Bond Vigilantes Call Interest Rates Higher And Currency Traders Call Currencies Lower On Concerns That QE 2 Is Monetization Of US Debt

Financial market report for October 27, 2010

A global bear stock and bond market commenced October 27, 2010, out of concern that the Federal Reserve’s QE II amounts to simply printing of dollars to sustain the value of short term US Government debt, as well as to support mortgage-backed securities.  

Interest rates on the US Government Debt, that is the 2 Year US Note, $UST2Y, the 10 Year US Note, $TNX, and the 30 Year US Treasury Bond, $TYX, rose sharply, not on concerns that the upcoming US Federal Reserve’s QE II is too little; but that it monetizes the nation’s debt. So investors sold bonds across the board: Total Bonds, BND, US Government Debt, SHY, IEF, TLT, ZROZ and MBB, the Inflation Protected Bonds, TIP, STPZ, LTPZ, the Corporate Bonds, LQD, BLV, PICB, the Emerging Market Bonds, EMB, and World Government Bonds, BWX. The fact that Junk Bonds, JNK, have now fallen lower means that the Great Global Financial Bubble has burst.

Chart of World Corporate Bonds PICB

Chart of Junk Bonds, JNK

Chart of Zeroes, ZROZ

Chart of World Government Bonds, BWX

The world currencies traded lower continuing yesterday’s world-wide currency sell-off, as the currency traders are exercising their sovereignty over the world’s currencies and implementing competitive currency deflation, by selling the yen based carry trades, causing an unwinding of investment globally.

The US Dollar, $USD, rose to 78.10, as the Yahoo Currency Center shows the currencies in this Finviz Screener traded sharply lower:  SZR, XRU, FXA, BZF, FXS, BNZ, FXE, FXF, FXB,  FXC, CEW, FXY, FXM,  and ICN. The USD/JPY traded up to 81.50; causing its inverse ETF, JYN, to fall lower. 

Chart of the Australian Dollar, FXA, perhaps the world’s strongest currency, fell lower .

The fall of the small cap pure value shares, RZV, relative to the small cap pure growth shares, RZG, RZV:RZG, communicates that a bear market started today as the major currencies, DBV, turned strongly lower, as the Interest Rate on the 30 Year US Government bond, $TYX, rose above 4%, and as the emerging market currencies, CEW, have fallen lower since October 14, 2010, when the Interest Rate on the 30 Year US Government Bond, $TYX, first rose strongly higher. 

Chart of $TYX

Chart of CEW

Falling emerging market currencies, CEW, has caused all the emerging market ETFs to fall.  Emerging market dividend payers, DGS, the emerging markets, EEM, and EET, such as Turkey, TUR, and Thailand, THD, and the emerging markets financial titans, EFN have all fallen lower.

Chart of Turkey, TUR.

The EUR/JPY traded lower to 112.42; which can be seen in the chart of FXE:FXY trading lower at 1.133. 

The Euro, FXE, fell from 138.04, to 137.17, causing European

Financials, EUFN, and European Shares, VGK, Spain, EWP, to fall lower. 

Chart of the Euro, FXE

Small cap shares sold off significantly; these included: Brazil Small Caps, BRF, Russell 2000, IWM, Small Cap Pure Value, RZV, South Korea Small Caps, SKOR, Small Cap Consumer Discretionary, XLYS, Australia Small Caps, Australia Small Caps, KROO, China Small Caps, HAO,  Canada Small Caps, CNDA.

Chart of Australia Small Caps, KROO

Countries trading lower included Sweden, EWD, Japan, EWJ, Mexico, EWW, Emerging Europe, ESR, India, INP, Singapore, EWS, Hong Kong, EWH, Emerging Markets, EEM, Australia, EWA, Poland, EPOL, Austria, EWO, Brazil, EWZ, and the Asian High Yielding Equity, DNH.

World Stocks, ACWI, and VT, the S&P, SPY, the New York Composite, NYC, energy producer Exxon Mobil, XOM, and basic material supplier BHP Billiton, BHP, and the Russell IWM, all fell lower.

Copper Miners, COPX, Metal Manufacturing, XME, Steel, SLX, traded lower on falling base metals, DBB, prices, particularly, Lead, LD, Tin, JJT, and Timber, CUT, prices. 

Oil, $WTIC, USO, and UCO, prices fell on reports of great abundance of product available in the marketplace.

Growth sectors falling lower included, Nuclear Energy, NLR, Solar Energy, TAN, Housing, ITB, Nanotechnology, PXN, Retail, XRT, and RTH,

Cyclical sectors falling lower included Gaming, BJK

Staples, XLP, fell lower.

Higher interest rates means inflation; this caused US Healthcare Provider, IHF, Utilities, XLU, to trade sharply lower; this marks five consecutive days of trading lower in the Utilities.   

Inverse Volatility, XXV, fell lower. The S&P Mid Term Futures Volatility, VXZ, and Volatility, VXX, rose.

Gold, GLD, and the Junior Gold Miners, GDXJ, fell lower, as carry traders took profit on the precious metals.

The turning down today of the real estate sector, PSR,  and IYR, REZ, FIO, Apartment Investment and Management Co., AIV, and Brookfield Properties, BPO, confirms that competitive currency devaluation by the currency traders has started a debt deflationary bear market.

Yahoo Finance Industry Center reports Foreign Telecom, Health Care Plans, Foreign Regional Banks, and Railroads fell lower; the turn lower in these industry groups is additional evidence that a bear stock market is underway. 

Historical records show that monetization of sovereign debt stimulates an investment demand for gold, $GOLD; and that it inflates agricultural commodity, RJA, and food commodity, FUD, prices.

The best ETFs to sell short include EWO, KBE, ITB, INP, IWM, RZV, EWD, BX, TAN, EWP, PNQI, KROO, FAA, RTH, BWX, EPOL, BRF, DNH, SKOR, PXN, BJK, XME … along with TLT, ZROZ, UBT and TMF … and URTY, RETL, SOXL, EET, INDLLBJ, UBR, UPV, and UYG.

The Eurozone Region of Global Governance appears to be forming by task force policy development and announcement of Leaders’ framework agreements. 

Jonathan Isaby of ConservativeHome provides news coverage of the British Conservative Party and writes Herman Van Rompuy Calls For Strengthening Economic Governance In The EU, and provides the The October 21, 2010 Task Force Report To The European Council which calls for “the introduction of a new mechanism for macroeconomic surveillance underpinned by a new legal framework alongside the budget-focused Stability and Growth Pact” and “deeper and broader co-ordination” of economic policy across the EU.  And it states: “In view of a swift implementation, all the recommendations by the Task Force aim to exploit to the maximum all the possibilities that EU secondary legislation can offer within the existing legal framework of the European Union”.  

Lee Rotherham of ConservativeHome writes in article Europe’s Economic Government; Of The Ccommittee, By The Committee, For The Committee:  “It came out late on Friday, so most journalists would have missed it. Van Rompuy has transmitted to heads of government the results of the Task Force on economic governance. This was, you may remember, the result of ministers kicking certain controversies into the long grass in the summer.

The grass has now been mown. In particular, we can observe how there is a clear call for an increased use of “sanctions” to control government recklessness. We note with particular concern “These sanctions will be first applied to euro area Member States only” (my emphasis), and take the form of an interest-bearing fine. Given the existing net British contribution to the EU budget, and the prospect of voting rights also being suspended, I’m not entirely convinced the co-opted buzzword “progressive” quite fits the bill.

It also, crucially, appears that the Commission seems to believe that enough authority already exists for such sanctions to be applied under the current terms of the treaty, a stance which although highly dubious (even were one to consider the use of the “rubber articles”) is only to be expected given the ‘minor democratic difficulties’ that seem to accompany treaty change.

There is also this bold assertion, as has already been flagged up by Dan Hannan: “For the new sanctions that will be adopted in secondary legislation, we will move towards qualified reverse majority vote.” This means the Commission gets its way unless a blocking majority votes against it – the threshold for the majority vote is thus reversed, and, moreover, a deadline is attached to make it that little bit harder.     

We are informed that “There have been some misunderstandings about this issue.” Quite so. Since the treaties don’t provide for it, this looks exactly like the sort of legerdemain that integrationists were involved with at the time of the Convention on the Future of Europe, where there was an attempt by the drafters to allow the treaty to be ratifiable without all the member states ratifying it.

It is as if the Commission has been spotted strolling into the storeroom in Rome where the EU treaties are held, carrying a rubber-tipped pencil.

Meanwhile, as a pointer to how the EU is developing a perverse form of subsidiarity in ever-closer union, this paragraph proves quite instructive;

    In order to further reinforce national ownership of the recommendations issued under the “European     semester”, governments, when submitting the draft budget to the national parliament are expected to     include policy recommendations by the Council and / or the Commission accompanied by an     explanation of how these have been incorporated.

Let’s take a step back. What this all signifies is that we shall soon be able to judge the mettle of the Treasury – all the more easily if it publically releases its submission to the Task Force, dated 9 July.

Hopefully, ministers will stand up to this prestidigitation. If they do so, they have an opportunity to strengthen their negotiating hand elsewhere. Even better, they have a heaven-sent opportunity to renegotiate powers back to the UK.

Some of the suggestions on ConHome of late as to what should come back have been ambitious, but given the realities of the current coalition I think the proposals are meaningless because they are unachievable. It is not that they are undesirable, but that the terms of this debate and latent reticence in the FCO limit our reach even if not our horizons. I have suggested repatriation of Fisheries as an achievable quid pro quo that some Lib Dems might agree with as the price for our agreeing a deal on the Eurozone, providing that non-Eurozone countries are unambiguously and permanently kept out of the equation.

Others will have different, very possibly bigger ambitions. But the real argument is not over the price tag; first we have to wake up Treasury and Foreign Office ministers to the real dangers and equally real opportunities now before them. Carpe diem!”

Jonathan Isaby of ConservativeHome relates Treasury Minister Mark Hoban insists the UK is exempt from the EU economic governance regime.

In Video Report Herman Van Rompuy, President of the European Council, outlines the recommendations of the Task Force to be presented to the EU Heads of State.

In other news of the day

BBC reports, “the minority government of Portugal has failed to gain opposition support for its proposed austerity budget. A failure to pass the budget could plunge the country back into the debt crisis it had seemingly escaped since the summer.” And this: “Prime Minister Jose Socrates threatened to quit if the budget fails, while the finance minister ruled out more talks.” In other words, the Portuguese government is about to fall, bond sales are to be put on Hiatus, and talk of the ESFS’ usage is likely to reemerge, and add Portugal to the list of recipients including Greece and Ireland.

The WSJ  reports that Ireland’s government said yesterday that budget cuts of €15 billion are needed over the next four years, double the amount previously expected, in order to meet EU targets.

Dara Doyle and Matthew Brown of Bloomberg report Irish Bondholders Suffer Pain Again as Budget Cuts Take Toll. Bond investors are losing faith in Ireland’s plan to lower the deficit as spending cuts threaten to undermine economic growth, reducing government revenue. Irish 10-year bond yields climbed within 50 basis points of the 454 basis-point record spread, set Sept. 29, relative to similar-maturity German bunds. Portugal’s spread fell about 1 percentage point against the German benchmark in the past month, the Greek-German yield gap narrowed 102 basis points and the Spanish spread was close to the lowest level since Aug. 10.  Chart of Ireland, EIRL.

John Detrixhe of Bloomberg reports Cash Hoard Shows Borrowers’ Angst Over Growth And Credit Markets. Nature Economist Eliane Meinel Supkis comments: “Businesses are buildingbulk by borrowing cheap ZIRP money and then holding it.  When it looks like spending will be a good thing, they will use it not to hire but to grow in size by eating up smaller entities.  Indeed, since 1990, the main game has been not to grow in size by hiring but to do the exact opposite: grow by absorbing other corporations that are rivals and then firing many people.” … “This is why we now are in an economic collapse: aside from exporting jobs and killing unions, the growth and consolidation of banks and businesses has been aimed at reducing competition and above all, reducing the number of workers.  So debts grew, working force shrank and we get a perfect storm.  All the various schemes and games of speculators, bankers and corporate executives could have run for a much longer time if it wasn’t coupled with chopping apart the workforce and reducing wages!”

Ms Supkis continues: “The games used to hide the reality of our dire economic condition continues.  I found it very hard to believe the headlines about how the taxpayers didn’t lose tremendous sums which were added to our debts due to China: Treasury Hid A.I.G. Loss, Report Says: CNBC investigation relates: “The United States Treasury concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program, TARP.”

And Ms. Supkis relates: “We see real socialist countries doing as well as proto-communist/capitalist dictatorship China as Alexis Xydias and Adam Ewing o Bloomberg report World Sweet Spot Is Nordic as Exports Lift Stocks: “While politicians and central bankers around the world struggle to keep economies from shrinking, the combination of surging exports and Europe’s smallest deficits is boosting optimism for Nordic markets. Credit-default swaps show Danske Bank A/S and Swedbank AB are among Europe’s safest lenders, though their shares trade at lower multiples of assets than Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA.” …. Chart of the Nordic 30, GXF.

And Ms. Supkis concludes: “Semi-socialist Germany is the same way, as Ambrose Evans Pritchard of the Telegraph reports German boom creates ECB policy nightmare as south lags.  “As the French riot so they can retire young, the Nordic and German states are moving in the opposite direction.  And as in all points in history, nations that work hard and don’t export jobs thrive whereas ones the choose to treat the citizens as either disposable cattle or the citizens want to goof off, they collapse.”


The world has gone beyond an important tipping point: the world’s population has passed from the age of prosperity to the age of austerity and debt servitude, with the currency traders acting as currency vigilantes selling the worlds major currencies, DBV, and emerging market currencies, CEW, causing yen based carry trade trades to unwind globally, that is, causing disinvestment from world stocks, ACWI, and the emerging markets, EEM, and the frontier markets, FRN. 

A debt deflationary bear market has commenced in both stocks, VT, and in bonds, BND, in response to the US Federal Reserve’s planned massive dollar printing QE 2.  Currency traders also acted as bond vigilantes, in calling the Interest Rate on the US 30 Year Government Bond, $TYX, above 4%, and the Interest Rate on the US 10 Year Note, $TNX, to 2.7% 

Simon Rabinovitch of Reuters reports: “China Minister Says Dollar Printing “Out of Control”.  Dollar issuance by the United States is “out of control”, leading to an inflation assault on China, the Chinese commerce minister said in comments reported on Tuesday. Chen Deming, speaking at a trade fair in southern China, said that exporters had done a good job of preparing themselves for exchange rate changes as well as rising labour costs, but were suddenly confronted with new challenges. “Because the United States’ issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems,” Chen was quoted as saying by the official Xinhua news agency.”

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 FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar to rise; as can be seen in this chart from April 26, 2010 to June 7, 2010.

On June 7, 2010, the US Dollar, $USD, turned down as the Euro, FXE, rallied on news of the call for the EFSF Monetary Authority to be established. This seigniorage authority may be called upon soon for seigniorage aid to Portugal.

Global debt deflation commenced again today, as the currency traders sold the major world currencies, DBV, and the emerging market currencies,  CEW, and called interest rates higher globally in anticipation that the US Federal Reserve’s QE 2, one week out, will be monetization of debt.   

I envision the day when regional governments will form out of Leaders’ Framework Agreements such as the Security And Prosperity Partnership, the SPP, and a Financial Regulator will arise to oversee banking, lending, credit, investment, and housing.  

Soon the word, will and way of The Financial Regulator will be the law of the land superseding sovereign nations, and their constitutions and laws.  One will no longer be a citizen of a nation state, rather one will be a residence living in a region of global governance.

The world’s sovereign Debt, BWX, as well as all the mortgage-backed securities, MBB, that the currency traders cannot run down through currency deflation, must be and will be applied to every man, woman and child, on planet earth. 

I believe a Global Seignior, that is a top dog banker, will institute unified regulation of banking globally, as referred to in the James Politi and Gillian Tett Financial Times article NY Fed Chief In Push For Global Bank Framework, and that The Seignior will oversee all matters of debt and credit, and will implement a global currency system.”


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