A bear market in stocks started September 17, 2010 as currency traders sold the Euro, FXE, in response to the Bank of Japan intervening in the currency markets on September 15, 2010 and selling Yen, FXY, to stop the rise of its currency; this caused the Yen to fall to its 20 day moving average, which in turn terminated “long carry trade investing”. The Euro, FXE, fell 0.32% to close at 129.88
This termination of “long carry trading” is reflected in the ratio of the small cap pure value, RZV, to small cap pure growth, RZG, shares, RZV:RZG, falling lower on September 16 and 17, 2010. This value hit resistance at .820 and .810, and closed at .795. The last time this metric had a significant sell off was on April 26, 2010 when the currency traders sold the world’s currencies against the Yen, FXY, as the European Sovereign Debt Crisis came to a head.
The termination of “long carry trade investing” is definitely seen in the yen carry trade charts as of September 17, with the FXE:FXY, FXC:FXY, XRU:FXY and FXS:FXY turning lower, and FXA:FXY, manifesting a dark cloud cover candlestick.
I provide the weekly chart of the Australian Dollar, FXA. I stand in awe as to how strongly it has performed. I have no crystal ball as to how quickly it will fall.
The ratio of major currencies to emerging market currencies, DBV:CEW, manifested a bearish lollipop hanging man candlestick at 50 day moving average, suggesting a fall lower is imminent, that is, the major currencies depreciating faster than the emerging currencies.
The Bank of Japan in selling Yen has commenced competitive currency devaluation; and thus started a more aggressive from of debt deflation than that of April 26, 2010 which accompanied the European Sovereign Debt crisis exploding on the world’s financial markets. Translated into plain English, this means stocks are going to fall fast and hard.
David Oakley of The Financial Times reports on September 15, 2010: “The European repurchase, or repo, market has enjoyed record trading volumes in a sign that the financial system, which came close to breaking down in the aftermath of the collapse of Lehman Brothers, is returning to health. The value of the repo market, considered vital to the functioning of the financial markets, has jumped 25% to €6,979bn from six months ago, beating the previous high recorded before the credit crisis … The new record in outstanding repo volumes in June shows trading in the market has rebounded sharply since December 2008, when it fell to €4,633bn, and surpasses the previous record of €6,775bn in June 2007 – two months before the credit crisis blew up.”
Ralph Atkins of the Financial Times reports on September 13, 2010: “In November last year, Jean-Claude Trichet, European Central Bank president, had a blunt message for bankers and politicians. Addressing the annual European banking congress … he warned emergency measures were all very well, ‘but if their use is prolonged, they can lead to dependence and even addiction.’ Ten months later, evidence is growing that ‘addiction’ by banks in eurozone countries such as Portugal, Ireland and Greece to ECB liquidity support remains high, and may even have increased. That is despite the improvement in the global economic climate and the boost to confidence in the eurozone financial system that July’s bank ‘stress test’ results were supposed to bring.”
The yenguy says: “The Bank of Japan and the currency traders have torched the skies” …..”we are in a new investment matrix” ….. “welcome to the desert of the real” ….. “we ain’t in Kansas no more”.
Wave 3 Down commenced in both the S&P, SPY, and world stocks, ACWI, on April 26, 2010 as currency traders sold the world’s currencies against the Yen as the European Sovereign Debt Crisis came to a head.
Wave 3 of 3 Down commenced in World Shares, ACWI, on September 17, 2010, when the shares fell 0.40% lower, manifesting a bearish engulfing candlestick, as the currency traders sold the Euro -.32%, the Canadian Dollar -.43%, the Swedish Krona -.45, against the Yen +03%, in response to the Bank of Japan intervening and selling Yen on September 15, 2010.
The S&P, SPY, traded 0.04% higher on September 17, 2010, manifesting a bearish lollipop candlestick, as currency traders sold the Euro -.32%, the Canadian Dollar -.43%, the Swedish Krona -.45, against the Yen +03%. A Wave 3 of 3 Down is likely to commence September 20, 21010, as currency selling becomes more pronounced.
The ETF, FAA, is the Investors Weather Vane reflecting expansion or contraction. It is the Predictor, it inevitably rises immediately before the markets turn lower. It rose immediately before the April 26, 2010 European Sovereign Debt crisis; and rose again before the August 10, 2010 downturn; and now has risen again; its rise signals a storm coming in stocks.
The world entered into an Elliott Wave 3 of 3 down, in world stock wealth on September 17, 2010. The third Elliott Wave is the most sweeping and dynamic of all waves. It is the one that builds wealth on the way up and destroys wealth on the way down. The end result for this current bear market will be a total destruction of stock wealth.
On August 31, investors sold out of Bonds, BND, which included ZROZ, and BLV, in response to the August 10, 2010 announcement by Fed Chairman Ben Bernanke to buy mortgage backed securities. Investors see the announcement as monetization of debt, and the market place called a defacto interest rate hike. The 30:10 Yield Curve, $TYX:$TNX, is now flattening. This will operate for years to destroy bond wealth bond in the public and private sectors.
Junk bonds, JNK, which have been leveraged up by abundant credit liquidity and yen carry investing of all sorts, closed up 0.79% for the week completing a three white soldiers advance.
Richard Bravo of Bloomberg reports on September 15, 2010:: “Record sales of speculative-grade bonds this year have chipped away at the wall of debt coming due through 2012, even as companies failed to reduce borrowings relative to earnings, according to Moody’s… About $55 billion of high-yield, high-risk bonds mature through 2012, down 37% from $87 billion in February, Moody’s analysts led by Kevin Cassidy … said… Companies issued about $120 billion of junk bonds in the first half of the year, up from $63 billion over the same period in 2009.”
The end of credit commenced September 17, 2010 as currency traders sold the euro against the yen, calling currencies in general lower in response to the Bank of Japan acting unilaterally to sell Yen to stop the rise in its currency: this amounts to a scorched earth policy on the part of the currency traders.
With the sell of the Yen by the Bank of Japan, and the sell of the Euro by the currency traders, Friday September 17, 2010 marks a historic pivot point. The world passed from abundant credit liquidity to ever diminishing credit liquidity. Peak Credit occurred Friday September 17, 2010. The 0.18% fall in the value of Junk Bonds, JNK, documents that the Global Credit Bubble has been pricked. The world has gone over the tipping point; it has passed from prosperity to debt servitude.
So now, carry trades are unwinding delveraging stock investment value; and the yield curve is flattening destroying bond wealth. Derivatives such as credit default swaps, and interest rate swaps will escalate downward pressure. So there is a complete triad of investment oppression.
Will a Financial And Credit Regulator Arise As Credit Runs Dry?
I believe that soon, out of a liquidity evaporation and a liquidity crisis, stemming from a fast fall in bond and/or stock values, 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.
This person 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/Renting 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, with a fall in the EUR/JPY from 112, there will be stock deflation, with the European Shares, FEZ, falling below 36, and European Financials, EUFN, falling below 22.50. 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.
While many write that Ms Warren has been appointed as lapdog, I believe that Ms. Warren, is more likely to turn out to be the top dog, that is the Seignior, meaning top dog who takes a cut, and be called upon in time of crisis, to assume the role of Financial Regulator overseeing investment, banking, lending, credit, seigniorage and house leasing as her many articles would uniquely qualify her for such a role.
Gold is Sovereign Wealth
Gold, GLD, manifested a lollipop hanging man candlestick and traded 0.07% lower. The rise of gold has been established as it as the sovereign currency and best means of preserving wealth. Over time as people see traditional wealth in currencies, stocks and bonds falling lower, they will rush to buy gold and its price will be maintained. Gold will become more expensive in the world’s currencies: its price certainly did inflate inflate in terms of yen this last week. I find it interesting that its price jumped immediately before the Bank of Japan’s announcement.
For all of those who have forex accounts, I hope your broker recommended the week ending September 17, 2010, going short the EUR/JPY, short the AUD/JPY, and long the USD/JPY. I believe the Euro and other currencies are going down, and that the US Dollar, $USD, traded by UUP will be going up; and JYN, which is the inverse of USD/JPY, will be going down, for a while.
Please understand I am not an investment professional, and I do not recommend numismatic gold coins. I am not a talk show or TV host who peddles liberty, being paid by media moguls or by oil company presidents who also underwrite the Tea Party. I am a blogger who writes on sovereignty and seigniorage, and I do recommend physical gold bullion ownership.
For those interested in short selling I provide a ChartList of stocks and ETFs to sell short for a debt deflationary bear market.
I also provide a Finviz Screener of stocks and ETFs to sell short; EWA, KBE, EUFN, ITB, EIRL, GDXJ, LVS, EWW, PGX, PMR, IWN, XSD, XLYS, EWP, EWD, JJT, HHH, TAN, REZ, NNI, LCAPA, EXPD, PPD, CMG, KME, BZ, PXN, N, FDN, FIO,P SR, BRF, CU, JYN, FRN, PLCE, PETM, TTM, RZV, XXV, AAPL, EPI, and SWH
And I also provide another Screener of Inverse ETFs to sell short: DRN, TNA, URE, UVT, USD, EZJ, and UCO.
One stock group I recommend selling is the Gold Miners, GDXJ and GDX, as when stocks fall lower, and as debt, ZROZ, falls lower, and as carry trades unwind, these will be falling lower as well. The chart of gold relative to gold mining shares, GDXJ:GLD will soon be turning down; and the chart of the HUI precious metal mining shares relative to bonds, $HUI:$USB, will be turning down, as carry trade investment comes out of the gold mining shares.
In today’s news
I … Randall W. Forsyth in Barrons writes Central Banks Embrace Risky Currency Gambit stating that “currency intervention is the new race to the bottom. And relates that competitive currency devaluations during the 1930s, wound up further contracting world trade even as nations tried to gain advantage for their exports to stimulate their own flagging economies.”
II …. Barry Gray of WSWS.org writes Economic Crisis Threatens To Unleash Global Currency Wars.:
III … Vincente Fernando reports in Business Insiser Now Brazil is Intervening to Weaken its Currency, As the Competitive Devaluation Cycle Heats Up.
IV … Dian L. Chu writes in Seeking Alpha article Japan’s Problem Is Bigger Than Yen writes that “some analysts are now worried about a possible global race of devalue-to-prosperity as other countries with appreciating currency may follow Japan’s lead.”
V … Anonymous wrote on 05-09-2007 in InvestmentIndex article US Markets Set For An Imminent Crash: “The overall concern is that stock markets are now in a synchronized worldwide finance bubble, and everything from stocks,, to bonds, to commodities, to include precious metal is infected with speculative froth.”
An excellent example is China’s Shanghai stock market, which is looking more and more like a speculative bubble waiting to implode. The danger signs abound: The benchmark Shanghai Composite Index is up 50% already in 2007, following a spectacular gain of 130% in 2006. On Wednesday, it shot across the 4,000 threshold to close at a record high of 4,013.08. China’s listed firms – most of them lumbering state-owned giants for which there is little reliable financial information – are now trading at lofty multiples of nearly 50 times earnings … someday the piper will need to be paid for this excessive liquidity” …. The chart of Shanghai Composite Index, compared to China, Hong Kong and Singapore, SSE Composite, FXI, EWH, EWS, for the week ending September 17, 2010, shows a close at 2,598, down 2.5% this week; it had a recent peak of 2,698 on September 7th.
VI … XEForexNews provides the Chris Lewis of Reuters report from Hong Kong on September 14, 2010 which describes the leverage that has come via low interest rates, and the former steepening Yield Curve, and flight from the European Sovereign Debt Crisis that produced strong demand for US Treasuries, IEF and TLT, has created a strong demand for high-yielding debt in China, Chinese developer and toll road operator Road King Infrastructure Ltd plans to price a five-year dollar bond on Tuesday, taking advantage of strong demand for the region’s high-yielding debt.
Waiting in the wings were Korea National Oil Corp, Korea, Electric Power Co, Korea Gas Corp and Woori Finance. Korea’s sovereign and corporate bond issues denominated in U.S. dollar, Japanese yen and euro have reached $14.4 billion so far this year, versus a record $24.3 billion posted for all of 2009, Thomson Reuters data showed.
This month, Korea Development Bank and Korea Hydro & Nuclear Power Co have raised a combined $1.4 billion from selling bonds that were oversubscribed, allowing the issuers to price their issues at the tight end of their guidance. The two deals drew nearly $9 billion in orders from investors.”
The iTraxx SovX Asia Pacific index, which tracks the five-year sovereign credit default swaps of 10
countries in the region, was flat at 112 bps, traders said.
VII … Marc Chandler in Seeking Alpha provides Observations Early in the Pacific Century with insights into “Japans Unilateralism” and relates “Welcome to the Pacific Century.”
VIII … Erwan Mahe in Seeking Alpha writes of A Less and Less Cooperative World.
IX … John Brinsley and Sachiko Sakamaki of Bloomberg report on September 16, 2010: “Naoto Kan took less than 24 hours to deliver the ‘decisive action’ he pledged during a fight to remain Japan’s prime minister, selling the yen to stem criticism his response to a slowing economic recovery was inadequate. Kan yesterday authorized the government’s first currency intervention since 2004 … The action came a day after he defeated a leadership challenge from Democratic Party of Japan rival Ichiro Ozawa, who had pledged to weaken the yen. ‘We’ll continue to take decisive measures when necessary,’ Kan said … ‘If rapid yen movements hurt the desire of Japanese companies to invest at home, employment conditions will get worse.’ Kan’s victory over Ozawa brought political continuity to a country that has seen five prime ministers since September 2007. His immediate policy response suggests a renewed urgency to prevent a strong currency from undermining an economic recovery hampered by a dozen years of falling consumer prices.”
X … Sarah Cwiek reports on September 17, 2010 in Detroit Michigan Radio article Tax Foreclosures Surge In Wayne County:
“Wayne County County puts a record 13,000 tax-foreclosed properties on the auction block starting today (Friday).
Ted Phillips is Executive Director of the United Community Housing Coalition in Detroit. He says the number of occupied properties facing tax foreclosure jumped tenfold this year.
Phillips says the economy is driving the problem, but tacking water bills and high interest rates onto back taxes contributed to the sudden surge.
He adds the huge amount of property available raises fears that speculators could buy much of it on the cheap, further degrading already hard-hit neighborhoods.
“In past years there’s been a half a dozen out of town investors that have purchased the property,” Phillips says. “We’ve been at this now long enough to see properties that were purchased at the auction that are now coming back onto the auction because the investors don’t pay the taxes, don’t keep the property up.”
The Wayne County Treasurer’s office says the sheer number of properties is forcing them to conduct the auction online.”
XI … Rob Lieber of The New York Times Your Money covers the appointment of Elizabeth Warren to oversee the establishment of the Consumer finance Protection Bureau and suggests 7 Tasks To Get The Consumer Chief Off To A Good Start: “With the experts help I write a list of seven tasks she might turn to first: 1 Student Loans, 2 Debt Disclosure 3 Free Credit Scores, 4 Other Options for Scores, 5 Lender Guidance, 6 Business Credit, 7 More 45 day Warnings”.
XII … Jim Kuhnhenn, of the Associated Press in article Obama Picks Consumer Adviser, Dodging Senate Fight writes Elizabeth Warren’s “job has the official status of a Cabinet undersecretary, but the title of special adviser to the president elevates her stature considerably and gives her direct access to the Oval Office. The designation appeared designed to quell worries among some Warren supporters that she would be subservient to Geithner.”
Disclosure: I am invested in gold coins