Tyler Durden quotes from the Arnaud Mares, Morgan Stanley, August 25, 2010 report … Sovereign Subjects: Ask Not Whether Governments Will Default, But How … ”Debt/GDP ratios are too backward-looking and considerably underestimate the fiscal challenge faced by advanced economies’ governments. On the basis of current policies, most governments are deep in negative equity. This means governments will impose a loss on some of their stakeholders, in our view. The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.”
“So far during the Great Recession, sovereign (and bank) senior unsecured bond holders have been the only constituency fully protected from partaking in this loss. It is overly optimistic to assume that this can continue forever. The conflict that opposes bond holders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well aligned with those of influential political constituencies …. Investors should be prepared to face financial oppression, a credible threat against which current yields provide little protection.”
I have to agree that investors should be prepared to face “financial oppression” (in addition, people should be prepared to face austerity measures) as a credible threat, against which, current yields, provide little protection.
I believe investors have blown the debt bubble so large, there is going to be a mad rush to the exit doors to sell, where there will not be enough buyers for sellers, resulting in a liquidity evaporation, and a liquidity crisis.
Today in early morning trading, August 25, 2010, a number of carry trades were down again, these include the AUD/JPY trading to 74 as seen in Yahoo Finance chart, and the EUR/JPY trading to 106.6 as presented by ForexInstructor in ActionForex Daily Technical Analysis article.
The Euro, FXE, closed at lower 1.2625 … iForex in ActionForex article Technical Analysis Daily EUR/USD relates that the Euro/Dollar continued decreasing till the weak US home sales pushed the Euro up. The European currency appreciated from 1.2588 to 1.2705 yesterday, and closed today lower at 1.2625.
The Yen, FXY, closed lower at 116.89.
World stocks, VT, traded unchanged. Stocks dropped in the morning on the falling currency carry trades; but recovered in the afternoon.
The ongoing Yahoo Finance chart of Japan, EWJ, Mexico, EWW, Europe, FEZ, Asia, DNH, and the US shares, VTI ….. EWJ, EWW, FEZ, DNH, VTI shows the effect of debt deflation stemming from the sale of EUR/JPY and the AUD/JPY beginning August 19, and 20, 2010.
Carry traders recently ran natural gas up; then they turned massively short, causing UNG to fall sharply. Today it fell another 3.7%. Over the last year, it has provided a negative 55% return, according to Yahoo Finance.
Money flows out of Europe and into Switzerland continued today. The Swiss Franc to Euro Dollar, FXF:FXE, carry trade was part of a transfer of money out of European Financial Institutions, EUFN, that commenced in November 2009 and then exploded in March as concerns finally forced the hand of the EU Finance Leaders and Nation Leaders to announce European Economic Governance with a seigniorage grant to Greece and a call for a Monetary Union with seigniorage authority to issue Eurobonds.
The 20 to 30 Year US Treasuries, TLT, zoomed up this morning to over 109 and closed lower at today August 25, 2010 at 107.41. Today might be a top in the 20 to 30 Year US Government Bonds, as TLT has risen parabolically and is manifesting three white soldiers, a reversal pattern.
The interest rate on the 30 Year US Government Bond, ^TYX, closed up at 3.58.
The interest rate on the 10 Year US Government Note, ^TNX, closed up at 2.45.
The yield curve, $TYX:$TNX, now in its tenth day of flattening; it flattened some more today to 1.409.
The 300% inverse of the 30 Year US Government Bond, TMV, closed up at 33.10.
I believe that once interest rates start to rise, TMV will start to rise faster than TYO, which one can follow in the combined chart of TMV and TYO.
For those who are into charts, I provide a listing of 16 ETFs to sell short and 10 ETFs to buy long for a debt deflationary bear market. As I look at the charts, I see US Government Debt, the ZROZ, and the 20 to 30 Year US Government Bonds, TLT, and municipal bonds, MUB, and California Municipal Bonds, CMF, topping out. Yes, even corporate bonds, LQD, is topping out as well.
Chart of the US Government Zeroes, ZROZ
Chart of Municipal Bons, MUB
Chart of California Municipal Bonds, CMF
Chart of Corporate Bonds, LQD
I believe that soon, out of the chaos of “financial oppression” cited by the Morgan Stanley author, that here in the US a Financial Regulator will be announced who will oversee lending and credit, as well as money market and brokerage accounts. He will be what I call a credit boss or credit seignior who funds economic operations with an emphasis on seeing that the strategic needs of the country are met and that monies for food stamps keeps flowing. I believe the government will become the first, last and only provider of liquidity and money.
I believe that here in the US, the 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 created and serviced mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, and Annaly Capital Management, NLY, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.
And I envision that in Europe, a continuing fall in the EUR/JPY from today’s 106.6, will result in further stock deflation, seen in the ETF, FEZ, falling below 32.50. Then a liquidity crisis will emerge, where there will not be enough buyers for sellers of stocks as well as bonds, causing small business failures and banks to become sorely decapitalized, resulting in the president of the ECB arising to be an “Eurozone credit seignior” and provider of liquidity to Europe.
I also believe that “framework agreements” will be announced in Europe providing for fiscal federalism, giving a whole new meaning to the term European Economic Governance. Yes, I foresee a greater fiscal union. Fiscal federalism will result in the Eurozone evolving into a region of global governance where national sovereignty will be a concept of a bygone era.
Disclosure: I am invested in gold bullion