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Peak Credit Likely Achieved Today As Total Bonds Turn Down

Total Bonds turned down today August 12, 2010.

Total Bonds, BND, turned down today, August 12, 2010; thus Peak Credit, that is Peak Debt, was likely achieved; and if this be the case, then ”bond deflation” has commenced.

The downturn seen in the weekly chart of the mutual FAGIX, lends confirmation, that Peak Debt has been achieved as this investment is falling through the middle of a broadening top pattern. FAGIX invests in distresses securities, the type of which, were accepted in trade under the Federal Reserve’s TARP facility which was part of QE to recapitalize the banks, KBE, the too-big-to-fail-banks, RWW, and some financial institutions, XLF. Under TARP, approximately 1.2 Trillion of US Government Bonds, TLT, and US Government Notes, IEF, were passed out to banks, in effect nationalizing them and integrating them into the US Federal Reserve, creating a combine of state and business banking.

The banks turned the capital infusion back to the US Federal Reserve where it resides as excess reserves,  as is seen in the chart of excess reserves,  EXCRESNS, posted in Dr. Housing Bubble in article there will be no U.S. economic recovery in the second half of 2010 – 13 charts showing weak housing trends, option ARM data, dramatic employment changes, and mortgage equity withdrawals.  The excess reserves are not being deployed in lending, they reside in a liquidity trap, and their value well be rapidly depleted by short sellers invested in ETFs like TMV and TYO, and by people selling out of  mortgage-backed bond funds such as GSUAX

The weekly chart of Total Bonds, BND Weekly, shows a rise that has come carry trade investing. Now that carry trades are unwinding DMV:FXY and CEW:FXY,  there could be a sharp drop in bond values like that seen in September and October of 2008.

In past times of equity market sell offs, debt instruments have often move higher, as equities have sold-off sharply, but that is unlikely to happen at the current time because most of the gains have come through carry trade investing and as investors are likely to take profits and because some, and perhaps a substantial portion of the rise in bonds has come via monetization of debt, as banks went long government bonds and notes with credit that came from their good standing enhanced by the excess reserves.

Yahoo Finance data shows that the US Government 10 Year Note, IEF, has risen from a starting value of 59.60 on July 02, 2002, and has turned down from its August 11, 2010 value of 97.90. This happening on a day when stocks, VT, are trading lower, suggests a top has been made in the 10 Year Note. This being seen in the Finviz monthly chart of IEF   

The daily chart of IEF, shows, five cup and handle breakout, on an ascending wedge with today manifesting a lollipop hanging man candlestick. And the daily chart of TLT shows resistance at a triple top with a questioning harami on three days of falling volume. And the daily chart of ZROZ, shows trading lower in a descending Andrews Pitchfork. The charts suggest to me that bonds are going down and interest rates are going up. 

The interest rate on the 10 Year Note, ^TNX, has turned up from an August 11, 2010 value of 2.68.

The interest rate on the 30 Year US Government Bonds,^TYX, has turned up from its August 11, 2010 value of 3.92. 

One can view the chart of debt, BND, IEF, LQD, EMB, MUB, CMF, JNK and TLT or use the Finviz Screener of Debt to view today’s activity. The Yahoo Finance five chart LAG, BND, and AGG, shows all have turned lower today from their August 11, 2010 highs. The Finviz monthly chart of AGG show three white soldiers and a questioning harami. 

This as Alan Zibel, of the Associated Press writes that today August 12, 2010, mortgage rates sank to the lowest level in decades this week, (which I say were pushed down by carry trade currency traders seeking a safe haven investment far removed from any troubled or liquidity impaired banking institution), to 4.44 percent, down from 4.49 percent last week. That’s the lowest since Freddie Mac began tracking rates in 1971.

Today, August 12, 2010, is the beginning of ”the end of credit”, as bonds traded lower.

The world entered into Kondratieff Winter yesterday August 11, 2010 as currencies deflated and debt deflation manifested globally in a massive sell off of stocks and commodities; and today bonds traded down, commencing the end of credit.

Debt deflation 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.”

Global Debt Deflation had recently commenced on April 26, 2010, when the value shares failed to outperform the growth shares.

After the brief European Financial Stress Test Rally, Global Debt Deflation re-commenced again August 11, 2010. as  the currency traders went long the yen and short the global currencies as is seen in this MSN Finance chart of  FXE, FXA, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar, $USD, traded by UUP, to blast up. The Yen was unable to finish at a gain, as it even succumbed to debt deflation, falling 0.02%, closing lower at 115.99; the chart show what appears to be a dark cloud covering.

European Financials, EUFN, traded 0.8% lower today as fresh concerns have emerged in the news regarding Spain, Greece, and Ireland’s finances. Business Insider relates in Chart Of The Day: The Eurozone Crisis Returns that credit default swap spreads are rising again for all of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). 

Abigail Moses of Bloomberg reports Sovereign Debt Risk Surges as Slowdown May Deepen Deficit Crisis. A gauge of government bond risk rose to the highest level in five weeks on concern Europe’s deficit crisis will worsen as slowing economic growth exacerbates bank bailout costs. The Markit iTraxx SovX Western Europe Index of credit default swaps on 15 governments rose for a seventh day, climbing 4 basis points to 140, according to data provider CMA. The gauge is the highest since July 7 and up from a three-month low of 109.5 on Aug. 3. Swaps on Ireland climbed to a 17-month high on speculation the $32 billion bailout bill for Anglo Irish Bank Corp. will add to the country’s fiscal deficit. The cost of the Anglo bailout may trigger a surge in Ireland’s budget deficit to 25 percent of GDP this year, before dropping to 10 percent in 2011, analysts at Dublin-based Davy Research wrote in a note today. The European Union limit for members of the euro area is 3 percent. Default swaps on Ireland climbed 15 basis points to 286, the highest since March 2009, CMA prices show. Contracts on Anglo Irish jumped 17.5 to 551.5, Allied Irish Banks Plc increased 17.5 to 441 and Irish Life & Permanent Group Holdings Plc rose 14.5 to 337. Germany may also have to absorb the holdings of two so-called bad banks, raising the nation’s debt to 90 percent of gross domestic product, Die Zeit reported. Contracts on Germany increased 3 basis points to 47, the highest since June 29. Swaps on Greece jumped 17.5 basis points to 809.5 as the wage-cuts and tax increases that aim to trim the European Union’s second-biggest budget deficit deepened a recession. Contracts on Portugal climbed 8.5 basis points to 277, Italy rose 10 to 182 and Spain was 7 higher at 221. The cost of insuring corporate debt against default also rose with the Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increasing 16 basis points to 520, according to JPMorgan Chase & Co., the highest in three weeks. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 4.25 basis points to 116.25, and the Markit iTraxx Financial Index of 25 banks and insurers rose 5.5 to 137.5, JPMorgan prices show.

Ambrose Evans Pritchard of the Telegraph in article Irish Debt Under Fire On Fresh Bank Jitters writes Ireland’s borrowing costs have begun flashing warning signs again on fears the full damage from the country’s banking crisis has yet to surface.

Tyler Durden relates that German Die Zeit reports that, in a stunning move, the EU Eurostat Has Ordered Germany To Count The Holdings Of WestLB And Hypo Real Estate As Government Debt. And Mr. Durden questions, will the onboarding of bad debt to the German Sovereign Balance Sheet lead to the nationalized RBS and its $168 billion in debt, be added to UK Sovereign Debt?  And he relates: “Then there is a whole slew of other banks in the pipeline in Europe that are full of trillions in toxic debt: will the sovereign hosts be able to onboard this debt? Most importantly, what happens to our administration’s adamant claims that Fannie and Freddie’s $6+ trillion in debt should not be counted as part of total Federal debt. We are confident that unless this decision by the EU’s statistics office is overturned, it will likely set off the next leg in the sovereign debt crisis.” I state that if the decision of Eurostat is upheld or obliged, then there is an increased federalization of the European Union, and loss of national sovereignty and the establishment of a regional fiscal and monetary authority in Eurostat, giving new meaning to European Economic Governance.     

William Poole, former St. Louis Fed President, in New York Time writes Say Good Bye To Freddie And Fannie.

With currencies, stocks, commodities and now bonds all falling lower, the world has entered into Kondratieff Winter, which is the final of the four economic cycles. Eventually there is an extinguishment of currencies, wealth and lending. And money as it traditionally has been known, ceases to exist.

Yet in the nearer future, I ask, might a credit boss arise to issue and manage credit as the debt bubble implodes and the economy shatters ?

I believe that Credit Seigniors, will oversee the disbursement of credit both in the US and Europe as the debt bubble implodes and the economy shatters.

Here in the US, I envision, that out of a coming credit crisis, where there is no credit available, a Financial Regulator, will exercise Discretionary Governance, and announce a Home Leasing Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve. Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have done servicing mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.

I also envision that this Credit Seignior, perhaps in public private partnership with American Express, AXP, and Capitol One Finance, COF, will provide seigniorage for credit. He will provide finance and issue credit mostly to those companies which serve strategic national needs. 

In Europe, I see a new role for the President of the ECB.  I envision that in response to severe credit contraction and banking ill-liquidity, that he also will be Credit Seignior, as he accepts sovereign and other debt and issues credit to Eurozone member banks thereby keeping some degree of money liquidity flowing.

When the debt bubble bursts, the world will see “the end of credit” as it has traditionally been known, where credit comes from the seigniorage of sovereign nations issuing sovereign debt and financial institutions securitizing bonds. 

Governments will become seignior, that is they will exercise seigniorage and become the first, last and only provider of credit. Then only food stamps and strategic needs will be financed.  

Investment Application

A bottom is being made in TMV as investors go short the yield curve, $TYX:$TNX.

Investors may want to consider investing selling debt by investing in TYO or TMV. It will be interesting to see if traders are able to short the yield curve, and in so doing TMO may rise more quickly in value than TMV for a while; and a strong short of the yield curve might even send TMV lower for a few days.   

Personally I am invested in gold coins and do not trade long or short any investments. I perceive that gold has arisen as the sovereign currency and sole standard of preserving wealth in a debt deflationary global economy where currencies, commodities, stocks and bonds are all falling lower in value. This can be seen in the chart of gold relative to stocks, GLD:VT and gold relative to major currencies, GLD:DBV and gold relative to emerging market currencies, GLD:CEW, and gold relative to debt, GLD:AGG rising in value since August 1, 2010.  

Today, GLD, traded up over 1% to move above its 50 day moving average as bonds, AGG, stocks, VT, major currencies, DBV, emerging currencies, CEW and Commodities, DBC all turned lower.

Oil, USO, plummeted 2.6% as it became aware to market participants that there is a huge oversupply of oil at the terminal that is not being picked up, that is bought by, the oil companies; this is a case where carry trade investors are being badly burnt. Bespoke Investment Group reports Oil Breaks 50 And 200-Day Moving Average In The Same Day. In my list of 25 ETFs to sell short and 7 ETFs to buy long for a debt deflationary bear market, I suggested that one sell Ultra Crude Oil, UCO: its 5% fall is producing gains to short sellers. 

Jesse provides chart article showing the chart of Gold, $GOLD, which broke out on August 6, 2010 and remarks sign of a top in corporate bonds

The five-day chart of gold, GLD, and the junior gold mining stocks, GDXJ, shows that the mining stocks have disconnected from the price of gold, and represent an excellent short selling opportunity, as they will continue to disconnect from the price of gold as stocks continue to fall lower. 

Disclosure: I am invested in gold coins