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Commodities Surge To What May Be A Market Top This Week

Financial Market Report for the week ending December 23, 2101

I … Base metal prices surged higher this week to what may be a market top

The ongoing five-day chart of China, FXI, together with EWX, HAO, TAO, CHIX, CHIM, CRBI, and DBB shows that on Tuesday December 21, 2010 and Wednesday 22, 2101, Base Metals, DBB, rose taking Global Industrial Metal Producers, CRBI, and China Materials, CHIM, higher.  

Then all turned lower on December 23, 2010 as Economic Policy Journal reports that on December 23, 3010, the PBOC raised benchmark one-year lending rate 25 bases points to 5.81%, and raised the one year deposit rate 25 basis points to 2.75%. This is the second series of rate hikes in the last 30 days.

China tightening may be the catalyst for turning commodities, DBC, and basic materials, DBN, lower, just as the European Sovereign Debt and Bank Debt imbroglio may turn world the US small cap shares, IWM, and the small cap revenue, RWJ, and the financial shares, XLF, lower.

It was the small cap revenue, RWJ, and the community bank shares, QABA, that performed strongly through out the week, even more so, than the networking, PXQ, and the gaming shares, BJK and the Nasdaq networking, PNQI as is seen in the ongoing chart of PXQ, PNQI, BJK, RWJ, QABA.

The rise in the ratio of the small cap pure value shares relative to the small cap pure growth shares, RZV:RZG, reflects the tremendous monetization, that has come to the small cap Revenue Shares, RWJ and the Nasdaq Community Banks, QABA. These should be fast fallers when deleveraging begins:  MainSource Financial, MSFG, Community Bank Sys, CBU, and Morningstar, MORN.

The chart of Base Metals, DBB, shows bearish harami candlestick and a fall lower to 23.43 on December 23, 2010. If the decline is sustained, then this would make for an Elliott Wave 3 of 3 Down commencing on December 23, 2010 in the base metals, DBB.

This week Commodities, DBC, manifested three white soldiers, a reversal pattern, in its trading, suggesting a market top has come in, and a turn lower is at hand. The strong rise in Commodities, DBC, came in part from a strong rise in oil, USO, that is West Texas Intermediate Crude, $WTIC. Aluminum, JJA, was strong, which caused Alcoa Aluminum, AA, to rise very strongly all week in an ascending wedge.  Copper, JJC, was strong as well, causing Copper Miners, COPX, to rise.  Freeport McMoRan Copper & Gold, FCX, rose strongly. BHP Billiton Ltd, BHP, rose strongly. Small Cap Basic Materials company,  Headwaters, HW, rose strongly; as did Insteel Industries, IIIN, as did Potash, POT, as did Small Cap Energy, XLES, which includes Pioneer Drilling, PDC, Kodiak Oil And Gas, KOG,  Ion Geophysical, IO, Steel, SLX,  Schnitzer Steel, SCHN, Global Water, CGA. American Water Works, AWW,  has been a notable consistent performer. And Agricultural Shares, MOO, doubled topped out on December 23, 2010 as moneyness came to US agricultural implement manufacturer, Deere, DE, and as monies flowed into Agricultural Commodities, RJA.    

Alcoa Aluminum, AA, and Freeport McMoRan, FCX,  as well as Deere, DE, are part of the Morgan Stanley Cyclicals Index, $CYC, which manifested a bearish harami on December 23, 2010 and closed at 1037.   

A top may be in for Exxon Mobil, XOM, at 73.20.

Biofuels, FUE, has likely topped out at 11.63 on December 23, 2010; according to ETFdb it has experienced a 37% gain this year.

Timber, CUT, has come in with a double top at 20.95.

Strong commodities have maintained the value of Australia, EWA, the Australian Small Caps, KROO, Australian Banking Firm Westpac Banking, WBK,  and BHP Billiton, BHP as well as the Australian Dollar, FXA. All of which stands in contrast to the British Pound Sterling, FXB.  

From the charts it appears that commodity prices are surging more than their stock counterparts: this indicates speculative froth and tulip mania seen at market tops

II … The high price of gasoline may be only temporary

Investors recently took flight from European sovereign and banking crisis as well as out of Bonds, BND, to US shares, especially the small cap shares found in USAA mutual fund USCAX, and the small cap shares, IWM, as well as commodities, one being Gasoline, UGA.  

Investors in the futures market as well as on the ETF market have come together creating contango which is price inflationary.

It may be that Gasoline, UGA, has hit a high and will be turning down. It may continue to command a premium over oil; but Oil, USO, is terrifically overbought, and will fall lower, as it has a significant yen carry trade investment, seen in oil relative to the Yen, USO:FXY; and this will unwind, deflating the price of oil.

It is likely that the nominal, that is the notational price of gasoline, absent the breakout of war, is topping out.

Gasoline will be increasingly seen as having “effective inflation”, meaning that in relation to ones disposable income it will be costly, as more and more people become unemployed.

People on disability income will experience effective inflation in 2011, as they will have to pay out of pocket costs for a number of things which were once an entitlement: because of Federal austerity cuts, many states have eliminated foot care, eye care and dentures and may even eliminate prescription coverage leaving only physician visits under Medicaid programs.

In addition to gasoline, moneyness has also come to the Swiss Franc Euro Carry Trade, FXF:FXE, beginning in 2010: the weekly chart shows that it has gone parabolically higher manifesting three white soldiers, that is a reversal pattern, suggesting a reversal is at hand.

Having said what I said, I do NOT see the Fed’s QE2 as asset or commodity price inflationary, per se. Of note, there is coming a deflationary collapse, which will likely be followed by Weimar type inflation, but that is technically a different type of inflation, that is it inflation in a class all by itself, even though its cause is currency debased by a central bank activities.

Rather I see QE 2 as deflationary. Anticipation of QE 2 caused the 30-10 yield curve, $TYX:$TNX, to rise up until the November 4, 2010 Fed Announcement.

III … The world passed from The Age Of Leveraging and asset value appreciation  …  And into The Age Of Deleveraging and debt deflation On November 4, 2010

This was when the bond traders seized control of both the Interest Rate on The US 30 Year Government Bond, $TYX, and the Interest rate on the 10 Year US Government Note, $TNX, as Ben Bernanke announced QE 2.

The 10-20 Year US Government Bonds, TLT, fell sharply on November 5, 2010.

Turkey, TUR, has experiencing a 16% fall from its November 4, 2010 high and is in a deep Elliott Wave 3 of 3 sell off. It and New Zealand, ENZL, are leading the emerging markets, EEM, lower in an Elliott Wave 3 Down. In contrast Emerging Europe, ESR, doubled topped out on December 23, 2010 as has lender Austria, EWO.  

Brazil, EWZ, and the Brazil Small Caps, BRF, has entered an Elliott Wave 3 Down; and is at the top of a massive head and shoulders pattern.  

India, INP, likely rose to an Elliott Wave 2 high on December 22, 2010 and is now ready to enter an Elliott Wave 3 Down.

In contrast to this deflation, there was a safe haven flight, if one can call it that, to the Small cap US shares, IWM, Global Industrial Metal Producers, CRBI, the major currency driven country shares such as Austria, EWO, and Sweden, EWD, as is seen in the ongoing chart of TUR, CRBI, IWM, EWO, and EWD.  Of particular note, Sweden, EWD, got pushed up this week; this type of thing happens immediately before market turns: its chart manifested an evening star on December 21, 2010. The Swedish Krona Yen Carry trade, FXS:FXY, has fallen lower, suggesting that carry trade disinvestment will be forth coming from Swedish, EWD, shares.  

The iPath Optimized Carry ETN, ICI, may have peaked out in an Elliott Wave 2 up on December 23, 2010, at 47.04. and may be ready to enter an Elliott Wave 3 Down.

The Emerging Market Small Cap Dividend, DGS, may have peaked in an Elliott Wave 2 up at 53.23, as emerging market currencies, CEW, may have peaked in an Elliott Wave 2 up at 22.23. If this be the case then it is reasonable to expect that Turkey, TUR, and Indonesia, IDX, are going to once again fall fast and hard. Small cap shares such as Taiwan Small Caps, TWON, Australian Small Caps, KROO, Small Cap Consumer Discretionary, XLYS, are likely to be exceptionally fast fallers. In the age of delveraging, things that have been leveraged, such as Barclays Leveraged S&P, BXUB,  Barclays Convertible Bond, CWB, Leveraged Buyouts, PSP, the leveraged Russell 2000, URTY, US Home Construction, ITB,  Leisure & Entertainment, PEJ, Retail, RTH, will also be fast fallers. A top is likely in for Retail Grocery, Krispy Kreme Doughnuts, KKD, Clothing Retailer, Abercrombie & Fitch, ANF, and Pet Supplies Retailer, PETsMART, PETM,

The chart of the Dollar Bull ETF, UUP, suggests that the US Dollar, $USD, is in an Elliott Wave 3 up with an objective of at least 81.5 or 82. If this is the case then, even the Swiss Franc, FXF, which has been strong, even rising to a high of 104.21 on December 22, 2010, is likely to turn lower.

World Stocks, ACWI, Weekly may have put a top in at 46.49 on December 23, 2010, and ready to commence an Elliott Wave 3 Down.

World Stocks, VT Weekly, may have put a top in at 47.45 on December 23, 2010, and ready to commence an Elliott Wave 3 Down.

World Stocks, VT Daily, may have put a top in at 47.45 on December 22, 2010.

The S&P, SPY, Weekly, may have put an Elliott Wave 2 high in at 125.60 on December 23, 2010 and is ready to enter into an Elliott Wave 3 Down

The S&P, SPY Daily, may have put a top in at 125.78 on December 22, 2010.

The European Shares, VGK, entered an Elliott Wave 3 Down, on December 14, 2010 at 48.99, immediately before the European Leaders Met; of which John Mauldin wrote they ”kicked the can down the road”, meaning that they came to no comprehensive solution to the European Sovereign Debt and Bank Debt Imbroglio.  The Euro, FXE, entered an Elliott Wave 3 of 3 Down at 133.30 on December 13, 2010.

Junk Bonds, JNK, may come to an Elliott Wave 2 high on December 23, 2010 and ready to commence an Elliott Wave 3 of 3  Down.

The Russell 2000 Growth Shares relative to the Russell 2000 Value Shares, IWN:IWO, may have put a top in on December 17, 2010 suggesting that growth has topped out.

The Small Cap Pure Value Shares, RZV, relative to the Small Cap Pure Growth Shares, RZG, RZV:RZG, put a top in on December 22, 2010 at 0.827, suggesting that the run up in the pure small cap values is over and that a “run of the world currencies” is ready to commence.

Financials, XLF, has completed an Elliott Wave 5 up and is now ready to turn down.  Financials relative to the S&P, XLF:SPY, communicates that both have now peaked out and will be turning lower.

The Baltic Dry Index, $BDI, is reading quite deflationary: it has now fallen to 1795.

IV … A deflationary collapse is coming from Götterdämmerung,
 that is an investment flameout, due to the European Sovereign and European Banking Debt imbroglio, and because of US deficit spending, and the US trade deficit.
World Government Bonds, BWX, and the major currencies, DBV, and the emerging market currencies, CEW, entered an Elliott Wave 3 Down on December 15, 2010, when the European Leaders, as John Mauldin said, kicked the can down the road, in not providing a comprehensive solution to the European Sovereign and Bank Debt Crisis. Falling currency price will take most everything down, which may include the commodity Gasoline, UGA, as well.

Out of  sovereign insolvency and financial collapse, a Chancellor, that is a Sovereign, and a Banker, that is a Seignior, will arise to provide order, credit and moneyness. Perhaps  Angela Merkel or  Herman van Rompuy or John Redwood  or Tony Blair, will rise to govern. And perhaps  Wolfgang Schäuble, or Olli Rehn, or Jean-Claude Trichet, or Gordon Brown or Jose Manuel Barroso, will rise to provide credit.  The Seignior will have fiscal sovereignty to control deficit spending, enforce internal country devaluations, provide a common EU Treasury for both taxation and transfer payments, assure mutual guarantees of the EU debt, and as Timothy Geithner called for, implement unified regulation of banking globally. All seigniorage, both credit and fiscal will come and go through the Seignior, who will make decisions on where money is spent. The Seignior will coordinate all aspects of economic policy, includes taxes, wages.

An investment in gold, $GOLD, as its value in terms of currencies has remained strong since the onset of the European Sovereign Debt Crisis, as is seen in the chart of gold relative to the Australian Dollar, GLD:FXA. I recommend that one purchase and take possession of physical gold. I would recommend a short shelling portfolio of 1/3 ProShares Basic Materials, UYM, and 2/3 ProShares Ultra Russell 2000, URTY, but I question if the brokerages in time of stress will enable withdrawals.  

V. Utilities are in a confirmed bear market; an Elliott Wave 3 of 3 down to be exact.

Utilities, XLU, have been rising for six days as the Interest Rate on the 10 Year US Government Note, $TYX, has fallen lower for six days.

An Elliott Wave 3 Down also commenced in Utility Stocks, XLU, on October 19, 2010, this is shortly after the interest rate on the 10 Year US Government Bond, $TNX, started to rise. And an Elliott Wave 3 of 3 Down commenced in the utility shares on November 4, 2010, when the bond vigilantes sustained the interest rate on the 30 Year US Government bonds, $TYX, above 4%, which has utterly decimated the 30 Year US Government Bonds, EDV.

Edward S Oneal communicates that higher interest rates hurt utilities as they tend to be debt heavy. Yahoo Finance Industry Center relates that NextEra Energy, formerly Florida Power and Light, NEE, has a terrific amount of debt; and Yahoo Finance chart of NEE compared with XLU, shows that NextEra Energy has had a great upward rally that came with the moneyness juice of low-interest rates and anticipation of QE 2, but now has been experiencing a downdraft with rising interest rates.  

Rising interest rates are really going to hurt the construction companies which design and build the power plants; these being FWLT, URS, JEC, FLR, unless they find a king and his project somewhere to help sustain them such as the King Abdullah City for Nuclear and Renewable Energy in Riyadh. Foster Wheeler, FWLT, and Fluor, FLR, manifest topping out in their chart patterns; as does the Design and Build ETF, PKB.

VI …. In today’s news

A … Dave Altig Senior vice president and research director at the Atlanta Fed: Whether we look at headline inflation (straight-up, component-by-component, or in terms of the long-run trend), core inflation measures (of virtually any sensible variety), or inflation expectations (survey or market based), there is little a hint of building inflationary pressure

B … Shadow Government Statistics presents SGS-Alternate CPI, which for 2010 is trending down and now stable

C … Mike Mish Shedlock reports: Margin debt is one measure of the amount of optimism or pessimism in the stock market. Rising margin debt generally correlates to a rising stock market. Margin use has soared to the highest level since September 2008. Moreover, mutual fund cash levels have been near record lows since September, and topping it off, a respected friend tells me NYSE cash levels are negative $35 billion. Collectively, this sounds like “all in” to me, and then some. However, just as in 2007, no one knows for sure when excessive optimism gets punished, historically it always is.

D … Blankfiend comments on the soon coming Euro debasement by the EFSF monetary authority: My thesis for 2011 remains the same – the recognition of sovereign insolvency, starting in peripheral Europe (Portugal, Italy and Spain), but by no means ending there.  Nations like the US and Japan, which can monetize debt may be able to avoid insolvency, but will default on debt through currency devaluation or other means.

The EFSF (European Financial Stability Facility) is little more than a CDO on a sovereign scale.  Rather than taking subprime loans and mixing them with prime to come up with an AAA security, it has taken subprime sovereign debt and mixed it with AAA debt from nations like Germany and France.  Once the mix of bonds in the EFSF becomes toxic enough, the AAA status will be difficult to maintain.  A CDS on the EFSF begins trading in January, and should prove very interesting to watch.  For more on this thesis, I recommend Europe’s Financial Alchemy by Luigi Zingales.

E …  I perceive the death of the sovereignty and seigniorage of the Hungary nation state by carry trade investing.  This is more evidence that the world has passed through a tipping point  …. the world passed from the age of  leveraging and economic expansion that came by Milton Friedman neoliberalism, Free To Choose, carry trades, and Alan Greenspan credit liquidity economic policies,  …. and into the age of deleveraging, and economic contraction.

Shaun Richards in article The Exchange-Rate Carry Trade which affected Japan,Switzerland and Eastern Europe reports:

The countries whose currency was most borrowed for this purpose Japan and Switzerland had low interest-rates in the middle of the last decade whereas many parts of Eastern Europe had high single figure interest-rates. Accordingly each year there is an interest-rate or carry profit and in some cases this was fairly substantial.

To put this into numbers you could borrow in Swiss Francs at just over 2% for ten years at the beginning of 2005. In comparison the Hungarian official  short-term interest-rate was 9.5% and she had various ten-year government bond auctions mostly yielding over 7%. So the attraction is obvious for all the players in this. The margins are so wide that the banks arranging the transaction can pocket quite substantial fees and yet still offer what on the face of them are attractive products. For the borrower the attractions of lower monthly payments and is some cases substantially lower are plain.

The Dangers

1. There was an insidious danger in all this which was not thought through except perhaps sadly by the unscrupulous. This carry trade became very popular in Eastern Europe and in fact became such a feature that it began to become so large that it affected the Swiss Franc exchange rate. This then fell due to the weight of money and it began to appear that not only were there interest-rate profits available but capital gains. I think we can imagine without too much effort the unscrupulous advising individuals and companies that both types of profit were available.
The obvious problem is that as even more were attracted to the scheme the problem of an exit strategy got worse. How could this ever be reversed without having the effect of raising the value of the Swiss Franc ? The answer is that it could not and in fact has been taking place recently when the Swiss Franc has been strong due to its safe haven status and a period where gold has done well. The error was the size of the trade which was much too large for the size of the Swiss Franc exchange rate market.
2. I am sure that some were encouraged to borrow more as monthly repayments under such a scheme would be much lower than before. If you think of a mortgage affordability calculation under the new lower interest-rates the possible implications become plain. I guess by now you will not be surprised there was something of a house price boom in Hungary.
3. There are considerable implications for the countries whose exchange-rate has been borrowed and the smaller the economy the more likely it is that it will be swamped. I have concentrated on Switzerland here but different flows of money also swamped Japan and the Yen which is a much bigger economy. They find that their currency is artificially depreciated at one phase of the arrangement and later artificially appreciated at the final stages.

Where we stand now.

In 2010 both the Swiss National Bank and the Bank of Japan have tried to fight such tendencies and so far they have failed. Actually my opinion is that they never stood a chance. I expressed my views on currency intervention back in late August and am intrigued to notice that Union Bank of Switzerland now agree with me,perhaps they still follow ex-employees!

Added to this is a theory that I have developed which goes as follows, talk of official exchange rate intervention seems to encourage markets to take the proposed intervention on and I think that we saw some of this yesterday. Sometimes they get bored easily and move onto other matters.

So there are real dangers to my mind in foreign currency intervention and it usually does not work. You might not get that impression from the media who like such news stories but it is true. Politicians like to be seen to do something and so the Bank of Japan may come under increasing pressure but it should hold fire in my view.Markets may concentrate on something else in the short-term which would help and if this is a long-term move then there is little it can do anyway. Accumulating more unrealised losses improves nothing. Sometimes you have to accept the limits of what can be achieved.

In practice the Bank of Japan tried various measures to restrain the Yen and certainly directly intervened once when the exchange-rate was at 83 versus the US dollar and maybe once or twice more. With the exchange rate at 82.89 as I type this is hardly a success but of course we never know how event would have unfolded otherwise.

The Swiss National Bank intervened much harder in 2010 and has lost heavily. At the end of the first half of 2010 it had lost some 14.3 billion Swiss Francs and at an exchange rate of 1.26 as I type the situation is worse now. It looks as though she may have tried again yesterday but why she thinks it will succeed now I do not know. Either way trapped between a possible exchange-rate inspired deflation and exchange-rate losses I would imagine it will not be a very happy Christmas at the SNB. If she keeps this up she may well become another central bank whose financial position becomes questioned.

One of the reasons I wanted to discuss this issue today is that it is topical and relevant as the Swiss Franc has been strong this week and the economic problems surrounding Hungary have led to her being downgraded by Fitch to BBB-. But there are two points of further news. Earlier in the week I saw that one of the ratings agencies had reaffirmed Austria’s AAA credit rating.Yes the same Austria whose banks were so heavily involved in the carry trade.

F … Markus Salzmann and Peter Schwarz of in article The Demolition Of Press Freedom In Hungary report: To reduce the budgetary deficit, Orban’s government raided private pension funds, unceremoniously incorporating them into the state budget. Approximately 3 million Hungarians with reserves totalling some €3.3 billion were affected. Critics have spoken of “cold-blooded expropriation”.

However, this was not enough for the international financial markets. They are demanding aggressive measures to permanently and definitively reduce workers’ income and state social spending. An analyst at the Vienna Raiffeisen International Bank was convinced that the Orban government would do everything to prevent a further downgrading of his bank’s creditworthiness. He was expecting a comprehensive reform package of drastic austerity measures in the spring of 2011.

The EU wants to avoid conflict with the Hungarian government, which takes over the EU presidency for half a year on January 1. Furthermore, Orban’s Fidesz party is a member of the European People’s Party, to which numerous other European ruling parties belong―including German Chancellor Angela Merkel’s Christian Democratic Union. Ultimately, all these parties consider it inevitable that authoritarian measures be implemented to enforce the austerity diktats of the banks against the working population.

G. Stephen Koptis remarks in Econobrowser: The customers wanted to borrow in SFr, and either the bank–one of Hungary’s largest–was issuing loans, or it wasn’t. It was.

Could the government of Hungary have intervened? Did the government of Hungary have the sophistication to institute capital controls without causing even greater harm? I have my doubts.

The best the government could have done was to bring the national deficit under control in timely fashion. The socialist government instead spent eight years laying the foundations of a fascist reaction.

The new Media Law was just passed this week. One paper greeted the news with the following loosely translated headline today: “What Progress! From Today, Only Good News”. Hungarians know censorship when they see it. All of which has really nothing to do with capital controls.

H. Hugh Edwards in The Price Of Power: After a sweeping victory in April’s elections, which saw the victorious FIDESZ party elected with a two-thirds majority, the incoming government unveiled a program which departed dramatically from that of the previous caretaker Socialist cabinet that had been following the outline of an IMF Programme introduced after the country narrowly avoided economic meltdown in 2008. Initially the party had pledged to cut taxes and create jobs in an attempt to stimulate the growth the country evidently badly needs to tackle its heavy debt burden, although such moves would obviously threaten targets agreed under the country’s 20 billion euro European Union/International Monetary Fund bailout.

In fact Hungary has – for anyone who looked hard enough – been in an unsustainable fiscal position for some time now (try this article of mine in January, Is Hungary Another Greece?). It was obvious that the deficit was going to be higher than the 3.8% objective – indeed I personally clashed publicly with the Finance Minister (see his reply to me here) on exactly this issue back in January – and that the provisional figures coming out for growth from the statistics office were just a bit too good to be true. Furthermore, the underlying “cashflow” deficit (as in Spain, see charts below) was in fact higher because of the need to fund the losses of state companies and others (like the hospitals and other public entities where the previous government was simply funding the losses by classifying them as unpaid short term debts). Hungary had been lucky until the election in that the financial markets had been too busy with Greece, Southern Europe and the Eurozone to pay the country too much attention. Now that state of grace is well and truly over.
But beyond the immediate, headline-catching, story there lurk a number of issues with implications which stretch well beyond the frontiers of the small central European country. The first of these is the high preponderance of forex loans which have been taken out by Hungarian families (largely in CHF, they constitute over 85% of total mortgages). The presence of these loans has been a massive aggravating factor in Hungary’s ability to conduct an effective monetary policy in a context of high inflation and low growth. Swiss franc loans are attractive in Hungary, since they are much cheaper than forint denominated ones, since while interest rates determined by the National Bank of Hungary are still over 5%, at the Swiss National Bank they are effectively near to zero.

The second issue is the failure of the current IMF programme to return the economy to a sustainable growth path. The Hungarian economy contracted by 7% last year, and even while it grew slightly in the first three months of this year, the level of Hungarian PIB is still likely to fall again in 2010. A 5% increase in VAT last July, and increasing reluctance to take out more loans means that domestic consumption is still contracting, while the public sector has been in an ongoing adjustment process since 2006. This leaves the economy – like its Spanish equivalent – completely dependent on exports to obtain growth. Yet while Hungary now has both a trade and current account surplus, the heavy level of international indebtedness means that the burden of interest payments is heavy, and the capacity to generate export lead growth insufficient.

Finally, we have the political lessons. Having seen the experience of Greece, and now that of Hungary, it must be very clear to all that the traditional ploy of those who win elections against unpopular governments – of blaming their predecessors for the disastrous state of public finances – is now no longer open. The financial markets are indifferent to who is responsible, they simply want to know how the extra debt being made public is going to be paid. So the lions share of their anger inevitably falls on the incoming government.

Also, this kind of situation demands a high level of responsibility from opposition parties. This responsibility was not shown by the FIDESZ party. Indeed in 2008 they organised a succesful referendum against the constitutionality of a number of cost saving measures in the health system (see my post on this at the time), only to find that they themselves will have to introduce similar (if not identical) measures. The only casualty here is democracy. Countries facing problems which can lead to national bankruptcy need the maximum political unity and consensus in seeking a way out, and not short term political gests which can only bring more problems in the longer run. If pensions need to be cut, they need to be cut, if the only way to finance them is to issue more debt at a time when markets are tired of buying so much of it. The sooner politicians find the courage to recognise this the better, whether we are talking about Hungary, or other (let them be nameless) countries on Europe’s periphery in similar difficulties.