I … Financial Market Report for October 22, 2010
On October 21, 2010, and also on October 22, 2010, Baidu, BIDU, propelled the Internet Stocks higher, these included Internet HHH, Nasdaq Internet PNQI, rose; and Dow Internet FDN. In addition, Software Stocks, SMH, rising to 44.64, have helped push the Nasdaq 100, QTEC, to a new high at 23.81.
Despite the Internet Stocks rising, a bear stock market is underway due to the anticipation of monetization of debt by the Fed, that is the US Federal Reserve’s QE II.
The debt deflationary bear market of April 26, 2010, that commenced with the onset of the European Soveign Debt Crisis, recommenced October 15, 2010, when the World Shares, ACWI, fell from 45.13 to 45.00 in response to major currencies, DBV, and emerging market currencies, CEW, turning lower on on October 15, 2010, with DBV falling from 23.46 to 23.42.
International Treasury Bonds, BWX, tuned lower on October 15, 2010, falling from 62.04 to 61.56; and in response to US Treasuries, TLT, turning lower on October 7, 2010, from 105.56 to 104.68.
The bear market began as “currency vigilantes” sold various yen based carry trades in response to the anticipation of QE 2 being debt monetization, that is toxic to the longer out bonds …. and the “bond vigilantes” calling the interest rate on the US 30 Year Government bonds, TYX, higher to 3.71% on October 7, 2010 from 3.66%.
It was at this time that the yield curve $TYX:$TNX rose to 1.55. The high level in the yield curve, was at one time a good thing; that is up until the longer out US Treasuries, TLT topping out October 6, 2010, and the longer our corporate bonds, BLV, fell lower October 7, 2010 from 86.18 to 85.84. Now a higher yield curve is toxic to bonds, as it is calling the longer out interest rates, ie $TYX, higher, very quickly. This will slow economic growth and cause businesses to shutter.
The “order of debt deflation” can be seen in the chart of BWX, FXI, ACWI, DBV, CEW, TLT where US Treasuries turned sharply lower on October 7, 2010, then world currencies, DBV, then emerging currencies, CEW, then world debt, BWX, then world stocks, ACWI, then China shares, FXI, today October 22, 2010 closing lower from 46.14 to 45.67.
Currency traders took note of Ben Bernanke’s Death Star Fiat Printer, on October 15, 2010, and sold the the Euro, FXE, from 140.22 to 139.25 and world stocks, ACWI, from 45.13 to 45.00, as is seen in the chart of the Euro, FXE, World Stocks, ACWI, and the 10 to 20 year US Treasuries, TLT. Note how the “bond vigilantes” took action on October 7, 2010 and called the Interest Rate on the 30 Year US Government Bond, $TYX, higher, resulting in TLT falling lower. It was later on the October 15, that the” currency vigilantes” came to the market, and called the Euro, FXE, lower, in response to increasing concern over the Death’s Star Debt Monetization.
Today’s chart of the Euro, FXE, shows a broadening top pattern with close at 138.78, down from its October 14, 2010 high of 140.22. It’s like Street Authority communicates: When you see the broadening top, the market will eventually drop. QE II is Debt Monetization and that is destructive to stock wealth.
Yahoo Finance shows the EUR/JPY traded up slightly to 113.38. I provide the chart of FXE:FXY trading up to fisish in a black lollipop hanging man candlestick. One can see the red lollipop hanging man candlestick on October 6, 2010 at 116; this was the euro yen carry trade setting up to move the Euro lower on October 7, 2010. It was an unwinding euro yen carry trade that moved the European Shares, VGK, lower on October 15, 2010 form 51.59 to 51.35. Neoliberal economist Milton Friedman introduced floating currencies, the era of profiting from borrowing at 0% interest from the Bank of Japan, and investing long in carry trades, started to be over April 26, 2010 with the onset of the European Sovereign debt crisis. October 6, and October 15, are simply nails in the coffin of a previous prosperous age.
Setyo Wibowo, of the Forex Instructor, relates: ”The EURJPY attempted to push higher yesterday, topped at 113.92 but found resistance at the upper line of the bearish channel as you can see on my h4 chart below and closed lower at 113.05″. The ActionForex.com report reads bearish at 113.27: “EUR/JPY’s recovery was limited at 113.92 and weakened again. Intraday bias is turned neutral for the moment. Fall from 115.56 is viewed as a correction in the larger rally from 105.42 only and hence, even in case of another fall, we’d expect downside to be contained by 111.44 support and bring rally resumption.” Of significant note, this week’s Yahoo Finance value of the EURJPY 113.92 is less than the Yahoo Finance Value of 114.40 of 10-15-2010 suggesting that the currency traders are selling the euro yen carry trade in response to higher sovereign interest rate on the US 30 Year Government bond and falling 30 Year US government bond values and falling 10 to 20 Year US Government Values, TLT.
The primary reason the US Federal Reserve is coming out with QE 2 is to sustain the value of the US Government Notes, SHY, and the value of the shorter duration US Government Bonds, IEF. And so far, its efforts have seen success as the Interest Rate On The 2 Year US Government Note, $UST2Y, has fallen to 0.35%.
The Fed’s QE, communicated through Fed Governors, and through Pacific Investment Management Company, and presented in summary form by EconomicPolicy Journal, has maintained the value of Pimco’s Mint, MINT, Mortgage Backed Bonds, MBB, the Intermediate Bond Funds, GSUAX, and Annaly Capital Management, NLY, as well as distressed investments, FAGIX. Note the contrast seen in the chart of the longer out US Government Debt, TLT, and its October 7, 2010 fall.
Chart of MBB
Chart of TLT; today was an excellent day to go short the longer out US Government Debt.
Theyenguy says: “The US Federal Reserve and the currency traders have scorched the Investment Skies, welcome to the Investment Desert Of The Real, we ain’t living in Kansas no more, we are living in a new Investment Matrix, and I hope you interpret the code correctly, and invest in gold, its one’s only protection one has in a debt deflationary bear market.”
I see the day coming very soon where a liquidity crisis will occur in the stock and bond markets, and then soon thereafter the US Government will be the sole provider of credit to America; and that credit will be primarily for the strategic needs of the North American Governments, including Canada and Mexico. Evidence from such a scenario comes from a large number of ongoing news reports, including the following two:
EconomicPolicy Journal reports “Today, Fitch Ratings issued a number of separate press releases placing on Rating Watch Negative most U.S. bank and bank holding companies’ Support Ratings, Support Floors and other ratings that are sovereign-support dependent.” Also, Tyler Durden provides coverage in article Fitch Places Bank Of America, All US Banks On Rating Watch Negative. To me, this is not only is this US Dollar Bearish, it is Euro bearish as well as it is sovereign related, which puts even more selling pressure on US Government debt, TLT, which eventually turns the Euro, FXE, lower.
Tyler Durden of ZeroHedge reports ”A few days ago, we penned The BlackRock – Bank Of America Ownership Catch 22, in which we discussed the incestuous cross-onwership relationship between the two companies. Then we said: “It is well known that Bank of America owns 34% of BlackRock via a legacy position inherited from Merrill Lynch, arguably the most valuable part of the business. As of today, the stake is worth around $11.5 billion. Yet what may be a little less known is that BlackRock has also returned the favor, and is now the largest holder of Bank of America, owning 5.35% of the outstanding BAC shares, for a total value of $6.6 billion. Does that mean that there is a wash in there somewhere? Who cares. But one thing that certainly is involved, is a massive conflict of interest, especially in the context of litigation. And a big question mark – to claim that BlackRock is willing to impair a nearly $7 billion investment is naive. Instead, due to the incestuous nature of Wall Street, and the cross pollination of MBS holders, is today’s action merely a ploy to get some of the more “impacted” parties to promptly settle and eliminate any possible future litigation? PIMCO, for one, and the FRBNY fir another, have the most to lose if the MBS crisis escalates, and if all MBS are unwound. Which means that somehow this is simply another diversion, with the real action taking place somewhere.” The action is indeed “elsewhere” – Charlie Gasparino has just reported that Larry Fink is seeking a partner to buy 35% of Bank of America. What better way to sweep all the problems underneath the rug than to just buy them all up.”
I believe that the Financial Regulator, that is the Secretary of the US Treasury, as having broad discretionary authority under the Dodd-Frank Legislation, will one day soon, call for integration of banking and mortgage business and the US Treasury and various Federal Government agencies; for the purpose of leasing of REO and shadow inventory properties as a solution to the large number of people living payment free in mortgaged property, and as a banking quagmire and deflationary economic collapse emerges — banks will want cash flow on their huge inventory of non performing home loans. Irvine Renter provides insight into the large number of people living payment free in mortgaged properties: “The banks can’t afford the write-downs associated with the market clearing process, so they actively encourage and participate in delaying foreclosure. For every property in visible bank inventory, there are four that are in shadow inventory waiting for the banks to initiate foreclosure proceedings.”
The best ETFs to sell short are those that will experience the fastest stock deflation; these are likely: EWO, KBE, ITB, INP, IWM, RZV, EWD, BX, TAN, EWP, PNQI, KROO, FAA, RTH, BWX, EPOL, BRF, DNH, SKOR, PXN, BJK, XME and URTY, RETL, SOXL, EET, UYG. The best debt ETFs to sell short are TLT, ZROZ, TMF and UBT. One can view these charts on this ChartList.
IWM; it was an excellent day to go short the Russell 2000.
Gold is a better investment strategy than short selling: as the US Federal Reserve continues to monetize the US Sovereign debt, the investment demand for gold, GLD, will rise. Analyst Doug Noland relates: “ When the Fed actually implements large-scale Treasurys purchases – injecting liquidity into the marketplace – current market dynamics seem to dictate that this intervention will only exacerbate the torrent of flows exiting the U.S. in search of higher returns in “undollars” (“emerging” securities markets, gold, silver, metals, agriculture, commodities, foreign economies, etc.”).” Here is the chart of Food Commodities, FUD, and agricultural commodities, RJA, for one’s consideration.
II … Global Governance is on the way — it’s coming soon to a region where one lives, whether that be in North America, Europe or Asia.
I envision that out of bank bond defaults like those of Anglo Irish Bank where some bond holders are not paid in whole by the national central bank, and out of a continuing falling, FXE, from 138.78, that a stock liquidity crisis will emerge, where there will not be enough buyers for sellers of bonds as well as stocks, causing small business failures and banks to become sorely decapitalized, resulting someone arising to be an “Eurozone credit seignior” and provider of liquidity to Europe.
Despite the detail presented in my report that the Deauville Task Force Fails To Provide A Framework Agreement For European Economic Governance, I believe that framework agreements will eventually 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. Fiscal federalism will result in the Eurozone evolving into a region of global governance where national sovereignty is a concept of a bygone era.
The word Segnior comes from old English and means top dog banker who takes a cut. Many Europeans will come to trust in him, and conduct their economic affairs through him, as he will oversee all banking, lending, credit and investment throughout the entire Eurozone. The word, will and way of the Seignior will be the law of the Continent.
Kelly Olsen, of the Associated Press reports Group Of 20 Vows To Avoid Currency Devaluations And Reduce Imbalances To Boost Global Growth: ”The grouping, which accounts for about 85 percent of the global economy, said in a statement that it will “move towards more market determined exchange rate systems” and “refrain from competitive devaluation of currencies.” … “The agreement comes amid fears that nations were on the verge of a “currency war” in which they would devalue currencies to gain an export advantage over competitors — causing a rise in protectionism and damaging the global economy. “Our cooperation is essential,” the statement said. “We are all committed to play our part in achieving strong, sustainable and balanced growth in a collaborative and coordinated way.” The meetings come ahead of a G-20 summit in Seoul set for Nov. 11-12 when leaders will consider the agreements reached by the finance officials as well as other proposals for strengthening the global economy.”
Simon Kennedy of Bloomberg reports: “Bank of England Governor Mervyn King said global finance chiefs need to reach a ‘grand bargain’ to coordinate economic policies and avert a round of protectionism. Speaking before Group of 20 finance ministers and central bankers meet in South Korea on Oct. 22-23, King said major economies’ policies are in ‘direct conflict’ with each other and that ‘collective’ action is required to rebalance the world economy.”
My comment is that the statements from work group of the world’s finance ministers, were simply rhetoric. It is the currency vigilantes and bond vigilantes who now have the upper hand in determining the value of currencies, and I believe we are going to see global currency devaluations, in response to the US Federal Reserves QE 2 debt monetization, before the November 3, 2010 FOMC meeting.
The only person of insightful vision at the G20 meeting was Oili Rehn, economic and monetary affaires commissioner of the European Union who said: “It is a milestone in reforming global governance,” … “Today we have been rebalancing global growth and rebalancing political influence in global governance.”
Perhaps Mr Rehn will arise to be what I refer to as the “Eurozone credit seignior”, the top dog banking, investment and credit official in Europe, the One who’s word, will and way will be the law of the continent.
Elaine Meinel Supkis in article British Lion Dies While US Eagle Chained In Deep Debt provides the image Eagle from defunct US train station in Vermont chained to tree, photo by Aaron Toscano, communicates the idea quite well that National Sovereignty is a precept from a bygone era.
III … Conclusion
My conclusion is that the world shares, ACWI, the European shares, VGK, and the emerging market shares, EEM, will fall lower as the Euro, FXE, falls lower, and as the Euro Yen carry trade, EURJPY, falls lower before the November 2, 2010 Election and before the November 3, 2010 FOMC Meeting, as US Treasuries, TLT, and World Treasuries, BWX fall lower.
In other words as the QE II Debt Monetization death star approaches, the anticipation of debt monetization, will cause an unwinding of major currency yen carry trades, DBV:FXY, and emerging market carry trades, CEW:FXY, resulting in debt deflation in world stocks, ACWI, and in European shares, VGK, and emerging market shares, EEM and EET
Chart of DBV:FXY
Chart of CEW:FXY
Chart of ACWI
Analyst Doug Noland relates: “With Fed-induced liquidity racing out to play robust inflationary biases overseas, how much monetization will be necessary for the Bernanke Fed to inflate U.S. consumer prices to its desired level? And, with the G20 seemingly in agreement to press forward with more domestic stimulus, I’ll assume that global central banks have no option but to retain their steadfast backstop bid for the global surfeit of U.S. dollars. These dynamics would appear to ensure the ongoing monetization of enormous quantities of government debt.” I add: Just think how dramatically world sovereign debt, BWX, will fall in value once monetization of debt gets underway in earnest.
Mr Noland continues: Such a scenario would seem to assure unwieldy global financial flows and Acute Monetary Disorder. For years now, it has been a dangerous case of using “Keynesian” policies to perpetuate Bubbles and attendant imbalances. Today, inflationism fuels Bubble dynamics on an unprecedented global scale. Policymakers can insist on referring to “global rebalancing,” but the reality is more in line with desperate and universal inflationism. “Monetary policy is about an environment that’s supposed to be stable. When you try to use it in a way that floods the market with liquidity, you can in fact get very bad outcomes.” Kansas City Federal Reserve President Thomas Hoenig, October 21, 2010.”
Theyenguy says: “In a debt depreciated future, all seigniorage will come and go through the Seignior.”
IV … News Focus on Portugal
EuroIntelligence reports in article Portugal – A Disaster Waiting To Happen: ”The FT reports that Portugal may not meet its deficit-reduction target this year and in 2011, due to political uncertainty, as new figures showed higher spending, and much lower income tax revenue. The yield spread with Germany has gone up again in response to those numbers (see below). The paper quotes Commerzbank said it now seemed “barely possible” that the government to meet the target to cut from 9.4% to 7.3% of GDP this year. The opposition is still threatening to block the 2011 budget unless the government replaced tax increases with spending cuts. The PSD leader Pedro Passos Coelho called for a renegotiation of the fiscal consolidation programme with the European Commission.”
Shaun Richards in article Portugal And Her Economic Problems reports: ”Portugal’s government keeps telling us that its deficit plans are front-end loaded but her statistics keep failing to back this up. Now the new plans have not been passed by Parliament yet but even so it is troubling that the latest official figures released this week show that on a year on year basis Portugal’s central government deficit widened by 200 million Euros in the first nine months of 2010 compared with 2009. Her attempt at austerity was sabotaged by income tax revenue falling 7.6 % and social security spending rising by 6 %.”
“We are back with a problem which Portugal has faced for quite some time her inability to maintain any sort of economic growth even in the good times has obvious implications for these more difficult times. The tough austerity budget plans led to a fall in her government bond yields of around 1% but can she implement them? In spite of an extraordinary gain of 2.6 billion Euros from transferring the pension funds of Portugal Telecom to the state Portugal is still unlikely to hit her targets for this fiscal year. Accordingly the improvement in her government bond yields is ebbing away and they rose by 0.15% yesterday to 5.92% for ten-year bonds.”
“We are seeing a push-me pull-me situation for government bond yields in these countries. The economic problems from which they are suffering mean that they offer sovereign yields for what are considered to be first-world sovereign nations which are higher than elsewhere. So bond funds looking for yield in a world where yields are generally declining are likely to buy at any time of perceived improvement. However,it is my sad duty to note that the perceived improvement seems to be invariably followed by a deteriorating reality.”
V … News Focus on Spain
Fred Sheehan in Safehaven.com article Municipal Deflation: Consequences of the Greatest Speculation relates: “This was speculative building on a grand scale, as Professor Herbert D. Simpson of Northwestern University informed the Forty-Fifth Annual Meeting of the American Economic Association in 1933: “Throughout this period there was another form of real estate speculation, not commonly classified as such, but one that has had disastrous consequences. This is the real estate ‘speculation’ carried on by municipal governments, in the sense of basing approximately 80 per cent of their revenues upon real estate and then proceeding to erect a structure of public expenditure and public debt whose security depended largely on a continuance on the rate of profits and appreciation that had characterized the period from 1922-29.”
“Simpson delivered his paper at the bottom of the Depression but the number of beleaguered municipalities kept rising until 1935, when there were at least 3,252 municipal issues in default. There are at least three reasons to think current municipal problems will be worse. First, the latest real estate bubble has probably been much bigger and more leveraged than in the 1920s. Second, expenses are not as easy to cut. The earlier retrenchment was not hamstrung by bloated government retiree pension and health benefits. Third, property assessments lag current prices. This promises to be a fierce battle. Towns want to hold the status quo so are in no hurry to tax properties at falling market values; residents do not want to fund comfortable teacher retirements when they are wondering what happened to their own pension plans.”
Shaun Richards writes in article Spain And Her Toubles Wth Her Economic Statistics: “I wrote on the 1st of October about concerns that exist over Spanish economic growth figures and in particular concerns about them having been overstated. Unfortunately there are also now concerns about the property statistics produced by the Spanish National Institute of Statistics (INE). It recently produced statistics which indicated that Spanish property prices had risen in the second quarter of this year. This reversed a three-year trend and allowed Spanish Prime Minister Mr. Zapotero to give interviews suggesting that the market had bottomed. Those who follow the Spanish property market simply did not believe the figures and their disbelief will only be added to by the fact that the Tinsa price Index showed that house prices fell again in September and at an accelerating rate. The annualised rate as recorded by this index is now at -5%.”
“An additional development this week has been that a small Spanish town has suspended all payments bar essentials. Whilst Villajoyosa is not large and in itself is a small section of Spanish economic life it has reminded everybody of the way the Spanish system has devolved a lot of expenditure to towns and regions. These towns and regions do not appear to have been following the central governments austerity mantra as the regions have increased their debts by 25% over the last year according to the latest Bank of Spain data.”
Cary says in comment: “Re the town hall debt in Spain. Yes, it has gone up and things are getting desperate in many places. In ‘my’ part of Spain, the regional government has taken to issuing revised property tax bills for the last three years, payable in full immediately even though there is ample evidence that the bills were originally paid on time! Eventually… the original amount will be paid, though not of course the new retrospective increase, which is chunky. Insiders tell me the repayments are scheduled for 2 years’ time. We’ll see, no breath being held around here. Of course there is a reason for this, it’s the unemployment pay, very generous for the first 18 months, and financed locally. Borrowing capacity has been reached. Creative finance is not limited to the City! The unemployed of the UK would quite like the level of unemployment pay that the Spanish enjoy, at least for a while. Then they default to an amount which is also above the UK’s JSA.”
So we have in Spain, another repeat of the 1929-1932 developments, which of course will end in an even greater disaster.
The chart of Spain, EWP, shows a double top coming in at 43.37.
Disclosure: I am invested in gold coins