Bond Vigilantes Have Called Interest Rates Higher …. And Currency Traders Have Called The Euro Lower In Response To The Federal Reserve’s QE 2

The bond vigilantes have called interest rates higher …. and currency traders have called the Euro lower in response to the Federal Reserve’s QE 2. 

The “bond vigilantes” took action on October 7, 2010 and called the Interest Rate on the 30 Year US Government Bond, $TYX, higher, resulting in the 10 to 20 Year Government Bonds TLT falling lower.

It was later on the October 15, that the” currency vigilantes” came to the market, and called the Euro, FXE, lower, in response to increasing concern over the Death’s Star Debt Monetization.

The 10-22-2010 chart of the Euro, FXE, shows a broadening top pattern with close at 138.78, down from its October 14, 2010 high of 140.22.  It’s like Street Authority communicates: When you see the broadening top, the market will eventually drop.

QE II is Debt Monetization and that is destructive to stock wealth.

Yahoo Finance shows the EUR/JPY traded up slightly to 113.38.

I provide the chart of  FXE:FXY trading up to finish in a black lollipop hanging man candlestick. One can see the red lollipop hanging man candlestick on October 6, 2010 at 116; this was the euro yen carry trade setting up to move the Euro lower on October 7, 2010.

It was an unwinding euro yen carry trade that moved the European Shares, VGK, lower on October 15, 2010 form  51.59 to 51.35.

Neoliberal economist Milton Friedman introduced floating currencies. The era of profiting from borrowing at 0% interest from the Bank of Japan, and investing long in carry trades, started to be over April 26, 2010 with the onset of the European Sovereign debt crisis. Now, on the blows of October 6, and October 15, are simply nails in the coffin of a previous prosperous age. We are entered into an age of austerity and hardship.

Setyo Wibowo, of the Forex Instructor, relates: ”The EURJPY attempted to push higher yesterday, topped at 113.92 but found resistance at the upper line of the bearish channel as you can see on my h4 chart below and closed lower at 113.05″.  The report reads bearish at 113.27: “EUR/JPY’s recovery was limited at 113.92 and weakened again. Intraday bias is turned neutral for the moment. Fall from 115.56 is viewed as a correction in the larger rally from 105.42 only and hence, even in case of another fall, we’d expect downside to be contained by 111.44 support and bring rally resumption.”  Of significant note, this week’s Yahoo Finance value of the EURJPY 113.92 is less than the Yahoo Finance Value of 114.40 of 10-15-2010 suggesting that the currency traders are selling the euro yen carry trade in response to higher sovereign interest rate on the US 30 Year Government bond and falling 30 Year US government bond values and falling 10 to 20 Year US Government Values, TLT.

The primary reason the US Federal Reserve is coming out with QE 2 is to sustain the value of the US Government Notes, SHY,  the mortgage laden intermediate mutual bond funds, such as GSUAX, and the mortgage backed securities traded by bond ETF, MBB. And so far, its efforts have seen success as the Interest Rate On The 2 Year US Government Note, $UST2Y, has fallen to 0.35%. Yes, the Fed definitely will do everthing in its power (read print money without end) to maintain the value of mortgage backed securities, as it has such a tremendous load of them which came via QE I, and the TARP Facility, where it took in not only mortgage backed bonds, but all kinds of distressed securities, like those in the mutual fund FAGIX, and traded out 1.2 Trillion in US Treasuries, of which roughly 1.0 Trillion are now in Excess Reserves at the Fed.  JohnM writing in Housing Doom article Foreign Cenbank Holdings Of US Obligations Update references the report Federal Reserves’s Factors Affecting Reserve Balances as of October 21, 2010 which presents the Fed’s holding of mortgage backed securities in footnote (4) as  1,067,874 – 10,665  + 301,331 … 1,065,751.

The Fed’s QE, communicated through Fed Governors, and through Pacific Investment Management Company, and presented in summary form by EconomicPolicy Journal, has maintained the value of Pimco’s Mint, MINT, Mortgage Backed Bonds, MBB, the Intermediate Bond Funds, GSUAX, and Annaly Capital Management, NLY, as well as distressed investments, FAGIX.

Note the contrast with the above seen in the chart of the longer out US Government Debt, TLT, and its October 7, 2010 fall.

Theyenguy says: “The US Federal Reserve and the currency traders have scorched the Investment Skies, welcome to the Investment Desert Of The Real, we ain’t living in Kansas no more, we are living in a new Investment Matrix, and I hope you interpret the code correctly, and invest in gold, its one’s only protection one has in a debt deflationary bear market.”

For those who insist on short selling I provide a ChartList on  where I suggest that one sell EWO, KBE, ITB, INP, IWM, RZV, EWD, BX, TAN, EWP, PNQI, KROO, FAA, RTH, BWX, EPOL, BRF, DNH, SKOR, PXN, BJK, XME and URTY, RETL, SOXL, EET, UYG. The best debt ETFs to sell short are TLT, ZROZ, TMF and UBT.

Internet, PNQI, with 29% gain year to date, may sell off quickly, as investors take gains on selling internet shares.

Russell 2000, IWM, with 12% gain year to date, is terrifically overvalued when one compares it to banks, as seen in the chart of IWM:KBE

Blackstone Group, BX, with 3% gain year to date, has a tremendous debt load; this is not conducive to investing long in the stock. When it does fall it should be a consistently good faller. 

India, INP, with 24% gain year to date, has seen hot money flowing into the country, as its interest rates have been rising attracting investors; and may see money rapidly flow out quite rapidly, rewarding short sellers.  One can take a look at the chart of Tata Motors, TTM, to understand just how over valued the India shares are.   

Sweden, EWD, with 27% gain year to date, is a fast faller when its currency the Swedish Krona falls, nicely rewarding those who are short.

Australian Small Caps, KROO, with 10% gain year to date, exemplifies rapid growth away from the US Dollar, and when the Australian Dollar, FXA, which has gained  9% year to date, falls, the small caps will fall quickly. And Brazilian Small Caps, BRF, with 18% gain year to date, also exemplifies rapid growth away from the US Dollar, and when the Brazilian Real, BZF, which has gained 8% year to date, falls, these small caps will fall quickly too.  Yes indeed, capital has flowed away from the US Dollar, $USD, and into the emerging markets, EEM, and EET. But it appears that a reversal is at hand. 

Austria, EWO, with 8% gain year to date, has been the major lender to developing Europe, GUR, and ESR. Having provided carry trade home loans to Hungary that will never ever be repaid, makes it an excellent short selling opportunity.

Spain, EWP, with -10% gain year to date, is an excellent short selling opportunity as the country has over 20% unemployment, is basically broke and on life support by selling its sovereign debt to Spanish banks who in turn sell it at full value to the ECB, that is without any hair cut what so ever. And to make matters worse, its autonomous regions have tremendous debt loads and small municipalities are now going broke and not providing services. Spain is a walking zombie, truly worthy of short selling. 

My investment maxim is in a bull market be a bull and in a bear market be a bear. In a bull market buy in dips and in a bear market sell into strength. Gold is in a bull market, so as it dips, and if it dips, buy more. As the US Federal Reserve’s QE 2 gets underway, injecting liquidity into the shorter duration bond marketplace, there will be torrent of flows exiting the U.S. in search of higher returns in “undollars” ie gold, GLD, food commodities, FUD, and agriculture commodities, RJA. I pity the poor peoples of the world as food prices are going to skyrocket.

The longer out bonds, TLT, are in a bear market; so one should sell into strength as it manifests. The rise in TLT on 10-22-2010 to 101.38 from 100.70 was a great short selling opportunity.

My final comment is that the currency vigilantes will be calling the world currencies, DBV, and the emerging market currencies, CEW, lower; and that bond vigilantes will be calling interest rates higher globally resulting in world bonds, BWX, that is sovereign debt globally, continuing to fall lower.

Yes debt deflation will be coming to bonds as well as stocks.

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. And it appears that Debt Deflation may have recommenced October 22, 2010, as the ratio of the small cap value share, RZV, relative to small cap growth shares, RZG, fell lower to 0.808 …. RZV:RZG

The 30:10 US Sovereign Debt Yield Curve, $TYX:$TNX is rising. This was once a good thing for investors; but since October 7, 2010, the rising sovereign debt yield curve, is making it more expensive for corporations to borrow and is punishing terribly those invested in the longer out corporate debt like BLV. This is evidence of the bond vigilantes at work.

I am bearish on oil at the current time. I sell West Texas Intermediate Crude, $WTIC, continuing to fall under $82. And the 200% Oil ETF, USO, falling from its current $10.40 value, as Alejandro Barbajosa reports Investors Reverse Bets On Dollars Gains.

I see Timber, CUT, falling from its lofty 20. And Tin, JJT, falling from 62. And Lead, LD, falling from 62.80.

Yes, I am invested in gold bullion, $GOLD, and I encourage others to be as well.


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