, UUP which closed at 22.74.

    II … Debt deflation, that is currency deflation, has started a bear market in stocks, with the US Dollar based Small Caps, the Russell 2000, IWM, and the Nasdaq, QQQQ, yen carry trade boosted shares, such as the Nasdaq Internet, PNQI, Nasdaq Biotechnology, IBB, and Nasdaq Banks, QABA, leading the way down. The European Financials Stress Test and FOMC Rally ended today October 4, 2010 as European Financials, EUFN,  are now trading significantly lower.  Strong fallers of the day include the following:

    Airlines, FAA, -2.0%

    Small cap gold mining shares, GDXJ, -2.55

    Russell 2000, IWM, URTY, TNA , -1.4%, -3.8%, -4.1%

    Sweden, EWD, -2.5%

    Japan, EWJ, EZJ, -1.9%, -3.6%

    Nordic 30, GXF, -2.2%

    Netherland, EWN, -1.8%

    Energy Services, OIH, -1.9%

    Metal Manufacturing, XME, -2.6%

    Copper Miners, CU, -2.4%

    Billiton BHP, BHP, -1.7%

    European Financials, EUFN, -1.4% … closed at 22.15

    Spain, EWP, -1.4%

    Austria, EWO, -2.5%

    European Shares, VGK, UPV, -1.6%, -3.3%

    Software, SWH, -1.5%

    Solar Energy, TAN, -2.8%

    Nanotechnology, PXN,  -2.6%

    Semiconductors, SMH, USD, SOXL, -1.2%, -3.2, -4.1%

    Intel, INTC, -2.3%; the fall in Intel is terrifically bearish, and is a very real and much-needed indicator that technological growth and profiting from technology shares is finished.

    Nasdaq Internet, PNQI, -1.3%

    Homebuilders, ITB, -1.3%

    Nasdaq Biotechnology, IBB, -0.6%

    Tax Managed Buy Write Opportunities, ETW, -0.9%; this will be a terrific faller in the coming bear market. Imagine trying to profit from going aggressively long in a market downturn; the performance of ETW might be like that of a 200% S&P ETF.   

    Emerging Markets Small Cap Dividend, DGS, -0.8%; this had been a market leader.

    Volatility, VXX, has turned up. +1.9%

    Inverse volatility, XXV, has turned down. -1.1%

    World shares, ACWI, have fallen lower. -1.0%

    International Discretionary Stocks, IPD, -0.7%

    Small Cap Consumer Discretionary, XLYS, -1.4%

    International Dividend Paying Stocks, DOO, -1.5%

    The S&P, SPY, -0.8%

    The 6.5% fall in American Express, AXP, witnesses a delayed and very real competitive currency deflation response coming to the US Financial Sector, XLF, in response to the US Dollar, $USD, having fallen so far for so long at the expense of major currencies, DBV, and world currencies, CEW, having risen so strongly.

    Even though the Euro, FXE, is likely to start falling now, I expect the US and its small cap shares, IWM, so heavily dependent upon financing for buying inventory, making payroll, and cutting accounts payable checks, to be ground zero for debt deflation. The chart below shows what I believe the completion of an Elliott Wave 2 up and ready to commence into an Elliott Wave 3 Down.

    Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

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

    It was on April 26, 2010, the currency traders went long the yen and short the global currencies, causing the US Dollar to rise; as can be seen in this chart from April 26, 2010 to June 7, 2010.

    On June 7, 2010, the US Dollar, $USD, turned down as the Euro, FXE, rallied on news of the call for the EFSF Monetary Authority to be established, it as of yet, still has to be used by member states.

    The Swiss Franc and the Australian Dollar both were sold against the Yen on April 26, 2010; but on June 7,  the Swissie-Aussie carry trade,  FXF:FXA,  blasted out of a consolidation triangle on June 7th as the US dollar was sold off.

    III … The turning down in commodities by a fall in the Euro, FXE, witnesses the power of carry trade investing in inflating commodity prices.

    Commodities, DBC, -0.3%

    Tin, JJT, -0.5%

    Lead, LD, -0.7%

    Base Metals, DBB, -0.1%

    Agriculture, RJA, -0.5%

    Food, FUD, -4.6%

    Timber, CUT, -2.3%. Timber will be the commodity loss leader in the commodity market downturn.

    IV … The mortgage moratorium which was announced the last week in September 2010, by a number of banks, reinforces FASB 157 and current stock market real estate values, PSR, by continuing the bank’s FASB 157 entitlement, to mark real estate at the manager’s best estimate rather than mark to market; and continues the surreal and overstated value of the real estate market on the for sale market place, and continues the entitlement to millions to live payment free in the mortgaged property.  I believe that this imbroglio, this mortgage morass, will continue until the Banks, KBE, and until the Excess Reserves residing at the Federal Reserve, are both significantly market place decreased in value. Then once the banks go hurting for cash flow, a Financial Regulator, a Credit Seignior, will announce, that is decree, that the banks lease their REOs and delinquent properties to all non paying occupants. Given the mortgage moratorium, specifically questions about ability to deliver documented title,  and the application of FASB 157, real estate sales, is now and will forever be, moribund.     

    V … Bonds as a group, BND, are up; but the longer maturity US Zeroes, ZROZ, have broken lower; the 20-30 Year .

    US Government Bonds, TLT, have fallen lower. The 7-10 Year US Government bonds, IEF,  and the 2 Year US Government Notes, SHY, are trading up to a new high on anticipation that they will be worth more come November 3, 2010, with a QE 2 announcement by the US Federal Reserve. This liquefaction come courtesy of a major announcement by Ben Bernanke — the so called Bennie Put.  

    Bonds, BND, have traded up to their September 28, 2010 high of 82.58. The world is attaining peak debt, that is peak credit, and about to pass from the age of prosperity into the age of debt servitude.  

    The weekly chart of the 30:10 US Sovereign Debt Yield Curve, $TYX:$TNX, shows a trade up making for a likely completion high. Soon the 30:10 US Sovereign Debt yield curve will be unwinding, greatly rewarding those short TLT, UBT, TMF, and ZROZ.

    Awareness of a likely QE 2 by the US Federal Reserve providing stimulus drove the $UST2Y lower today to 0.41%.  

    Given that full recognition by the bond market, has likely been made to QE 2, I believe that the interest rate on the US 30 Year Government Bond, $TYX, will be going up going up from today’s low of  3.70% … And, likewise, I believe that the interest rate on the US Ten Year Note, $TNX, will be going up from today’s low of 2.74.%.  

    The peak in the chart of the US 30:10 Sovereign Debt Yield Curve Weekly, $TYX:$TNX, suggests that debt deflation will soon be flattening the yield curve; one can no longer profit from investing in the longer out US Sovereign debt.

    With the unwinding of carry trade investing, the world has passed through peak investment liquidity, as Junk Bond, JNK, has finally turned lower.

    VI … Today October 4, 2010, marks the end of successfully investing long the debt, equity and currency market places; all forms of fiat wealth are now going off into the pit of financial abandon together. Gold, $GOLD, has arisen as the sovereign currency and storehouse of investment wealth. Chart of the gold ETF, GLD, shows that it could easily fall lower with a further fall in the Euro, as there are those who having used carry trades, will likely want to take profits. 

    VII … The chart of the gold mining shares, GDX, relative to gold, GLD, GDX:GLD, reflects that gold mining shares, GDX, have detached from the price of gold and can no longer preserve wealth. Yes, yen carry trade investment came out of gold mining shares today, which fell 1.9% lower. Deflating currencies cannot be used to run up the price of gold mining shares; hence the HUI Precious metal mining shares, ^HUI, will now be turning lower and disinvestment will be coming out of gold mining mutual funds such as TGLDX which through October 1, 2010 has seen a 37.3% rise in value this year.  The chart of the HUI Precious Metal Mining Shares, $HUI, relative to the US Treasuries, $USB, $HUI:$USB, shows that the gold mining shares generally turn lower with debt at market turns. The age of profiting from investing in gold mining stocks and the junior gold mining shares, GDXJ,  is done and over. The HUI’s monthly rise from roughly 38 in October 2000 to 514 in September 2010 is the investment success story of the current age of investing.

    VIII … Neither repudiation of debt, nor state bankruptcy, but rather simply on-going austerity is what I believe the future holds for Ireland. 

    I do not believe there will ever be a state bankruptcy for any Eurozone nation using the Euro, as I have consistently presented in the EconomicReview Journal that a region of global governance exists in the Eurozone. It is now “one for all; and all for one”. “All have a common shared destiny.”  This region came into existence on May 10, 2010, as I relate in article EU Finance Ministers Announce European Economic Governance And Call For A Monetary Union With Seigniorage Authority To Issue Eurobonds. At that time, leaders waived national sovereignty; sovereign nation states were effectively disbanded by announcement of EU Leaders. One is no longer a citizen of a country; rather, one is a resident in a region of global governance.  A historic and bloodless economic political coup was effected by the Eurozone leaders.  

    In early September 2010, the EU finance ministers announced framework agreements for oversight of financial services; these largely follow the blueprint proposed by a working group headed by Jacques de Larosière. The framework agreements establish a new European Systemic Risk Board, ESRB, under the aegis of the European Central Bank , ECB; and it creates three new European Supervisory Authorities, ESAs,  for banking, securities and insurance. The ECOFIN announcement federalized economic governance over Eurozone financial services; and constitutes a further loss of national sovereignty in the establishment of a region of global governance.

    Can there be any doubt that global governance is the order of the day?  Europa Press Release reports that the eighth EU-ASEM Summit is being held in Bruussels on October 4th and 5th 2010 to develop more effective global financial and economic governance. A declaration entitled “Towards more effective global economic governance” is expected to be announced at the end of the summit.

    The word, the will and the way of the leaders is the law of the land and the contintent in Europe and in Aisa.

    Asia-Europe Meeting is a forum for dialogue between Europe and Asia which involves virtually the whole of the two continents. The 48 ASEM partners represent half of the world’s GDP, almost 60% of the world’s population and 60% of global trade.

    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 Framework Agreements at various Summits, globalization has effected the loss of national sovereignty and the rise of global governance manifesting in regions of global government.

    I strongly disagree with the position implied by the article title, but not the facts, of Steve James, who writes in Ireland Moves Closer To State Bankruptcy: “Current estimates of this year’s public sector deficit, which the government had hoped to restrict this year to 11.6 percent of annual GDP, have soared, literally overnight, to 32 percent.

    In comparison, according to the Economist, Greece, after the EU bailout expects an 8 percent deficit this year, while for Portugal, another country causing similar concerns as Ireland, the figure is 9.3 percent.

    Total public debt in Ireland is around 98 percent of GDP, currently around €172 billion, and could rise to 115 percent. This percentage figure is topped only by Zimbabwe, Japan, Singapore, Jamaica, Saint Kitts and Lebanon.

    Lenihan’s measures were immediately endorsed by European Economic Commissioner Olli Rehn, who welcomed efforts to “calm markets”. Rehn demanded that the government adhere to an austerity programme intended to reduce the public sector deficit to 3 percent by 2014, and warned there was no alternative. “If [governments] stand by and allow these banks to fail in a disorderly way, the stability of the entire financial system would be in jeopardy with devastating macroeconomic consequences,”, he said.

    European Central Bank head Jean-Claude Trichet endorsed Rehn’s remarks. The austerity plans were “absolutely essential in terms of the credibility of the country”.

    Lenihan has repeatedly signalled that he intends to cut more than the €3 billion already planned for later this year, a proposal endorsed by most of the Irish political and economic establishment. New taxes on working people are considered inevitable.

    The government has already imposed repeated austerity budgets, cut public sector pay, health education and welfare budgets by up to 15 percent. These measures, developed by the Fianna Fail-led coalition since the crisis erupted in 2008, seek to transfer the costs arising from Ireland’s collapsed financial boom and property bubble onto the working class.”

    I provide the chart of Ireland, EIRL; which I believe will see significant deterioration.

    IX … In  today’s news:

    1) Graham Bowley of the New York Times reports Cheap Debt for Corporations Fails to Spur Economy 

    2) Simon Kennedy of Bloomberg relates Wall Street Sees World Economy Decoupling From U.S.                                                                      

    3) The New York Times reports Communities are increasingly pushing vehicle dwellers out. The entitlement for Bohemians to live on the beach is ending as gentrification has improved neighborhoods.
                                                                                                                                        4) Ambrose Evans Pritchard in the Telegraph writes the IMF admits that the West is stuck in near depression.    

    5) Dr Housing Bubble writes California has nearly 9 years of housing supply – MLS lists 176,000 properties while total shadow inventory is over 468,000. A detailed real estate count of all 58 California counties

    Disclosure: I am invested in gold bullion
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