Bear Market Begins With Currency Traders Squeezing The European Leaders For A Committment

I … Stocks continued their slide again todayreinforcing an end to the rally that began with the announcement of the EFSF Monetary Authority in early June 2010, and which for many insightful investors carried insight that the US would come out with QE 2 in its November FOMC meeting.

A global bear stock market actually commenced on November 5, 2010, when World Shares, ACWI, fell from the November 4, 2010 rally high of 46.60 to the November 5, 2010 value of 46.51on rising credit default swaps of European sovereign debt particularly that of  Ireland and Portugal; and as bond vigilantes, called the Interest Rate on the US Government  Debt, $TYX, above 4.0% as QE 2 constitutes monetization of debt. Currency traders then sold with major currencies, DBV, and the emerging market currencies, CEW, against the Yen, causing carry trades to unwind globally. Peak stock wealth has been achieved as stocks have fallen parabolically lower for a full week.

Other evidence for a bear market downturn comes from:

1) Yahoo Finance reports that the NYSE Cumulative A/D Line, $NYA, topped out on November 5, 2010 at 7800; this is when the Interest Rate on the 30 Year US Government Bond $TYX, rose to 4.126% and major world currencies, DBV, peaked at 24.10, and emerging market currencies, CEW, turned down to 23.48.

2) Bloomberg reports the bear market mutual funds DXESX, DXRSX, And UKPSX began rising November 5, 2010; Barchart reports this as well; The Street reports this as well; MSN Finance reports this as well; Daily Finance reports this as well; and Yahoo Finance presents as well  

3) Barchart reports that the Top 100 Stocks, TOP, began falling November 5, 2010.

4) Yahoo Finance reports high yield municipal bond fund NHMCX has turned parabolicaly lower; and   Bloomberg reports it fell 1.5% this week.   

4) Mid Term Futures Volatility, VXZ, has increase from 68.58 on November 5, 2010, Inverse Volatility, XXV, fell from 31.76 on November 5, and Volatility, VXX,  rose from 44.56 on November 5, 2010.

The 1.5% fall in the chart of the Ibbotson Alternative Completion Index, PTO, also evidences that a bear market is underway; this canary in the stock market coal mine warns investors to get out.

Doug Noland in November 12, 2010 article The Official Start Of QE2 remarks: “For the past couple of months, the world has been enamored with QE2 and prospects for concerted global central bank monetization/liquidity creation.  European peripheral debt problems were viewed as ensuring ECB market intervention/support.  Deflation had the Bank of Japan poised for aggressive action.  In the U.S., structural problems were sure to support multiple QE’s and a feeble dollar.  A faltering greenback equated to ongoing Asian central bank dollar purchases and the “recycling” of these balances back to the U.S. Treasury market.  Ultra-low Treasury yields would then remain a steadfast anchor on market yields for the vast spectrum of global borrowers. ”

I provide the following charts to show just how enamored the world has been with the anticipation of QE 2.

World Shares, ACWI, -1.0%. World shares lost 2.4% this week.

S&P, SPY, -1.2%; the S&P lost 2.0% this week. 

New York Composite, NYC, -1.4%; the NYC lost 2.0% this week.

Russell 2000, IWM, -1.7%; -2.3% this week.

Europe, VGK, -0.4%, -3.2% for the week.
European Financials, EUFN, -0.4%, -4.1% for the week. 
Europe Small Cap Dividends, DFE, -0.95; -4.1% for the week.
Italy, EWI, -0.55; -4.0 for the week.
Sweden, EWD, -1.7%; its fall is greater than that of the Eurozone countries as its currency has for the last two years been more volatile. Sweden shares lost 4.4% this week.  

Ireland, EIRL, -0.3%; Ireland lost 5.3% this week.

The interest rate on Irish 10 Year Government debt had been creeping higher, then this week as Bloomberg chart shows the rate higher, causing the Euro to tumble, and the bond vigilantes to sell world government debt, BWX, which in turn caused the currency traders to sell the major currencies, DBV, and the emerging market currencies, CEW, against the Yen, FXY, globally.  

A nation, any nation, cannot pay this kind of interest rate and survive.

No one and no organization other than the ECB will buy Irish sovereign debt.

The ECB is the fiscal sustainer of Ireland, Greece and Portugal and their people, as their  governments have lost their seigniorage authority.

The ECB is the lender of first and last resort for the Irish people.

The ECB is Ireland’s Seignior.

To help understan the realities of European economics, Gonzalo Lira writes in Financial Sense of the tidal forces ripping Europe apart

Jens Erik Gould and Andres R. Martinez of Bloomberg report:  “The peso’s biggest rally on record may prompt Mexico’s central bank to cut interest rates next year to boost exports after other Latin American policy makers raised borrowing costs to cool their economies.  Governor Agustin Carstens signaled … he would consider cutting rates should the peso keep gaining, according to analysts.” But the currency traders intervened this week and called the Mexico Peso, FXM, 1% lower as part of their global currency war. This resulted in a 2 drop of the Mexico shares, EWW.

Australia, EWA, -1.9%. Australia shares lost 5.6% this week.

Australia Small Caps, KROO, -2.2%; Australia small caps lost 4.7% this week.

Brazil Small Caps, BRF, -2.2%. The Brazil Small Caps lost 7.2% this week.

India, INP, -2.8%; India shares lost 7.2% this week.

India Earnings, EPI, 3.4%; lost 6.8% for the week. The value shares are more currency driven than India proper. India has seen a large amount of currency appreciation as investors have sought the interest rate differential between the 0.25% Bank of Japan lending rate and the currently high interest rate provided by India’s lending institutions. It’s reasonable to expect that India and India Earnings will fall rapidly as carry trades unwind. In other words, it is reasonable to expect that the rate of currency deflation will be greater in India and tht will take a quick toll on India and India Earnings. Those who sold the 200% India ETF, INDL, short, gained 12.2% this week; with 6.1% of that gain coming in today.

Turkey, TUR, -2.1%; Turkey shares lost 5.3% this week.

Asia, excluding Japan, EPP, -1.9% Asia Excluding Japan lost 4.5% in the last week

South Korea Small Caps, SKOR, -5.2%. South Korea Small Caps lost 4.9% this week.

Thailand, THD, -2.5%; Thailand shares lost 5.2% this week.

Emerging Europe, ESR, -1.0%; lost 4.8% this week.

Emerging Markets, EEM, -2.4%; lost 4.3% for the week. Those who sold the 200% Emerging Markets EET, short, gained 7.5% this week, with 4.1% of that gain coming in today

Doug Noland relates:  Chinese stocks (Shanghai Composite) were hit for 5.2% today on fears of more aggressive monetary tightening by the People’s Bank of China.  Chinese authorities have warned of the heightened inflation risk related to QE2.  Yesterday, China reported a larger-than-expected 4.4% y-o-y jump in consumer prices.  Also this week, China reported its October money supply (up 19.3% y-o-y) and bank loan growth ($89 bn) surprised on the upside.  Reports on China’s retail sales (up 18.6% y-o-y) and auto sales (up 27% y-o-y) were strong.  And to the chagrin of Chinese authorities, real estate prices remain resilient at elevated levels.  These days, China’s policymakers face an overheated Bubble Economy, a dilemma compounded by the prospects for surging commodity costs and destabilizing “hot money” inflows.  Patience is wearing thin.  Prospects are not favorable for monetary “tinkering” to be effective. The markets are taking this talk seriously. China, FXI, -3.1%; lost 3.7% this week. Mr Noland also provides these news items.

November 10 – Bloomberg:  “China will force banks to hold more foreign exchange and strengthen auditing of overseas fund-raising, stepping up efforts to curb hot-money inflows…  The State Administration of Foreign Exchange will introduce new rules on currency provisioning and tighten management of banks’ foreign-debt quotas, the regulator said… The government will also regulate Chinese special-purpose vehicles overseas and tighten controls on equity investments by foreign companies in China, it said.”

November 10 – Bloomberg:  “China’s passenger-car sales in October rose at the fastest pace in six months… Wholesale deliveries of cars, sport-utility vehicles and multipurpose vehicles increased 27% from a year earlier to 1.2 million last month… Passenger-car sales surged 76% to 946,400 vehicles in October 2009 as the government cut the tax rate for small cars…”

November  9 – Bloomberg (Wing-Gar Cheng):  “China’s challenger to Boeing Co. and Airbus SAS expects to announce the first order for its single-aisle passenger plane next week, breaking into a market that may be worth $1.68 trillion over 20 years… ‘This is a big breakthrough for China, which will eventually become a player in the global aircraft market,’ said Bai Bingyang, an analyst at Capital Securities Corp in Shanghai. ‘Boeing and Airbus’s duopoly will be under threat.’”

China Small Caps, HAO, -3.3%; -3.5% this week. China Materials, CHIM -4.0%; -3.1% this week.

This induced a massive sell off in copper mining stocks. 

Copper mining, COPX, -3.4%; -3.8% this week.

Based upon the likelihood that carry trade investments will unwind, the best foreign ETFs to sell short are SKOR, INP, BRF, THD, TUR, IDX, GXG

II  … An Elliot Wave 3 of 3 Down has commenced in the world’s stocks, chart shows.

The chart of the world stocks, ACWI Weekly, shows that stocks globally have entered an Elliot Wave 3 Down, the third wave is the most sweeping and forceful of all of the five economic waves: it creates wealth on the way up and destroys wealth on the way down. For all practical purposes, all the world’s fiat wealth will be completely wiped out as this wave takes its toll.    

Solar energy stocks, TAN, will be a fast faller in the debt deflationary bear market, -2.9%; -8.5% this week.

As will clean energy, ICLN. -2.4%; -6.2% this week.

As will Nuclear Energy, NLR. -2.8%.

The commencement of the Elliott Wave 3 Down means an end to profitable investment in energy service companies, OIH, especially those that fail to provide a high dividend; off 2.2% 

Historical evidence shows that utility companies, such as CenterPoint Energy,  CNP, fall quickly in bear markets; its 2.9% fall today brings home that point very well. 

III … The currency traders commenced a global currency war on November 5, 2010 in selling the major world currencies, DBV,  from a high of 24.10;  and at the same time selling the emerging market currencies, CEW,  from a high of 23.52, which had the effect of calling the US Dollar, $USD, higher from 75.88.

Doug Noland in November 12, 2010 article The Official Start Of QE 2 provides the facts that document that the currency traders have commenced a global currency war against the world governments: “The dollar index rallied 2.0% (up 0.3% y-t-d) to 78.11.  For the week on the downside, the Swedish krona, FXS, declined 3.7%, the Norwegian krone 3.3%, the Australian dollar, FXA, 3.1%, the New Zealand dollar, BNZ, 2.8%, the South African rand, SZR, 2.7%, the Brazilian real, BZF,  2.5%, the Euro, FXE, 2.4%, the Danish krone 2.4%, the Swiss franc, FXF, 2.0%, the South Korean won 1.8%, the Japanese yen, FXY, 1.5%, the Canadian dollar, FXC, 1.2%, the Mexican peso, FXM, 1.1%, the Singapore dollar 0.9%, the British pound, FXB, 0.4%, and the Taiwanese dollar 0.3%.”  One can follow commonly traded currency ETFs in this MSN Chart of FXA, FXE, FXM, FXC, ICN ,FXB, FXS, SZR, FXF, BZF, XRU, FXY, BNZ or this Finviz Screener

The only result of this global war will be the destruction of all currencies; and the institution of a global currency.

The fall of the Optimized Currency ETN, ICI, from  47.40 to today’s 46.96, communicates that peak currency wealth has been attained.

The European Financials, EUFN, Spain, EWP, Italy, EWI, and Austria, EWO, in addition to the Interest Rate on the US 30 Year Interest Rate, $TYX, are the current focal points of the global currency war, which started November 5, 2010, as the currency traders have undertaken a plan to establish global corporatism and themselves as sovereign over humanity.

In summary: global competitive currency deflation, that is global competitive devaluation, has come at the hands of the currency traders, as concerns have arisen over the sovereign debt of Ireland and Portugal, and that the US Federal Reserve’s QE 2 purchases of US Government debt, constitutes monetization of debt.

IV … The global currency war and falling global currency values means an end to investing long in yen based carry trades and US dollar based carry trades.

Evidence for the end to carry trade investing comes from six sources:

1) The fall in Junk Bonds, JNK, from their Thursday November 4, 2010 high of 41.25, as well as the fall in Asia High Yielding Equities, DNH.  The chart of these suggests that the world has passed through Peak Investment Liquidity

2) The fall in the Optimized Currency ETN, ICI, from its November 8, 2010 high of 47.40 suggests that peak fiat currency wealth has been achieved and that currencies cannot be leveraged one against another for long-term gain.

3) The fall in the small cap pure value shares, RZV, relative to the small cap growth shares, RZG, RZV:RZG, below support of 0.815 suggests that the currencies in falling lower, are deflating the worth of the value shares and that carry trade investing can no longer be profitable.

4) The rise in the US Dollar, $USD, traded by UUP, suggests that the currency traders are now repaying their dollar carry trade loans taken out at Wall Street Brokerages.

5) The global yen carry trade, ACWI:FXY, has fallen lower from a lollipop hanging man candlestick, over debt issues in Europe, and now concern over inflation in China, suggests that world stocks are going to continue to fall lower.

6) The fall in major currencies, DBV, and emerging market, CEW, since November 5, 2010, has been greater than the fall in the Yen, FXY, suggesting that investors have forsaken risk appetite and now have risk aversion.  Off the currencies seen in this Finviz Screen, FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, CYB,  BZF,  XRU, FXY, BNZ, DBV, CEW, the Swedish Krona has been the greatest.

The currency traders have forced an investment paradigm shift from investing long in carry trades to going short in carry trades as seen in the chart of the major currencies relative to the Yen … DBV:FXY 

The chart of the emerging currencies relative to the Yen … CEW:FXY provides additional evidence  of the currency traders going short in carry trades.

Investment liquidity is now turning down.

The week ending November 12, 2010 saw falling carry trades, stock values, and bond values …. the world has passed from age of prosperity and growth that came from the Japanese Central Bank’s ZIRP lending policy, the neoliberal Free To Choose economic policies of Milton Friedman, and US Central Bank quantitative easing … and into a new age of austerity and contraction that comes from competitive currency deflation, at the hands of the bond vigilantes and the currency traders.   

Since January 1, 2009, there has been an awesome hot money flow into Thailand, THD, Turkey, TUR, Australia, EWA, and Sweden, EWD. as evidenced by the chart of the emerging market currencies, CEW, relative, to the Brazilian Real, BZF, the Australian Dollar, FXA, the Swedish Krona, FXS, and the Euro, FXE …  CEW, BZF, FXA, FXS, FXE  It is reasonable to believe that stock values will fall quickly in the countries mentioned, especially their small cap shares, their value shares and their dividend paying shares, as competitive currency devaluation, at the hands of the currency traders, picks up speed. 

The vice stocks have been the darling of the carry trade investors, BJK.   

Closing out of carry trade investments caused gold, GLD, to fall 2.8%

And the junior gold mining shares, GDXJ, fell even more than gold; off 3.9%. In article after article, I have warned investors against this speculative investment, as the price of the junior gold mining shares, relative to gold, GDXJ:GLD, zoomed parabolically higher last week.

Some speculative carry trade investment washed out of food commodities, FUD, today -6.5%. 

And out of Tata Motors, TTM, as well, -5.1%

And out of the ever manic silver, SLV, too, off 5.9%. This is what happens when things go parabolically higher — all attributable to 0.25% percent Bank of Japan Lending and anticipation of the US Federal Reserve’s QE2.

The 6.2% fall in nickle, JJN, verifies an end to profitable speculation in base metals as well as concerns over inflation in China. 

Much can be said of  Tin, JJT, as well, off 4.5%.



V …. Commodities, DBC, fell to the lower part of their upward channel; off 4.2% 



VI … The cessation of investing long in carry trades coupled with risk aversion to sovereign debt, has turned total bonds, BND, 0.45% lower; this is a terrific amount for bonds.

The 0.4% fall seen in the chart of Aggregate Debt, AGG, shows that peak debt, that is peak credit has been achieved. 

The 2.1% fall lower of subprime subprime automobile lender Nicholas Financial, NICK, communicates the end of credit has commenced.

VII … The end of stimulus and the beginning of austerity is seen in the huge issuance of Build America Bonds sales and their likely termination next year by a Republican Congress as well as by rising interest rates.

Brendan A. McGrail of Bloomberg writes In $4 Billion of BAB sales this week Denver’s RTD sells 300 Million secured by sales tax: Denver’s Regional Transportation District, which runs the Colorado capital’s mass-transit system, took advantage of pledged sales-tax revenue to win the lowest borrowing cost of the week’s five largest Build America Bonds.

The transit agency’s $300 million borrowing, rated third highest by Moody’s Investors Service at Aa2, the same as three of the biggest issues, paid the least amount of extra yield above 30 Year Treasuries, according to data compiled by Bloomberg. The sale came amid a supply surplus that drove the average yield to an almost four-month high.

About $4 billion in Build Americas, BAB, are being sold this week, the most ever for a holiday-shortened week, according to Bloomberg data. States and municipalities are issuing about $11.2 billion in municipal debt this week, the most since Oct. 29, Bloomberg data show.

The sales-tax revenue backing RTD’s deal “is very secure funding to support the payments to our lenders,” Chief Financial Officer Terry Howerter said in a phone interview. “Our sales taxes come in, and our debt is serviced before we make payments for operations, etc.”

The agency’s 40-year obligations, its first Build America, BAB, sale, priced to yield 5.84 percent, or 160 basis points above 30-year Treasuries. That compares with so-called spreads of 160 basis points for Santa Clara Valley Transportation Authority’s 22-year bonds, 240 basis points on University of California 38-year bonds, and 167 basis points for New York City Municipal Water Finance Authority’s 34-year debt. A basis point is 0.01 of a percentage point.

The agency’s November 2038 bonds were priced to yield 4.6 percent, about 50 basis points above a Bloomberg Valuation index of AAA 28-year securities.

The spread between 2 and 30 Year AAA reached 376 basis points yesterday, the most since Dec. 16, according to Bloomberg Valuation indexes, as investors took more defensive positions against possible future inflation.

“I would say it’s a concerned market,” said Mark Steffen, chief operating officer at White Plains, New York-based Belle Haven Investments, which oversees $450 million in munis. “Investors have been a little bit nervous. Two-years and shorter are rallying because it’s a good hiding place.”

Yields on 30 Year AAA bonds surged 29 basis points midweek, the biggest one-day jump since April 20, while two-year bond yields fell three out of four days this week, Bloomberg Valuation indexes show.

The general drop in municipal yields is likely to persist next week as increased issuance continues to overwhelm demand, Steffen said. About $18.4 billion is scheduled for next week, which would be the most since at least 2003, Bloomberg data show.

Selway of Bloomberg reports:  “The Republican landslide in U.S. House elections may derail efforts to extend the Build America Bond program, BAB, a part of President Barack Obama’s stimulus that has helped pump $158 billion into local public-works projects.  With the federally subsidized bond program set to expire at year-end, supporters are pressing for an extension … Prospects will grow dimmer in January, when Republicans, who have called Obama’s $787 billion stimulus too costly, take control of the House and reduce the Democratic majority in the Senate.”

Rising interest rates are implied by the fall in price of Build America Bonds, BAB. The chart of BAB shows that the investment literally broke down as the Interest Rate on the US 30 Year Government Bond, $TYX, rose above 4% as bond traders called the Federal Reserve’s QE 2 monetization of debt.   

Vivien Lou Chen of Bloomberg reports:  “The Federal Reserve’s decision to undertake a second round of large-scale Treasury purchases may be prescribing the ‘wrong medicine’ to the economy’s ailments, said Richard Fisher, president of the Fed bank of Dallas … ‘I asked that the FOMC consider that we might be prescribing the wrong medicine for the ailment from which our economy is suffering,’ Fisher said … ‘The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed.’

VIII … The Euro, FXE, rose 0.2% today as Lorraine Turner and Padraic Halpin of Reuters in article Respite For Ireland, Euro After Sharp Selloff report that the Leaders Of France, Germany, Italy, Spain and Britain, at the Group of 20 Summit, on Friday November 20, 2010, announced in Seoul Korea, that the future European debt crisis resolution mechanism, will not apply any hair cut whatsoever to any outstanding debt that exists at the current time: “Whatever the debate within the euro area about the future permanent crisis resolution mechanism and the potential private sector involvement in that mechanism we are clear that this does not apply to any outstanding debt and any program under current instruments,” the statement said.

Market pressure on Ireland and other euro zone states eased and the single currency made up ground on Friday after Europe reassured bondholders they would not be forced to take a hit in the event of a new bailout in the bloc.

Irish Prime Minister Brian Cowen criticized Germany for pushing the idea of asset value reductions, or “haircuts,” for private bondholders in a future rescue mechanism that Berlin wants in place by 2013, when the currency bloc’s temporary bailout facility expires.

Although Germany has made clear the new mechanism would only apply to debt issued after that date, the plan has spooked investors, who have sent the borrowing costs of peripheral euro countries to record highs.

Concerns about Ireland and fears its woes could drag down other countries on the euro zone periphery like Portugal and Spain have weighed on the euro, which hit its lowest level against the dollar since late September on Friday.

But the EU statement appeared to calm currency and bond traders, who pushed the euro up a full cent from six-week lows to $1.37 and the risk premiums for Irish and other peripheral debt lower.

Ten-year Irish spreads over German Bunds stood at 600 basis points, down from record highs of nearly 700 earlier in the session, while Greek spreads narrowed to 900 basis points after rising to 985 earlier.

Despite Friday’s gains, peripheral yields remain far above the levels they have traded at in recent months and traders said worries about the financial state of Ireland and Portugal remained acute.

Gilles Moec, an economist at Deutsche Bank, said the fact that the EU statement did not include any mention of “haircuts” was a positive for the markets.

“I think that it is very significant that the possibility of haircuts is not mentioned,” Moec said. “I think that’s a clear signal they want to send to the market.”

Germany is expected to finalize its proposals for the new rescue mechanism next week, possibly presenting them to its euro zone partners at a meeting in Brussels on Tuesday, November 16.

Finance Minister Wolfgang Schaeuble could come under intense pressure at that meeting to water down the plans, which Ireland and others blame for rekindling a crisis euro zone countries thought as recently as last month they had largely overcome.

The Irish Times reported on Friday that informal contacts were already under way between Brussels, Berlin and other capitals to assess their readiness to activate the EU’s rescue fund in the event of an application from Dublin.

A spokesman for Ireland’s finance ministry called the report “completely untrue.

Irish officials have insisted they have no intention of tapping the fund, stressing they are not in the same situation as Greece was back in May, when it was forced to seek a 110 billion euro ($150 billion) rescue from the EU and IMF.

Ireland is fully funded through mid-2011 and is therefore not currently at risk of a Greek-style liquidity crisis.

Dublin expects to return to the market early next year and hopes a four-year 15 billion euro austerity plan to be unveiled later this month and passage of the 2011 budget in early December will bring its borrowing costs down.

“We’re not borrowing at the present time so I don’t think any of what’s going on at the moment is going to affect the real price of Irish borrowing,” Communications Minister Eamon Ryan said on Friday. “When we do have to go out next year, I think there will be different circumstances.”

But concerns remain about whether Irish borrowing costs will fall far enough by then to make debt refinancing sustainable, or whether the deeply unpopular Cowen can win passage of the budget on December 7 given his government’s razor-thin majority in parliament.

Growth data on Friday highlighted sharp divergences between euro zone heavyweight Germany and the weaker periphery, which is putting in place draconian austerity measures that are likely to depress their economies further.


IX … The currency traders are now the global sovereign power.

The Euro, FXE, opened Friday, November 12, 2010 at 136.90, a rcovery form its prior close on Thursday November 11, 2010, at 136. The Euro has fallen 2.5% from its Thursday November 4, 2010 value of 141.5. The Euro closed today at 136.40.

The Leader’s Announcement Of Restrictions On The European Crisis Mechanism evidences the power of the currency traders over the European government leaders – the currency traders squeezed the European leaders for a statement of their resolve of continued european economic governance and for a commitment to exercise authority over banking and fiscal matters of European countries. 

The European Leaders Statement from the G-20 Meeting in Seoul Korea on November 15, 2010 is a firm continuation of global governance of the Eurozone and the commitment to principles of fiscal federalism and authority.

I believe that the Irish Government still is resolved to apply an 80% haircut to junior bondholders of Anglo Irish Bank debt, as today’s announcement applies, I believe, only to the future crisis mechanism. And from the elevated levels of credit default swaps, I conclude that investors believe that Portugal, Italy, Ireland, Greece and Spain are going to default on their sovereign debt.

The European Financial Stability Facility, EFSF, set up by euro-zone governments in response to Greece’s difficulties will be of no help to Ireland as assistance will come with significant conditions attached. Ireland could be forced to abandon its low corporate-tax policy, a totemic symbol of what’s left of Ireland’s economic sovereignty. Ireland will never tax the corporations, as it would result in corporate flight from its borders, leaving Ireland as a total economic dead zone. 

This week’s fall in the value of the China shares, FXI, and the world’s government bonds, BWX, as well as the 30 Year US Government Bond, EDV, evidences that the China central bank and the world’s central banks have lost their seigniorage authority. The currency traders are now the sovereign global economic power. 

Doug Noland in article The Official Start of QE 2 relates: Global yields were on the rise.  German bund yields gained 9 bps to 2.51% and Japan’s JGB yields rose 7 bps to 0.99%.  Notably, UK 10-year yields jumped 24 bps (3.21%), Spain 17 bps (4.53%), and Italy 18 bps (4.15%).  Our 30-year Treasury yields rose 17 bps to 4.29%, the high since mid-May.  Benchmark U.S. municipal yields jumped 24 bps to 3.70% (from Bloomberg). Mr. Noland asks: Has quantitative easing – on this, the initial trading day of QE2 – turned counterproductive?

I say that we have passed gone past an inflection point, where sovereign debt is now toxic, and that the currency traders have declared a global currency war on the central banks to obtain fair and genuine value for the currencies they issue. 

X …  I question: Who will bear the burden of debt that cannot be paid? 

The global investment bubble that began with the Milton Friedman neoliberal Free To Choose economic paradigm was burst by a rise in the US 30 Year Bond rate going above 4% and by the credit default swaps rising on European debt to the point where default is implied.

It really still is “up in the air”, that is an undecided issue, if the junior bondholders in Anglo Irish Bank bonds will get a haircut — one could be applied at the current time by Ireland. 

The burden of debt means austerity for the people of the world. Needless to say, Obamacare will be reversed. I believe that all states will partially reject mandated Medicaid, that is they like the state of Washington, will phase out what they believe to be discretionary budget items such as pharmacy benefits, foot care, eye care, and dental care. That is many states will opt out of Medicare’s fiscal federalism as much as they can.  And some states like Texas and Arizona may attempt to drop Medicaid altogether, as they don’t want to pay for birthing alien residents. 

At some point in time, when difficult conditions arise, I ask, who will provide care for those in assisted living homes such as the non profitable Health Care REIT, HCN

There will come a point in time where the debt that cannot be taken down by the bond vigilantes and currency traders through debt deflation, must be applied to every man, woman and child in the world. 

At that time, and most likely soon, I believe a Global Seignior and Global Sovereign will arise and institute unified regulation of banking globally, this 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 implement a universal currency system, that is a global currency system, that will likely first be used by Portugal, Italy, Ireland, Greece and Spain, as they will have lost their sovereign debt seigniorage and the ECB will have stopped buying their debt.

Perhaps Robert Rubin, Co-Chairman of the Council On Foreign Relation, the CFR, or European Council President Herman Van Rompuy will rise to be the world’s Sovereign and institute global governance as he said November 9, 2010:  ”We have together to fight the danger of a new euro-scepticism. … This is no longer the monopoly of a few countries. In every member state, there are people who believe their country can survive alone in the globalised world … It is more than an illusion: it is a lie!”, reports OpenEurope in November 10, 2010 Daily Briefing.

One can read the full EU Press release of his speech here. And Mark Alexander provides the reference to the Daily Telegraph report: Euroscepticism leads to war and a rising tide of nationalism is the European Union’s “biggest enemy”, Herman Van Rompuy, the president of Europe has told a Berlin audience.

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 debt deflation commenced, as seen in the chart of RZV:RZG, commenced when the currency traders sold the major currencies, DBV, and the emerging currencies, CEV, as the Interest Rate, on the ten-year US Government bond, $TYX, rose to 4.126 on November 5, 2010 as the bond vigilantes declared Ben Bernanke’s Quantitative Easing to be monetization of debt.

Chart of  RZV:RZG

Chart of $TYX shows a close higher to 4.268%


The Assoicated Press reports Treasury prices are taking a plunge even after the Federal Reserve stepped into the market to buy government bonds. The Fed bought its first batch of Treasurys on Friday since announcing its $600 billion plan to boost the economy last week. The central bank picked up $7.23 billion in Treasurys coming due between 2014 and 2016. The Fed’s Treasury purchases are supposed to drive down long-term interest rates over the long-term. But Treasury prices dropped Friday, sending their yields sharply higher. The yield on the 10-year Treasury jumped to 2.76 percent, the highest yield since Sept. 16.”

The reason the Treasury prices dropped, is that the bond vigilantes are calling their yields higher as they judge QE 2 monetizes the US Government debt.

Chart of IEI, the 1 to 3 Year Government Notes, shows they fallen lower to 117.28

Chart of TLT, the 10 to 20 Year US Government Bonds, shows they have fallen to 95.81 which has erased all gains going back to Wednesday May 19, 2010.


Joe Weisenthal provides the scary chart on the municipal bonds, traded by the ETF, MUB which had three back crews in its daily chart; having fallen 2.9%, wiping out all gains going back to July 12, 2010. 

XI … The Death of Currencies Is Coming Soon …. It’s Wise To Be Invested In Gold Bullion 

The United States Federal Government has two white washed tombs. The First, is the Toxic Debt, which trades like the mutual fund FAGIX, and the Mortgaged-Backed Securities, MBB, which it took in under QE 1; and, The Second, is the Excess Reserves, that is the formerly money good, traded out under TARP, for the toxic debt and mortgage-backed bonds, which now sits deteriorating at the Federal Reserve.

Elaine Meinel Supkis relates: “In Professor Kennedy’s prescient book, ‘The Rise and Fall of the Great Powers‘ he discusses how power is based mainly, since the Industrial Revolution, on the industrial base of production and the RATE of growth is of highest importance.  Empires that ran their systems based on debt always declined even as they win individual battles or spats or won diplomatic struggles if their industrial base was ravaged by imports while the tax burden grew ever greater. Even if the taxes were based on very cheap credit, the gross overall size of these future obligations meant the ability to raise taxes during inevitable wars would vanish and the empire would then have to go outwards to seek funds from foreign powers and thus, lose sovereignty.  And the US is following exactly this track and is going bankrupt just like all previous empires.  That is, we learned absolutely nothing from a very obvious history that is easy to grasp.

The Japanese system of holding huge reserves in their FOREX accounts will continue unabated.  The ‘carefully designed macro-prudential measures’ seems to be a new fancy way of saying, ‘Quantitative Easing’.  Which is the least prudent thing on earth, of course.  It is totally reckless.  It is playing with one of the most dangerous of the Cave of Wealth and Death’s goddesses: Inflation.  She is a total terror because unlike her sister, Depression, Infinity kills money.  Depression doesn’t kill money, it makes money more valuable.  But people dislike this because it means no easy loans and rising profits.  So they want Inflation instead only she is a hungry beast and easily runs out of control due to a simple human trait: greed.

Once the greedy little banking gnomes realize they can simply print money and keep most of it, they do this.  To infinity.  They can’t stop!  This is why we had a gold standard: to prevent paper money from running suddenly to infinity.  Without exception, EVERY government that runs a purely paper money system lurches into destruction due to this temptation to simply print up endless amounts of cash.  I will note that many Americans are prey to this sort of delusional thinking that we can have a paper money system and no inflation.  This is humanly impossible.  We can’t help it: easy money creation always leads to reckless money creation and thus, the death of the currency. Always.”

I relate that history shows that monetization of debt creates an investment demand for gold. That is why I am invested in gold bullion. And why I encourage others to be invested in gold bullion as well. Yes, monetization of debt without end as Chris Martenson writes in Zero Hedge: “For a very long time I have been calling for, expecting and otherwise anticipating the day that the Federal Reserve would begin openly monetizing government debt. I knew the day would come intellectually, but in my heart I hoped it wouldn’t. But with the Fed’s recent decision to directly monetize the next 8 months of federal deficit spending, that day has finally arrived. I have to confess, while my prediction has proven accurate, I’m still stunned the Fed actually did it. In this report I examine the risks that this new path presents, what match(es) may finally ignite the decades-old pile of dry fuel, what the outcomes are likely to be, and what we can and should be doing in preparation.”

Over the last 90 days, the value of gold in terms of the Euro, FXE, the Yen, FXY, the Brazilian Real, BZF, and the Australian Dollar, FXA, has increased in value as is seen in the chart of the ETFs, GLD, FXE, FXY, BZF, and FXA.

I expect gold to growing in value relative to the world’s major currencies, DBV, currencies, and emerging market currencies, CEW, even though its nominal value may fall, as the interest rates rise, taking world government debt, BWX, and international corporate bonds, PICB, lower.

XII … Keywords:

Euro Crisis Rescue Mechanism, European Sovereign Debt Crisis, EFSF, carry trade investing, debt deflation, currency war, competitive currency deflation, sovereignty, global currency war, municipal bonds, monetization of debt, QE 2, bond vigilantes, global governance, The Seignior, Seignior, seigniorage, Europe Crisis Mechanism, Investment Bubble, KOL, coalstocks, coal stocks


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