1) … Introduction
The fundamentals for continued economic growth have been dissolved, as the seigniorage for both stock market and economic growth has exhausted. Seigniorage over the last two years has come via quantitative easing 1 and quantitative easing 2; it has been totally consumed and expended. Now exhaustion of quantitative easing will cause economic contraction, to be seen soon in falling capital goods order, falling industrial production, and a falling Bloomberg Financial Conditions Index.
2) … With the exhaustion of quantitative easing, the world is passing through an inflection point.
Seigniorage failed February 22, 2011 as World Stocks, ACWI, World Currencies, DBV, and Emerging Market Currencies, CEW, turned lower, as quantitative easing exhausted.
Exhaustion of quantative easing has turned the World Financials, IXG, lower. The Brazilian Financials, BRAF, Australian Bank, Westpac Banking, WBK, India Bank, HDFC Bank, HDB, the European Financials, EUFN, led by Banco Santender, STD, and the Emerging Market Financials, EMFN, the US Financials, XLF, and Banks, KBE, all fell lower, communicating an end to the seigniorage, that is moneyness provided by quantitative easing and the seigniorage of central banks globally.
Failure of seigniorage comes from the fall lower in distressed investments like those in mutual fund, FAGIX, which constitute a large part of the US Federal Reserve’s balance sheet, and which served to underwrite the recovery of the last two years. Also the turn lower in junk bonds, JNK, from its recent high, and a topping out in world government bonds, BWX, serves as evidence to the end of US central bank seigniorage. Failure of seigniorage is also sen in the ratio of US Stocks, VTI:TLT, relative to US Government Note, and in the ratio of world stocks relative to world government bonds, VT:BWX, both turning lower. Without seigniorage, ACWI, world stocks will fall precipitously world wide. And economic expansion will turn to economic contraction.
The Morgan Stanley Cyclical Index, $CYC, fell lower; its fall communicates an end to the current growth cycle. Given that this growth cycle, and the rise in the Morgan Stanley Cyclical Index, came via the extreme use of the seigniorage of QE, its reasonable to believe that there will be a dramatic fall lower in stock value, and very soon a downturn in economic reports such as Capitol Goods Orders, Industrial Production, Exports, and Bloomberg Financial Conditions Index, as quantitative easing continues to exhaust, effecting deleveraging both in stock market value and in economic activity as well.
The fall lower in the Industrial stocks, IYJ, comes at the same time as the fall lower in the Transportation stocks, IYT, and communicates the Dow Theory principle that a bear market has commenced — as industrial stocks and transportation stocks make market turns together.
This bear market will be the bear market of all bear markets, as the seigniorage of the long enduring Milton Friedman Free To Choose Currency Regime developed over the last forty years has failed.
The where-with-all since the last financial collapse, that is the subprime collapse, has come via quantitative easing 1 and quantitative easing 2. The seigniorage, that is the moneyness, came via an asset swap, where Ben Bernanke, traded out money good US Treasuries for distressed securities, like those traded by mutual fund FAGIX. For the most part, then the banks placed the US Treasuries into Excess Reserve with the US Federal Reserve. The distressed investments, and the Excess Reserves have been the great springboard of investment growth; but now growth shares and the Asian country shares have fallen lower.
The Coal Producers, KOL, fell to 45.53. Arch Coal, ACI, has entered an Elliott Wave 3 Down.
And the South Korea Shares, EWY, fell to 58.09.
And the Taiwan Shares, EWT, fell to 14.52.
And the Copper Producers, COPX, fell to 18.62.
And the Metal Manufacturing, XME, fell to 69.79.
And the Semiconductors, XSD, fell to 60.85,
And the Nasdaq 100, QTEC, fell to 27.31,
And the Russell 2000, IWO, fell to 91.03,
And the German Shares, EWG, to 25.68,
And the Canada Small Caps, CNDA, fell to 34.75,
And the Real Estate, IYR, fell to 59.09; Leading REITS have fallen lower; these include Gilmcher Realty Trust, GRT, and First Industrial Realty Trust, FR,
And the Small Cap Energy Shares, XLES, fell to 37.66, Clayton Williams Energy, lCWEI, fell to 96.33
And the Dow Jones Energy Services, IEZ, fell to 63.73, National Oil Well Varco, NOV, fell to 77.89.
And the Small Cap Discretionary, XLYS, fell to 28.12,
And the Internet Retailers, HHH, fell to 76.81,
And the Solar Companies, KWT, fell to 13.66,
And the Timber Companies, WOOD, fell to 47.97
And the Small Cap Pure Value, RZV, fell to 40.10,
And the Banks, KBE, fell to 26.47,
And the World Stocks, ACWI, fell to 47.92,
And the S&P, SPY, fell to 131.83,
And the Emerging Markets Small Caps, EWX, fell to 51.80,
The snap declines in leading sectors document that a bear market has commenced.
The chart of the S&P Weekly, SPY Weekly, as well as World Stocks Weekly, ACWI Weekly, both show that an Elliott Wave 3 Down has commenced in each.
QE exhaustion has propelled the world from the Age of Leverage and into the Age of Deleveraging. The world is passing from The Age of Leverage characterised by sovereign debt expansion, currency inflation, credit liquidity, stability, stock and junk bond inflation, economic growth and expansion and prosperity … and passing into The Age of Deleveraging characterised by failure of sovereign debt, currency deflation, credit ill-liquidity, instability, stock and junk bond deflation, economic contraction and austerity.
Ben Bernanke in effecting quantitative easing through its TARP Facility effected a bloodless financial, banking, and economic coup d'état that nationalized the banks, and socialized losses to the public while privatizing profits to the corporations. QE created a behemoth of global corporatism which made US Treasuries, distressed securities and junk bonds the money good of worldwide recovery. Now its expansionary inflation has reached its limits, and has turned toxic, destabilizing US Treasuries, EDV, 10 Year US Government Notes, TLT, emerging market bonds, EMB, world government bonds, BWX, emerging market currencies, CEW, emerging market investments, EEM, and the BRICS, EEB.
It was on November, 4, 2010, that the bond vigilantes called the Interest Rate on the US Ten Year Note, $TYX, and the Interest Rate Higher on the 30 Year US Government Bond, $TNX, higher as Ben Bernanke’s QE2 constitutes monetization of debt. The anticipation of Quantitative Easing 2 created a liquidity trade, that was a safe money trade, a money good trade. But investors sold Ben Bernanke’s actual announcement of QE 2, taking profits on Bonds, BND. A flattening in the 30 10 Leverage curve, $TYX:$TNX, which is the inverse of the 10 30 Yield Curve, illustrates the loss of value in the 30 Year US Goverment Bonds, EDV, and the 10 Year US Government Notes, TLT.
Now, debt deflation has come to the greatly inflated ones, that is RZV, XME, XSD, QTEC, HHH, IWO, IYR, KWT, WOOD as Ben Bernanke’s monetization of debt has turned risk appetite to risk avoidance
And debt deflation has even come to the gold mining stocks, GDX, and the junior gold mining shares, GDXJ, as they have fallen lower, having disconnected once again from the price of gold, GLD, as is seen in the chart of gold stocks relative to gold … GDX:GLD.
The HUI Precious metal stocks, ^HUI, have been the great swing trade of all time, now quantitative easing exhaustion has deleveraged even these awesome stocks as is seen in the chart of the HUI Precious Metal Stocks relative to gold $HUI:$GOLD.
Once very desirable precious metal mining companies such as Nevsun Resources, NSU, and Silver Standard Resources, SSRI, have turned down.
Gold, $GOLD, has risen to be the sovereign currency and storehouse of investment wealth as monetization of debt by the US Federal Reserve has created an investment demand for gold.
3) … The Yen Carry Trade as a means of leveraging investments for gain has failed: the end of credit as it has been known has commenced.
The borrowing of funds via the Bank of Japan at 0.25 interest is no longer profitable for investment gain; using yen carry funds to invest long no longer leverages stocks as the value of world stocks relative to the Japanese Yen, VT:FXY, has turned down.
The optimized carry ETN, ICI, turned down on announcement of QE2 and has entered an Elliott Wave 3 of 3 Down.
Thus both spigots of investment liquidity, the US Federal Reserve lowering of interest rates and the provision of carry trade loans by the Bank of Japan have failed. Tthe great world wide investment bubble has popped. The end of credit, as it has been known, has commenced.
The Milton Friedman neoliberal Free To Choose, Floating Currency Regime has come to an end.
A new global banking, and investment regime will soon emerge. It will feature a Seignior, a word which comes from Old English and means top dog banker who takes a cut. He will establish fiscal sovereignty, as well as credit seigniorage, and institute unified regulation of banking globally, as called for, by Timothy Geithner and reported by James Politi and Gillian Tett in the Financial Times.
4) … The US Dollar may take a bounce higher tomorrow February 25, 2010.
The US Dollar, $USD. closed at 77.10. it may bounce up tomorrow February 25, 2010 and a large number of these currencies FXY, FXF, SZR, FXE, FXB, FXS ,ICN, FXA, BZF ,BNZ ,FXM ,FXC ,BZF, and CEW, fall lower, as FX currency traders renew their global currency war against the world central bankers, in a new round of competitive currency devaluations, that is competitive currency deflation. One can use this Finviz Screener to create a portfolio of currencies to track currencies.
The other scenario will be for the US Dollar to collapse through its current base of 77; but I think it will bounce higher before doing so.
5) … The inflation caused by Quantitative Easing has destabilized governments world wide.
Quantitative easing drove up investment in the Philippines, EPHE, EPHE, China, YAO, India, INP, Indonesia, IDX, Turkey, TUR, Thailand, THD and Brazil, EWZ. But the first announcement of QE2 at Jackson Hole destabilized all, as is seen in the chart of EPHE, YAO, INP, IDX, TUR, THD, and EWZ
Coal miners, KOL, have lost more investment value than copper miners, COPX, with Arch Coal, ACI, and ANR Resources, ANR, being prime examples. Other QE exhausted investments include Pharmaceuticals, XPH, Nasdaq Biotechnology, IBB, S&P Biotechnology, XBI, Las Vegas Sands, LVS, Brazil Financials, BRAF, Airlines, FAA, Shipping,SEA, and Manufactured Housing, CVCO as is seen in the chart of CVCO, FAA, SEA, XHP, XBI, IBB and KOL.
Quantitative easing 1 and 2 created a crack up boom in commodities, particularly agricultural, JJA, and food commodity, FUD, prices.
Governments in Africa, AFK, and the Middle East, MES, are in turmoil; turning down investment in gold rich South Africa, EZA.
The sovereign in Tunisia has been deposed. And now Ambrose Evans Pritchard of the Telegraph reports Saudi ruler offers $36bn to stave off uprising amid warning oil price could double. The king of Saudi Arabia last night announced $36bn (£22bn) of extra benefits for his people in an attempt to stop the wave of Arab uprisings spreading to the world’s biggest oil exporter, as experts warned Brent crude could hit $220 a barrel.
Gregory Viscusi of Bloomberg reports Qaddafi Is No Mubarak; Overthrow May Mean 'Descent to Chaos'. Muammar Qaddafi may leave Libya without a way of avoiding further bloodshed. After protesters forced out the leaders of Tunisia and Egypt, both countries had constitutions that laid out the transfer of power to caretakers who are now negotiating a path to greater democracy. Libya, where Qaddafi has ruled since his coup overthrew the monarchy in 1969, has no constitution and political parties and unions have been banned for 35 years. “If Qaddafi goes, there will be an enormous vacuum, not just politically, but also socially and economically,” Diederick Vandewalle, a professor at Dartmouth College in New Hampshire, said by telephone. “There’s no organization that could interact between the government and the protesters.” Libya, home of Africa’s largest oil reserves, may be set for a longer and bloodier period of unrest than its neighbors as Qaddafi, the world’s longest serving non-royal leader, clings to power and no alternative leader emerges.
Robert Hutton and Kitty Donaldson Bloomberg reports Cameron Says World May Need to Act to Stop Libyan Repression. The international community may need to take action to halt attempts by the Libyan leader, Muammar Qaddafi, to crush a revolt against his regime, U.K. Prime Minister David Cameron said. It’s still open to Colonel Qaddafi to stop that behavior,” Cameron said in an interview in Qatar yesterday for Al Jazeera television. “More will have to be done if this violence continues.”
Rajhkumar K Shaaw and Shikhar Balwani of Bloomberg India's Sensex Falls Most Since November 2009 on Inflation, Oil Concerns. India’s benchmark stock index tumbled the most in more than 15 months as food-price gains accelerated and surging oil prices stoked concern inflation will lead to higher interest rates. Tata Motors Ltd., the nation’s biggest truck-maker, sank 7.8 percent, the most in 22 months. Larsen & Toubro Ltd., the largest engineering company, slid 5.3 percent. An index of wholesale farm-product prices rose 11.49 percent in the week ended Feb. 12 from a year earlier, after climbing 11.05 percent the previous week, the commerce ministry said today. Oil surged to the highest in 30 months in London as Libya’s violent uprising cut supplies from Africa’s third-biggest producer. The Bombay Stock Exchange Sensitive Index, or Sensex, slid 545.92, or 3 percent, to 17,632.41 at the 3:30 p.m. close in Mumbai, the biggest drop since Nov. 3, 2009.
Emma Charlton and Keith Jenkins of Bloomberg Greek, Irish Bonds Fall as Crude Oil Gain Damps Demand for Riskier Assets. Greece and Ireland led declines in the bonds of the euro region’s most-indebted nations as escalating violence in Libya pushed the price of oil to a 30- month high, sapping demand for assets perceived to be risky. Greek 10-year yields climbed 11 basis points, or 0.11 percentage point, to 11.86 percent at 4:24 p.m. in London, after reaching 11.89 percent, the highest level since Jan. 11. The Irish 10-year yield surged 17 basis points to 9.32 percent. Portuguese 10-year yields added four basis points to 7.50 percent, while Italian 10-year yields gained one basis point to 4.84 percent.
Zero Hedge Liquidations Coming: Hedge Fund Margin Debt Surges - Total Free Cash Lowest Since July 2007, Just Prior to Quant Wipe Out.
(Hat Tip to Gary of Between The Hedges for the above five news items)
6) … Summary
February 22, 2011, was a day that will live in financial and economic infamy, as quantitative easing failed, and the seigniorage of the US Federal Reserve failed, as the mutual fund FAGIX, and Junk Bonds, JNK, both turned lower. The direction in stock values worldwide, ACWI, is now down.
The United States, has lost totally lost its debt sovereignty, that is its debt and currency seigniorage. The assets of Ben Bernanke’s QE have been used up. Mary Bottari in December 2, 2010 article Ben Bernanke's Secret Global Bank writes: “Thanks to tremendous public pressure and the recently passed Wall Street reform bill, the U.S. Federal Reserve was forced to reveal the details of its emergency bailout of the financial sector for the first time yesterday. From a quick review of the data now available on the Federal Reserve website, we can see that the Fed took an expansive internationalist view of its role, prompting U.S. Senator Bernie Sanders to ask: “Has the Federal Reserve Become the Central Bank of the world?”
Now. the economic growth expansion capability of that bank’’ assets have been fully exhausted, evidence by the world stocks having turned down.
Soon there will come Gotterdammerung, an investment flameout, as US Government Treasuries, EDV, the US Government Ten Year Note, TLT, and World Stocks, ACWI, loose more and more value, Then out of the ensuing chaos a global Chancellor, that is a Sovereign, and a global Banker, that is a Seignior, will arise to establish a new global order, a new and universal Seigniorage with austerity for all.
7) … Suggested Reading
Ron Hara in 321Gold article QE2 And Its Consequences writes that QE2 monetizes US Government debt and runs the risk of collapsing the US Dollar, $USD.
Wall Street Journal EU Should Surrender Budget Powers … subscribes only (I say a fiscal collective, that is a United States of Europe will be born out of the European Sovereign Debt Crisis and that the EFSF currently constitutes a debt union that monetizes the debt of formerly sovereign nation states)