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Weekly Charts Of The US Dollar, US Treasuries And The Yield Curve Suggest A Top Is Being Made In US Government Debt

|Includes: AGG, SPDR Gold Trust ETF (GLD), IEF, IWM, SJH, TLT, TMV

Introduction: April 26th, 2010 was a watershed event: On April 26, 2010, the world entered into global stock deflation. Could it be that the US Dollar, and US Government debt as well as Aggregate Debt are topping out and will follow stocks into deflation very soon? 

Commentary: Approximately seven weeks after the end of the Federal Reserve’s Quantitive Easing,  the stock market sold off, and also, the US Treasuries, IEF, TLT, ZROZ,  began to fall in value since; yet this week have surged in value in a presumed flight to safe have investment.

The aforementioned IEF, TLT, ZROZ chart shows that it is harder for the longer out maturity debt, ZROZ, and TLT,  to come back to their previous highs than the shorter maturity IEF.  

ZROZ, put in a high of 80.05 on May 21, 2010

TLT, put in a high of 98.10 on May 21, 2010

ETF, IEF put in a high of 93.96 on June 7, 2010

EconomicPolicy Journal reports that The Peoples Bank of China has announced that it will no longer fix its currency in terms of the dollar. Instead it will manage the yuan against a basket of currencies. This new policy by the PBOC is that they will have less demand for Treasury securities. With the alarming Treasury debt that will be issued in coming years the fact that China is marginalizing its direct need for dollars is another reason why at some point U.S. interest rates explode to the upside, says the Journal’s author Robert Wenzel.

President Obama says additional deficit spending are needed: We won’t be able to bring down this deficit overnight, given that the recovery is still taking hold and families across the country still need help. … Just as it would be a terrible mistake to borrow against our children’s future to pay our way today, it would be equally wrong to neglect their future by failing to invest in areas that will determine our economic success in this new century.” The HeritageFoundation in article Budget 2011: Past Deficits vs. Obama’s Deficits in Pictures relates that Obama’s deficits will exceed previous deficits.Such awesome deficits, and lack of any announced austerity measures by the United States places US Debt at a disadvantage in the sovereign debt marketplace.

Reuter provides the report China Says Dollar Peg Is Dead And Vows Yuan Flexibility. And Austrian Economist Mike Mish Shedlock communicates that  Treasury Secretary Tim Geithner gives Schumer a go ahead to pass protectionist legislation. Yes, it looks the Treasury Secretary Geither gives his approval for import duties and other trade sanctions;  he has for all practical purposes announced an all out trade war. Such an development is not conducive in any way to investing in US Treasuries. 

Given a lessening of demand for Treasuries, the yield curve is going to explode sending interest rates on US Sovereign debt higher, destroying the value of US Treasuries across the board.  

Currency chart of FXA, FXE, BZF, FXM, CEW, INR, XRU, FXC, FXS, FXB, FXF, SCR  shows comparative currency loses since April 26, 2010 relative to the US Dollar Bull ETF, UUP: April 26, 2010, brough a great unwinding of yen carry trade investment in foreign stocks.

On April 26, 2010 the US stock markets entered into a wave 3 decline.  John Rubino in DollarCollapse article Pretty Much Everything is Headed Down provides the Australian analyst Graham Dyer’s newsletter which begins with the assertion that most of the world’s stock markets have entered a “wave 3″ decline,  specifically ”wave 3 of 3″, which, according to Elliott Wave theory, is generally the longest and most punishing of the five-wave bear market sequence where he shows a chart of $INDU falling in value.

The Yahoo Finance Chart of DIA, compared to QQQQ and RZV shows this wave 3 decline on April 26, 2010, on unwinding yen carry trade investments, and rising fears of sovereign debt default, causing financial contagion to come to financial organizations, IYG, world-wide especially the European Financials, EUFN.

China stocks, FXI, began their decline on April 14, 2010 on central bank credit tightening. 

The Euro Yen carry trade began to unwind in December 2009; those “in the know”, those ”with inside knowledge of just how serious the Greek debt situation was”, went “double short” the euro and “double long” the yen, as seen in the Yahoo Finance chart of EUO contrasted with YCL. It was at this time the Euro, FXE, really started to take a nose dive.  

Wikipedia’s 2010 European sovereign debt crisis web page gives insight as to the series of events that started the Euro’s down-slide: In October 2009, a new Greek government is formed after the election, led by PASOK, which received 43.92% of the popular vote, and 160 of 300 parliament seats. On November 5, 2009, a new budget draft reveals a deficit of 12.7% of GDP, more than twice the previously announced figure. On November 8, 2009, a final budget draft aims to cut deficit to 8.7% of GDP in 2010. The draft also projects total debt rising to 121% of GDP in 2010 from 113.4% in 2009. On December 8, 2009,  Fitch Ratings cuts Greece’s rating to BBB+ from A-, with a negative outlook. And on Deember 14, Greek PM Papandreou outlines first round of policies to cut deficit and regain investor trust.  

But trust could not be found and the currency traders relentlessly sold the Euro against the Yen causing disinvestment out of Europe and European banks, as the chart of the European shares, FEZ, shows their dramatic tumble in early January, 2010.   It was on December 16, that S&P cut Greece’s rating to BBB+ from A-. and on December 22nd that Moody’s cuts Greece’s rating to A2 from A1. Analysis shows that the European shares, FEZ, began an Elliott Wave 3 of 3 decline on October 22, 2010. 

Yes, the “3 of 3 wave” is the most active of all economic waves; it builds wealth on the way up and destroys wealth on the way down. We are now entering into an era where all wealth outside of gold and oil will be utterly destroyed

Weekly Charts

Chart of the US Dollar, $USD; click on chart to enlarge.

Char of the Seven To Ten Year Government Notes, IEF; click on chart to enlarge.

Chart of the Twenty Year To Thirty Year US Government Bonds, TLT; click on chart to enlarge.

Chart of the Yield Curve, $TYX:$TNX, has been increasing, that is strengthening, since April 26, 2010, suggesting that the rally in US Government debt cannot be maintained; click on chart to enlarge

Chart of the Euro, FXE; click on chart to enlarge.

Chart of the Russell 2000, IWM. The Russell 2000 is comprised of small companies which are critically dependent upon a stable and reliable credit market that provides an unfettered flow of capital at low-cost.  The rising yield curve presents a headwind for the credit sensitive Russell 2000 stocks, IWM as does the widening interest rate spread between junk debt and US Treasury Debt; and also corporate debt and US Treasury Debt.  Click on chart to enlarge.

Chart of ProShares 200% inverse of the Russell 2000, SJH. What Spain is to the European stocks, the Russell 2000 is to US Stocks. The Russell 2000, like Spain shares which have recovered more than its continental peers. The downturn in European Shares, while currency driven of fears of sovereign debt default, has turned into both a bank liquidity crisis a commercial credit and lending crisis. The same will be true of the Russell 2000, lacking the trove of cash on hand of the larger companies, and lacking low-cost commercial credit they will fall awesomely in value. Much research has been published how the small caps out performed the larger companies during the rich years of credit liquidity. Lacking such in the coming down turn, those short with SJH will prosper more than with other 200% short ETFs.  Click on chart to enlarge.

Chart of Direxion 300% inverse of 30 Year US Government Bonds, TMV, is making a bottom; click on chart to enlarge.

Daily chart of Aggregate Debt Daily shows a dark cloud cover candlestick, suggesting that debt investments are topping out. 

Summary: The weekly charts of the US Dollar, US Treasuries and The Yield Curve suggest a top is being made in US Government Debt; and the US Treasuries are going to succumb very soon to the great deflation of financial instruments that includes stocks, currencies, and debt, that commences Debt Deflation. 

Debt deflation is consequence of credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is that “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.”

One immediate consequence of debt deflation is reported by Mike Mish Shedlock: Philly Fed Business Index Dramatically Slows, Lowest Reading in 10 Months.

And Mary Schlangenstein and Mary Jane Credeur of Bloomberg reports another consequence of debt deflation, that being stagflation FedEx Outlook Trails Estimates As Employee Costs Rise

John Hara provides the details of debt deflation in article Into The Abyss: The Cycle Of Debt Deflation posted in Gold Speculator as well as posted in 24HGold; and as he does, he describes the entrance into Kondratievv Winter. 

While the ETFs, SJH and TMV may be appropriate for institutional investors,  Gold, GLD, and gold alone will preserve the personal investor’s wealth. I am invested in gold coins. 

Disclosure: I am invested in gold coins