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Bear Market Gets Underway As The Seigniorage Of Quantitative Easing Fails


Financial Market Report for March 10, 2010

The “failure of quantitative easing bear stock market” picked up steam today.

The seigniorage, that is the moneyness, of quantitative easing failed, on February 22, 2011, as the value of distressed securities, like those in Fidelity Mutual Fund, FAGIX, traded lower, and as a result World Stocks, ACWI, turned lower. Failure of seigniorage means there is a demand for US dollars, $USD, as those long stocks and short the dollar, are now rushing to cover their shorts , and take profits on the long position in stocks.

Indices fell today as follows:
Emerging market small caps, EWX, -2.0%
All world small cap stocks, excluding US, VSS, -2.5%
US Small caps, IWM, -2.6%
Small Cap Pure Value, RZV, -2.5%
Nasdaq 100, QTEC, --2.1%
S&P, SPY, -1.9%  
World shares, ACWI, -2.1%

The US Dollar, $USD, and its 200% ETF, UUP, rose today as world currencies, DBV, and emerging currencies, CEW, fell lower. There is a saying “When the dam breaks there is a flood”; and today, there was a downward torrent of falling currencies.     

A dollar liquidity crisis is starting; and it will be a leading factor in pressing the world from the Age of Leverage …. and into …. The Age of Deleveraging.  

The Age of Leverage was characterised by debt expansion, credit liquidity, stability, economic growth and expansion and prosperity …. The Age of Deleveraging is characterised by inflation destruction, debt deflation, credit ill-liquidity, instability, economic contraction and austerity.

The small cap value shares decreased more than the small cap growth shares. Both silver mining stocks, SIL, and shopping center REITS, such SL Green Realty, SLG, are considered to be value shares; these fell strongly today.

Value must precede growth; that is why Ben Bernanke in coming out with quantitative easing, had to increase the worth of the financial shares, which included General Electric, which had so great a commercial lending portfolio. Once the financial structure was stabilized by his TARP, and other facilities, then growth could and did occur. Now all of this is coming undone as its seigniorage, that is its moneyness, is built upon distressed securities, which is now starting to fall together with the US government bonds, which have already fallen, as is seen in the chart of the Flattner ETF, FLAT, and the 30 Year US Government Bond, EDV, and the 10 Year US Government Note, TLT … FLAT, EDV, TLT   

A fall in the Currency Leverage Curve, that is the ratio of the small cap pure value shares relative to th small cap pure growth shares, RZV:RZG, communicates that the FX currency traders are now intensifying their global currency war against the world central bankers, by adding a sell of the world major currencies, DBV, and the emerging market currencies, CEW, to their sell of the US Dollar, $USD.

The  Age of Deleveraging will see the currency traders effecting competitive currency devaluations, that is competitive currency devaluation. Currencies falling lower today included:

XRU -1.3%
FXS -1.3%
FXA -1.5%
FXB -1.0%
FXE -0.8%
SZR -1.0%
ICN -0.8%
FXC -0.7%
BZF -0.6%
BNZ, -0.5%

The Mexico Peso, FXM, The Swiss Franc, FXF, and the Japanese Yen, FXY, traded basically unchanged.

The US Dollar, $USD, rose in relation to the Yen, taking the USD/JPY slightly higher and its inverse ETF, JYN, slightly lower. The USDJPY has been rising ever since QE 2 has been announced; this is why investing long in carry trades has not been productive since the announcement of QE 2, as is communicated  in the Elliott Wave 3 of 3 Decline in the Optimized Carry ETF, ICI.

Fastneal exemplifies a mid cap stock that has benefited from quantitative easing. Fastneal, FAST, paid $0.50 per share in dividends on February 25, 2010. The opportune time to sell this stock short was on Tuesday March 8, 2011 at a price of 62.44, as the stock market had entered a bear market down turn on February 22, 2011, and rose to the point of optimal short selling. Fastneal entered an Elliott Wave 3 Down today; yet it is in the prime short selling territory. Given the fact that it has a PE of 34 means that it has a long fall to a more reasonable PE. I travel around the Internet and am amazed by analysts who have been writing bullish articles since February 22; yes amazed, amused, and also very troubled these pundits, who fail to realize that the seigniorage of quantitative easing and carry trade investing failed February 22, 2011. Many investors are now suffering loss for their lack of understanding of the operation of seigniorage.

Having brought up the subject of short selling, I qualify my remarks by relating that I do not engage in it as I am concerned more about the return on my investment than the return of my investment. I will never place my financial reserves in a brokerage account where they might be swept away but some brokerage rule or government edict. Rather I buy and take possession of  gold and silver bullion and secure it properly.

Failing seigniorage caused stocks to fall today; sectors included the following:

Silver Miners, SIL, -5.9, Silver mining stocks were the swing leader of QE 2, now they are begging the great swing down; with exploratory silver miner SSRI being the greatest swinger of the silver swingers. The silver mining stocks were the inflation trade leaders; now that the seigniorage of the inflation trade has failed, these are failing as well.   

Solar stocks, KWT, -5.2 Solar stocks will be a deflationary leader in the capital short Age of Deflation.
Small Cap Energy Shares, XLES, -5.2
Junior Miners, GDXJ, -5.1
Uranium Miners, URA, -4.5
Coal Miners, KOL, -4.2
Copper Miners, COPX -4.1
Dow Jones Energy Service, IEZ, -4.1
Energy Service, OIH, -3.8
Metal Manufacturing, XME, -3.6
Energy, XLE, -3.6
GDX,  -3.6. It was concern over sovereign debt that has inflated the gold mining shares over the years. Now that the concern is readily apparent, investors are deleveraging out of the mining shares and buying the real thing. Is it not the Age of Deleveraging. The chart of gold relative to the gold mining shares, GDX:GLD, shows that the gold stocks disconnected from the price of gold immediately before the last European Summit in December. They did so again on February 22, 2011, giving credence to the theory that stocks are falling on the exhaustion of quantitative easing. Gold mining make market turns lower with the 30 Year US Government bond, as is seen in the chart of the HUI Precious Metals relative to the 30 Year US Government Bond. $HUI:$USB.
Gold mining stocks, like Nevsun Resources, NSU, will never ever be higher.
Hard Asset Producers, HAP, -3.5
Agriculture, MOO, -3.0
Small Cap Industrial XLIS, -3.0
Community Banks, QABA, -2.6
Gaming, BJK, -2.6
World Real Estate Excluding US, WPS, -2.6
Emerging Markets, EEM, -2.6
Small Cap Pure Value, RZV, -2.5; Small Cap Pure Value, will be a slow but sure, that is a steady decliner in the Age of Deleveraging. Besides Banking, KBE, and Community Banks, QABA, these share are the very essence of the failure of seigniorage.  

Stocks falling lower included the following:
Small cap pharmaceutical manufacturer, Valeant Pharmaceuticals, VRX,
Small cap agricultural implement manufacturer Lindsay Corp, LNN,
Small cap automobile parts manufacturer Modine Manufacturing, MOD. This company was an early on victim of inflation destruction, as were some other automobile parts manufacturers and automobile parts retailers; these were both the first beneficiaries of quantitative easing, as well as the first to suffer the loss of its seigniorage. These others include, Tenneco Automotive, TEN, and Advanced Automotive Parts, AAP.  Other sectors to suffer QE exhaustion early on, were Emerging Market Small Caps, EWX, Pharmaceuticals, XPH,  Airlines, FAA, and Biotechnology, XBI.    

Countries falling on an exhaustion of quantitative easing included the following; these were the ones that benefited from the destruction of the US Dollar by quantitative easing. Many of these saw hot money inflows; now that money is flowing out to buy dollars
Russia, RSX, -4.0
Norway, NORW, -4.3
Australia Small Caps, KROO, -4.0
Canada Small Caps, CNDA, -3.5
Russia, RSX, -4.0
South Korea, EWY, -3.3
Taiwan, ETW,  -3.3
South Africa, EZA, -3.3
Chile,ECH, -2.9%
Spain, EWP, -3.6
Italy, EWI, -3.1
Shanghai, CAF, -2.8
India, INP, -2.5
Brazil, EWZ, -2.5
Europe, VGK, -2.5
The UK, EWU, -2.8
Sweden, EWD, -2.5
Japan, EWJ, -2.5
Japan Small Caps, JSC, -2.0
Mexico, EWW -2.0
Chain, YAO, -1.7
Switzerland, EWL, -1.5
New Zealand, ENZL, -1.5

Falling stock values turned commodities lower. Inflation destruction came to commodities today. Urban Dictionary defines inflation destruction as the fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies. Inflation destruction begets more of the same as former vigilant investors turn short sellers, and carry out their attack on their former investment, by going short the 200% ETFs, such as ProShares Ultra Brazil, UBR.

Inflation Destruction may precede Debt Deflation which 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.”

US Commodities, USCI, -2.0 and Commodities, DJP, -2.1 fell lower on lower stock values
Cotton, BAL, -1.8
Grain, GRU, -1.7
Food, FUD, -2.6
Corn, CORN, -3.2
Agricultural commodities, JJA, -2.1, fell on lower stock prices.
Timber, CUT, -2.4; Timber was the great inflation trade in commodities; it will be a fast faller in the deflation trade
Natural gas, GAZ and UNG, both -2.3
Oil, USO, -1.4

Total Bonds, BND, rose 0.45%

The continuing sell of Junk Bonds, JNK, evidences failed seigniorage of the US Federal Reserve as these are very similar to the distressed investments taken by the US Federal Reserve and for which it traded out money good US Treasuries to commence quantitative easing.

The bond vigilantes called world sovereign debt interest rates higher on the failure of US Federal Reserve’s Seigniorage, and also on the failure of the European Leaders to address the European Sovereign Debt crisis. The Competitiveness Pact is a Framework Agreement for austerity, it does nothing to address the onus of sovereign debt at banks and insurance companies, nor does it provide any assistance in fiscal seigniorage of the periphery nations. World government bonds, BWX, and international corporate bonds, PICB, fell lower.

The ongoing failure of seigniorage which commenced February 22, 2011, deleveraged investments in stocks, ACWI, commodities, DJP, world currencies, DBV, emerging market currencies, CEW, world government bonds, BWX, and international corporate bonds, PICB  

The US Dollar was king in the Age of Neoliberalism; but in the age of Deleveraging gold and silver bullion will be the sovereign currency and storehouse of investment wealth.