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Gold Rises As The Euro Yen Carry Trade Unwinds Sending Currencies, Stocks And Commodities Lower



Stocks fell today August 19, 2010, after the US Labor Department said claims for unemployment benefits rose unexpectedly last week, renewing concerns about the pace of the economic recovery. The Yen, FXY, is rising and the Euro, FXE, is falling; thus the EUR/JPY is trading lower. The great spigot of investment liquidity, the euro yen carry trade is being turned off, sending currencies, stocks and commodities lower. Today’s rise in the Yen, FXY, to 116.05 is not conducive to investing long stocks or commodities; such a high yen causes carry trades to unravel and speculators to pay back their 0.25% Bank of Japan carry trade loans.

ETF fallers included: Solar Energy, TAN, -3.5%,Small Cap Value, RZV, -3.4%, Nanotechnology, PXN, -3.0%, Airlines, FAA, -3.0%European Financials, EUFN, -2.7%, Spain, EWP, -2.1, Russell 2000, IWM, -2.7%, Europe, FEZ, -2.6%.

World currencies, DBV, -0.8 …  Emerging currencies, CEW, -0.5

The Swiss Franc, FXF, rose and the Australian Dollar, FXA, fell below support of 90 to close at 89.48 The US Dollar, $USD, rose to hit resistance at $82.46 When the US Dollar fell lower on June 10, 2010, as the EFSF Monetary Authority was announced, the age of competitive currency deflation commenced: all fiat currencies are now tumbling lower together, albeit at different rates. Yes even the Yen, FXY, will gradually start to fall lower from its perch of support at 116.06. YahooFinance chart shows a falling EUR/JPY inducing a fall in world stocks, VT.

Financial market activity for August 19, 2010

World stocks, VT, -1.5

European Stocks, FEZ -2.6

US Stocks, VTI,  -1.8

Emerging markets, EEM, -0.8

Asian shares, DNH, -1.7 The Asian shares reside at the middle of a broadening top pattern that goes back to September 28, 2009. 

European Financials, EUFN, -2.7

Ireland, EIRL, -2.8

Italy, EWI, -3.1

Spain, EWP, -2.1

Australia, EWA, -2.0 Australia fell from a head and shoulders pattern with support at 21.40 that went back to September 19, 2009. 

Russell 2000, IWM, -2.7 …. The Russell 2000 fell through support of 62.

Japan, EWJ,  -0.2  …. Japan fell to the exact edge of a ledge of support at 9.60

Nanotechnology, PXN, -3.0%

Airlines, FAA, -3.0%

Home Builder, XHB, -2.8

Banks, KBE, -2.4

Industrials, XLI, -2.1

Semiconductors, SMH, -2.0 Semicondctors fell to the edge of a head and shoulders pattern that goes back to December 2, 2009. Both the chart of Semiconductors, SMH, and the chart of banks, KBE; the former represents economic downturn and the second represents financial downturn from mortgage lending.  The only difference between the two is that banks, KBE, is at “the edge of the precipice”. When it goes over, watch for the credit sensitive small US companies, that is the Russell 2000, IWM, to really take a dive.

Solar Energy, TAN, -3.5 % Solar stocks were for the longest time, stock market loss leaders and recently a European Financials Stress Test rally leader 

Industrial and Office Real Estate, FIO  -3.4

Banks, KBE, -2.2

Chart of Hotel and Motel REITs  … HST, LHO, DRH shows their 4.3% fall.

Telecom, IYZ, -1.7% …. The defensive sector, telecommunications finally fell lower today.

Utilities, XLU, -1.4% … This defensive sector finally fell lower today.   

Edward Hugh in SeekingAlpha article Spain’s Addiction To The Use Of  Dinero B presents Spain’s and Spain’s Regions’, that is Spain’s Autonomous Communities’, extra-sovereign, and public-private partnership debt. This off the sovereign debt balance sheet debt explains why the credit default swaps are so high on Spain, and why it’s banks borrow so heavily and continually from the ECB, and why Spain shares fell so signficantly today. He relates:  ”The position of Spain’s local authorities is also similar – with the proportion of “non-accounted” debt rising from 14 to about 23% – although again, there is even more evidence of post-crisis financial stress if we look at the gap between the two lines, and how it widens, which is none too surprising when you consider that it was the local authorities who lost the biggest chunk of their financing with the collapse of the construction boom. Indeed, it is my impression that in this case the gap only hasn’t widened further due to the fact that very few people are now willing to give any sort of credit to Spain’s local authorities” ….  ”As I indicate, one of the easiest ways of “kicking the can down the road” in terms of public finances, is to delay payment on receivables (if you are not sure what receivables are, check this Wikipedia entry), and the following charts show the relentless use of this procedure in Spain, despite the promise of Spain’s government to bring short term credit under control by 2013, there is no sign of this happening to date.”  … “The other big area of “non-accounted” debt, is that accumulated by governmentally owned or “satellite” companies (who may for example run public transport, or outsourced cleaning services for local authorities). As can be seen from the charts below, this debt has increased massively since the crisis started.” 

Mr Hugh goes on to relate a distressing development: “Symptomatic of the current “relaxed” state of things is the fact that only last week José Luis Rodríguez Zapatero, the Spanish prime minister, even started to air the possibility of reversing some of the spending cuts his government announced in May.” … “Mr. Zapatero said the government expected to restore some suspended infrastructure investments” … “A €6bn cut in public sector investment was among the biggest austerity measures announced by Mr Zapatero in May to coincide with the EU and IMF announcement of a €750bn financing facility for the eurozone.”

And Mr. Hugh relates: “European Central Bank Executive Board member Stark was out again on Monday, warning in the columns of the Financial Times that the European Union is all set to ramp up economic surveillance to prevent a repeat of the region’s recent debt crisis. “A new framework for macroeconomic surveillance will monitor whether national trends are compatible with those that are appropriate for the Union as a whole”, he said. “This framework will allow both targeted peer pressure and differentiated and more binding recommendations on follow-up action at the national level.” 

I envision that with a continuing falling EUR/JPY resulting in stock deflation, a liquidity crisis, will emerge, where there will not be enough buyers for sellers of stocks; and that lending will grind to a halt, causing small business failures, and that banks will become sorely decapitalized, resulting in the president of the ECB arising to be credit seignior and provider of liquidity to Europe. I also believe framework agreements will be announced providing for fiscal federalism giving a whole new meaning to the term European Economic Governance. Yes, I foresee a greater fiscal union, that is coming fiscal federalism will result in the Eurozone evolving into a region of global governance where national sovereignty is a concept of a bygone era.   

The European Sovereign Debt crisis was not abated by the either the approval of the EFSF by all 16 Eurozone members, nor by the European Financial Stress Tests. The crisis was only held in abeyance until the currency traders sold out of the euro yen carry trade on August 11, 2010 with the end of the stress tests and again today August 19, 2010, with the US Labor Department relating that claims for unemployment benefits rose unexpectedly last week.  The European Financial Stability Facility, EFSF, has been created with aim to preserve the financial stability in Europe. It’s a special purpose vehicle, SPV, that will sell Euro-bonds and use the money it raises to make loans up to a maximum of € 440 billion to Eurozone nations in financial distress which will be backed by guarantees of the individual nation states. Should the EFSF ever be effective in issuing debt, it will not solve anything, it will only monetize the existing sovereign debt in the eurozone: creating more debt to cover existing debt is never a good thing.

GDXJ, -0.8

Gold, GLD, +0.1  …. Gold broke out August 11, 2010, as world currencies, DBV, and emerging currencies, CEW, turned down. The chart of the Zeroes, ZROZ, Gold, GLD, the Junior gold stocks, GDXJ, and the HUI Precious metal mining stocks,  GLD, ZROZ, GDXJ and GDX, shows that stocks are now starting to be disconnected from the price of gold. The gold mining stocks, $HUI, generally turn lower with US Treasuries, $USB. In as much as US Government debt will be turning lower soon; this represents an excellent time to go short GDXJ which traded lower today, manifesting a bearish harami at 29.56 which is about the sixth time it has reached this high in its history. 

Jesse provides the chart of gold

Commodities, DBC, -1.0

Tin, JJT, traded unchanged.

Bonds, BND, rose to 82.57; Debt deflation came to currencies, DBV, and CEW, stocks, ACWI, and commodities, DBC, on August 11, 2010. Debt deflation will be coming to bonds soon when the 20-30 US Government Treasuries, TLT, turns down. A close inspection of the chart shows a megaphone or broadening top pattern is forming in the daily trading of BND. Another bond ETF, LAG, appears topped out.   

Chart of BND

Chart of LAG

Chart of TIP shows a close at 107.29

This is an excellent time to go short Junk bonds, JNK which fell only 0.2%, having been supported by rising TLT today; they have the potential to fall quickly to 36.00 from their current value of 38.98.

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 commenced on April 26, 2010, when the value shares failed to outperform the growth shares.

It was on April 26, 2010, the currency traders went long the yen and short the global currencies causing the US Dollar to rise. Then there was a rally in the Euro, FXE, on June 10, 2010 as the EFSF Authority was announced. Then on August 11, 2010, the currency traders sold the EFSF rally, causing world currencies, DBV, to fall lower.

An Elliott Wave count on world currencies, DBV, shows April 26, 2010, as being wave 3 down, and August 11, 2010 as being a wave 3 of 3 down. The 3 of 3 waves are the most sweeping and powerful of all waves in that they build wealth on the way up and destroy it on the way down. In a very short order, within a few months to at most two years, all traditional wealth will be utterly destroyed, while gold will be the sovereign global currency. That is why I am invested in gold coins.

ActionForex provides chart of the EURJPY’s fall.   

And LearnToTradeTheMarket provides the chart of the AUDJPY’s fall

Yahoo Finance provides the chart of the fall of the AUD/JPY inducing a 2% fall in EWA.

An Elliott Wave count on Chile, ECH, shows that debt deflation finally came to this stellar stock market performer today, as it finally for the very first time has turned lower. Chile is now commencing on an Elliott Wave 1 down, which comes from CEW falling to the apex of a broadening top pattern going back to March 8, 2010.  Much can be said of the Brazilian Small Caps, BRF;  Turkey, TUR, Taiwan, TWN, and the emerging market small cap dividend, DGS, as well.  These stand very much in contrast with Vietnam, VNM, which fell near its December 2009 low. 

Mention goes to the 200% inverse of the Russell 2000 Value Shares, SJH; and the 200% inverse of the European Shares, EPV, which were two of the better performing bear market ETFs today.

In today’s news

Bloomberg relates U.S. Budget Deficit Forecast Increased by CBO to $1.066 Trillion for 2011. The U.S. Congressional Budget Office predicted the budget deficit for fiscal year 2011 will be $1.066 trillion, revised up from an estimate of $996 billion in March. “Today’s CBO outlook only underscores what we already know — the current pace of U.S. spending is unaffordable and unsustainable, and without a change in direction, this country is headed for fiscal calamity,” Gregg said in a statement. The CBO report said economic growth has been “anemic” compared with previous recoveries and predicted the economy will only grow by 2 percent from the fourth quarter of 2010 to the fourth quarter of 2011. 

Bloomberg Asian Computer Shipments Signal Extended Consumer Spending Slump in U.S. At Taipei-based Acer Inc., the world’s second-largest maker of computers, sales plunged 38 percent in July from a year earlier. Micro-Star International Co., a maker of boards that connect computer components, recorded a 15 percent drop. Sales at Asian computer makers, which account for more than 80 percent of computer and parts imports into the U.S. each year, indicate American shoppers aren’t likely to boost the spending that accounts for 70 percent of the world’s largest economy. Already, consumption is growing at the slowest pace of any recovery since 1945.

Bloomberg reports Retail Spaces Lead Drop in U.S. Commercial Property. U.S. commercial real estate prices fell the most in almost a year in June as the economic recovery showed signs of faltering, Moody’s Investors Service said. The Moody’s/REAL Commercial Property Price Index dropped 4 percent from May, the company said today in a report. The decline was the biggest since July 2009, and pushed the gauge down 0.9 percent from the start of the year. High unemployment and concern over slowing economic growth are hampering a price rebound for offices, apartments, industrial and retail properties, Moody’s said. The Moody’s index is down 41 percent from its 2007 peak, having gained 4.2 percent from the seven-year low set in October. The value of malls and shopping centers fell almost 11 percent in the second quarter, the biggest drop of any commercial property type tracked in the Moody’s index. Apartments and offices values both gained about 4 percent, while industrial properties dropped 2.9 percent.

Bloomberg reports Corporate Bond Risk Increases in Europe, Credit-Default Swap Market Shows. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 4 basis points to 485, according to JPMorgan Chase & Co. at 3:30 p.m. in London. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.5 basis points to 108, JPMorgan prices show. The Markit iTraxx Financial Index of 25 banks and insurers climbed 1.5 to 126.25.

Bloomberg reports Vietnam Dong Slumps to Record Low as Adviser Warns of ‘Shock’. Vietnam’s currency dropped for a fourth straight day to a record low after an adviser to the Prime Minister said the country risks a foreign-currency liquidity ‘shock.’ The warning came after the central bank yesterday devalued the currency for a third time in the past year to boost exports and shore up the nation’s trade deficit that has nearly doubled in the seven months through July. The currency has slumped 5.2 percent in 2010, the worst performance among 16 currencies in Asia monitored by Bloomberg.

Reuters reports U.S. Homeowner Confidence Fell in 2nd Quarter. U.S. homeowners were less confident about the value of their homes in the second quarter, with one-third believing home prices had not yet reached a bottom, real estate website said.

Disclosure: I am invested in gold coins