Falling World Currency Values Drive Oil, Commodities, Bonds, And Stocks Lower

Financial market report for the week ending November 19, 2010

Grant Smith of Bloomberg in November 19, 2010 article Oil Heads for Biggest Weekly Decline in Three Months as China Drains Cash writes oil declined, headed for its biggest weekly loss in three months, following China’s decision to raise banks’ reserve ratios. Futures reversed a 1.1 percent gain after China ordered lenders to set aside larger reserves for the fifth time this year to rein in inflation, potentially crimping demand in the world’s fastest-growing major economy and biggest energy user. “The Chinese are fearful of inflation, and that’s causing a bit of risk reduction in the market,” said Robert Montefusco, a senior broker with Sucden Financial in London. Crude has dropped 3.8 percent this week, the most since the seven days ended Aug. 13, as Ireland grappled with its deficit and China’s Premier Wen Jiabao said the government was drafting measures to counter inflation.

Two weeks of decline in West Texas Intermediate Crude, $WTIC, from November 8, 2010 price of 87.29 to Friday November 19, 2010 to 81.98 suggest that a debt deflationary bear market is underway in the oil market. For the last two weeks, the oil market has seen deflation, not inflation. With currency prices falling world wide, the top is in for oil. Support levels are lower at 82, 80 and 78.

The falling oil is a result of falling world wide currency values.

The currency traders are conducting a global currency war. Peak currency wealth was achieved on November 5, 2010, as the Optimized Currency ETN, ICI, has fallen lower since has fallen lower since that time, as have all of the currencies listed below.

Cumulative currency value losses since November 5, 2010 are as follows:

FXS -3.6%
FXF -3.0%
ICN -2.9%
SZR -2.7%
FXA -2.7%
FXY -2.6%
FXE -2.5%
BNZ -2.1%
XRU -2.0%
BZF -1.9%
FXC -1.8%
CEW -1.7%
FXB -1.2%
CYB -0.5%
FXM -0.5%

Chart of the Euro, FXE, shows a close at 136.36

The chart of the small cap value shares relative to the small cap growth shares, RZV:RZG Daily, shows a November 19, 2010 close at 0.7879, down from November 4, 2010 high of  0.8047, providing evidence that debt deflationary is underway. Other evidence that debt deflation is underway is the rise in the S&P Mid Term Futures Volatility, VXZ, and the fall in Junk Bonds, JNK.

The strong fall in CenterPoint Energy, CNP, provides even more evidence yet that a bear market has commenced.

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, this was when the European Sovereign Debt Crisis started to emerge. It recommenced November 5, 2010 when the bond vigilantes sustained the Interest rate on the US Government Bond, $TYX, above 4%, and as the currency traders sold the major currencies, DBV, and emerging market currencies, CEW, causing the US Dollar, $USD, to rise.

Since November 5, 2010, debt deflation has come to commodities, DBC.  The chart of commodities reads weak compared to a number of stock categories such as the Russell 2000, IWM, or the Semiconductors, XRT.

The weekly chart of Biofuels, FUE Weekly, sure does look a lot like commodities, DBC. Commodities have turned down hard on the news coming out of China.

With currencies falling lower, the recent gains in Natural Gas, UNG, have likely come to an end.  Its pattern looks more like a stock than a commodity.

Since November 5, 2010 debt deflation has come to bonds, BND. Peak credit was achieved November 4, 2010.

And also, debt deflation has come to world stocks, ACWI, the S&P, SPY, the Russell 2000, IWM, the New York Composite, NYC. Peak stock wealth has been achieved November 4, 2010.

When one looks the weekly chart of the Russell 2000 relative to Banks, IWM:KBE Weekly, one can see just how terrifically overvalued the Russell 2000 are.

The downturn’s loss leaders include Clean Energy, ICLN, Solar Energy, TAN, Wind Energy, FAN, Residential Real Estate, REZ, Industrial And Office Real Estate, FIO, India, INP, India Earnings, EPI, India Small Caps, SCIF, China, FXI, Australia, EWA, Asia High Yielding Equity, DNH, US Home Construction, ITB, Poland, EPOL, Emerging Europe, ESR, Emerging Markets Financials, EMFN, Turkey, TUR, Thailand, THD, Brazil, EWZ, Brazil Small Caps, BRF, China Small Caps, HAO, European Financials, EUFN, Auatralian Small Caps, KROO, South Korea Small Caps, SKOR, Emerging Markets, EEM, International Basic Materials, DBN, International Utilities, IPU.

The chart of India Earnings relative to the World shares, EPI:ACWI, communicates that the earnings shares have been hurt badly by the Telecommunications Scandal that forced A. Raja, India’s telecommunications minister to resign this week.

Frontier market, FRN, leader Columbia, GXG, has broken significantly lower; the former trades like a growth stock, the latter like a value stock.

When one compares the Morningstar Mid Cap Value, JKL, to the Morningstar Mid Cap Growth, JKH, one can see that the positive impact of the growth shares like semiconductors, XSD, had on the stock market this week; and one can see the negative impact of the bank shares, KBE, had on the stocks market.   

Individual real estate stocks showing loss include, Blackrock, BLK, and Brookfield Properties, BPO, and Stanwood Property Trust, STWD, the Blackstone Group, BX.

The end of profiting from investing long in the energy service companies, OIH, and Exxon Mobil, XOM, is done and over. The chart of the energy service companies shows a euphoric and manic, end-of-rally burst up.  

When one looks at the chart of the HUI Precious Metals, GDX, relative to gold, GLD, one can see that it is  debt that has stopped out the potential of the HUI Precious Metals, ^HUI, to move higher. Gold mining stocks such as NSU, ANV, GBG, GOLD, have been great performers but the age of profiting from investing long the gold mining stocks is over. It’s wise for those invested in gold mining stocks and funds to trade out for the real thing now. Peak wealth in the gold mining stocks came on November 11, 2010 when the Index hit 567; it has turned down to 545; mutual fund USAGX turned down last week having provided a 28.41% return this year.

The strong rise in disk drive manufacturers, is to be sold. A good investent maxim is: buy in dips in a bull market, and sell into strength in a bear market.  The three white soldiers in Quantum is a reversal pattern suggesting that QTM is to be sold short. Western Digital, WDC, are and Seagate Technology, STX, are to be sold as well. Yes, all are great short sellers.

Yes, all kinds of short selling opportunities about, in the Business Services category, Firserv, FISV, will return nice rewards to the short seller. The Board of Directors of Firserv approved buying back up to 7 million shares, or about 5 percent of outstanding shares.

The strong gains in Future Brands, FO,  on divestiture, suggest that this is the time to go short.

Consumer Discretionary, Hansen Natural, HANS, is another. I wish I had time to list all the large number of short selling opportunities that come to mind.

The end of credit has commenced; this being seen in the fall of subprime automobile lender Nicholas Financial, NICK, Mastercard, MA, and American Express, AXP.

In video report Steve Keen relates QE2 Won’t “Work” Because Debt Deflation Has Reached “Terminal Velocity”  The anticipation of Quantative Easing from June through October 2010, debased the US dollar and created an investment demand for gold. Quantative Easing is simply printing money out of thin air. As Arthur, with Thoughts From Spain writes, it raises interest rates, and it monetizes the nation’s debt and has caused Treasury Bonds, EDV, TLT, as well as International Government Bonds, BWX, as well as corporate bonds, PICB, BLV, and LQD to fall in value.  Doug Noland of Prudent Bear relates that global yields are on the rise:  U.K. 10-year gilt yields jumped 18 bps this week to 3.38%, and German bund yields surged 19 bps to 2.70%. Ireland yields declined 2 bps to 8.11%.  Greek 10-year bond yields rose 18 bps to 11.56%.  Ten-year Portuguese yields were little changed at 6.73%. Japanese 10-year “JGB” yields jumped 7 bps to 1.06%.  Brazil’s benchmark dollar bond yields rose 7 bps to 4.00%, and Mexico’s benchmark bond yields rose 20 bps to 4.02%. China’s Shanghai Exchange dropped 3.2% (down 11.9%). And in Watch he reports: Veronica Navarro Espinosa and Helder Marinho of Bloomberg report : “Banco Bradesco SA and Banco Industrial e Comercial SA withdrew bond offerings as a global market rout and an investigation into alleged bank fraud pushed Brazilian corporate borrowing costs to a seven-week high.” And Michael Aneiro and Stu Woo of Wall Street Journal report: “America’s strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market.  The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations.”

The anticipation of QE 2 is best seen in the chart of the consumer discretionary, XLY, compared to the International Discretionary, IPD, and the small cap consumer discretionary, XLYS, …  XLY, IPD, XLYS, with the small cap consumer discretionary, XLYS, racing up in the last six months, all being driven higher on liquidity provided by the anticipation of Ben Bernanke coming out with his money printing machine.

And Doug Noland in China Bubble Watch relates the Geoff Dyer of Financial Times report: “China is considering a package of price controls and other measures to contain inflation which rose sharply last month and has become the principal risk to the economy. The National Development and Reform Commission, China’s main economic planning body, is putting together a ‘one-two punch’ of policies to limit food inflation, state media reported … in a sign that debate is breaking out over how to tackle rising prices. Several major cities in China have announced plans to try to cap food prices, while two officials in Beijing also confirmed this week that the government was looking again at price controls.” And from Bloomberg:  “China may impose temporary price controls to counter the fastest inflation in two years, the cabinet said. Price caps on ‘important daily necessities’ and production materials will be used if necessary, the State Council said … China’s accelerating inflation has sent stocks and commodities sliding on speculation that efforts to curb prices will cool the world’s fastest-growing major economy.”… “Chinese Central Bank Governor Zhou Xiaochuan said China is under ‘pressure’ from capital inflows as a state newspaper said price controls could be imposed to cool the fastest inflation in two years.  Zhou reiterated government goals of ‘moderate’ credit growth and stronger liquidity management” …  “China’s four biggest banks will not issue any new loans to property developers for the rest of the year, the state-run China Real Estate Business reported”

Gold, GLD, has fallen lower with the currencies.

Gold, $GOLD, last traded at $1,353; strong support comes in at $1,320. In ongoing debt deflationary, gold will act to preserve one’s investment wealth. The chart of gold, GLD, relative to the Australian Dollar, FXA, GLD:FXA, shows that it out performs the Australian currency.

Peak fiat wealth was achieved November 4, 2010 as the 30 10 US Government Debt Yield Curve, $TYX:$TNX, flattened. It was a steepening yield curve coupled with investment liquidity from the anticipation of Quantative Easing 2 as well as Yen based carry trade investing and US Dollar carry trade investing, that had rallied the world stocks, VT, since June 7, 2010. The world entered Kondratieff Winter on November 9, 2010 when the world stocks fell 0.97% to 47.67. Investment risk appetite has turned to risk aversion; and now carry trade investment is unwinding globally. The weekly chart of world stocks, ACWI, shows world stocks have entered into their second week of Kondratievv Winter.

Those who went short the 200% ETF on November 5, 2010 have profited:
Oil, UCO  + 13%
India, INDL + 19%
Real Estate, URE  + 13%
Asia Excluding Japan, UXJ  + 11%
Brazil, UBR + 10%
Emerging Markets, EET + 8%
Europe, UPV + 7%
Russell 2000, URTY + 6% The Island Reversal Patten, fall and now recovery n ProShares Ultra Russell 2000, URTY, provides an excellent low risk short selling entry point.

The rise in the ProShares Ultra Emerging Markets, EET, to the middle of a broadening top pattern, suggests this is a low risk short selling entry point.

It would be reasonable to sell Japan Short at this time. That is to short sell ProShares Ultra Japan, EZJ, as well as the hedged Japan ETF, DXJ.

Those who invested in the bear market mutual funds DXESX, and DXRSX on November 5, 2010 have profited. 

For now, the currency traders have established themselves as the world’s sovereign governing power; their rule over bond markets, stock markets, commodities markets, and the world’s governments, began November 5, 2010 when the bond vigilantes sustained the Interest rate on the US Government Bond, $TYX, above 4%, and as the currency traders sold the major currencies, DBV, and emerging market currencies, CEW, causing the US Dollar, $USD, to rise.

It may seem that the world government leaders are in control of banking and debt, as in the case of the Ireland banking crisis, with the IMF, EU, and the UK negotiating a seigniorage aid package, as Ireland has lost its nation’s seigniorage authority and has experienced a run on its banks after Merkel and Sarkozy raised the spectre of sovereign debt default in late October 2010, by suggesting a sovereign debt crisis mechanism.

But the currency traders, still have the upper hand and will continue their program of competitive currency deflation, that is competitive currency devaluation against the world governments, to control the world, its peoples and resources.

Doug Noland provides an accurate historical account: “It is my view that a world financial apparatus dominated by marketable debt instruments is inherently unstable. Implement a monetary policy regime to manage marketplace liquidity and asset prices at your own peril.  Be prepared for market dependency and ever-increasing liquidity injection requirements.  Such a regime will reward the savviest speculators and ensure acute systemic vulnerability.  To be sure, recent notions of perpetual QE inflated global markets indiscriminately.  The “liquidity trade” threw caution to the wind.  Liquidity overabundance also pushed inflationary forces in China and throughout Asia into the danger zone.

The basic premise of the “Bretton Woods II” thesis has been that it is in the interest of both parties for the U.S. to run Current Account Deficits and for Asian economies to send us manufactured goods while their central banks recycle the resulting dollar flows back into U.S. securities.  And for as much distaste as I’ve had for “BWII” analysis, there has been the semblance of truth to the thesis of mutual benefits.  I’ve argued that the arrangement where we exchange new debt instruments for imported goods, services, energy and commodities was dysfunctional and unsustainable.  Today, with our massive expansion of non-productive – hence inherently vulnerable – debt and Asia’s heightened susceptibility to inflation and unwieldy financial flows, this arrangement has turned problematic.  It is also fundamental to global marketplace liquidity.

Our policymakers are acting to the detriment of our Creditors.  They speak in a tone that does not inspire confidence and may likely antagonize.  The Chinese, in particular, can be counted on to act in what they perceive as their own best interest.  They today confront serious inflation, “hot money” and overheating issues.  As such, what has appeared as favorable prospects for continued global liquidity overabundance now look a lot less certain.  Global yields were on the rise again this week, with heightened attention to structural debt issues.  U.S. municipal bonds were hammered.  My premise has been that the markets will inevitably discipline Washington.  This may occur after it works its way up the food chain.”

I ask: is a neo-authoritarian global currency regime on the way to way to replace the Milton Friedman neo-liberal Free To Choose floating currency regime?  

In today’s news, we have the likelihood that the junior Allied Irish Bank bondholders will get a haircut, a call for a global currency system and another call for the sacrifice of national sovereignty in taxation and economic governance to a centralised EU body beyond even EU Council control.

Bloomberg reports Allied Irish Bonds Fall on Concern IMF ‘Bad Guy’ to Impose Loss. Allied Irish Banks Plc’s 12.5 percent subordinated bonds due 2019 were quoted at a bid price of about 45 percent of face value, according to Jefferies International in London, down from 100 percent in September. Credit-default swaps insuring 10 million euros ($13.6 million) of the debt cost 5.9 million euros in advance and 500,000 euros annually, according to CMA.

Irish central bank Governor Patrick Honohan said he expects the country to ask for aid from the European Union and the IMF worth “tens of billions” of euros to rescue its battered banks and stop contagion across the region. The government already pledged to impose losses on junior bondholders at Anglo Irish Bank Corp. and Irish Nationwide Building Society.

Anglo Irish was nationalized in January 2009 as loan losses spiraled after a property bubble burst. The government also has taken a 36 percent stake in Bank of Ireland Plc and is preparing to take a majority stake in Allied Irish.

Credit-default swaps on the junior debt of Bank of Ireland Plc cost 2.9 million euros in advance and 500,000 euros a year, signaling a 58.75 percent likelihood of default within five years. Contracts on Anglo Irish’s sub debt cost 8 million euros upfront, showing a 99.99 percent probability of default. Swaps on Allied Irish signal a 90.24 percent chance of default.

Robert Hockett, Professor of Law at Cornell Law School, teaches and writes in the areas of domestic and international financial law and economics. Writing in Benzenga article Global Currency Relations, Macroeconomic Recovery, and Long Term Financial Stability he documents that competitive currency devaluations that persisted in the 1930 have returned. And relates that “Our only long term answer is a truly global currency; a truly cooperatively owned and operated global ‘bank’ that manages, in the name of all nations, global credit supplies denominated in that currency; and procedurally regular, automatic adjustment mechanisms that revalue national currencies in relation to one another to prevent sustained cross-border surpluses and deficits.”

Philip Aldrick, Economics Editor of The Telegraph in November 19, 2010 article reports IMF Chief Dominique Strauss-Kahn Urges Leaders To Cede More Sovereignty To EU:  European nations need to cede more of their sovereignty and hand greater powers to the centre to avoid future crises, the head of the International Monetary Fund has said.

In a speech in Frankfurt addressing the sovereign debt crisis engulfing Europe once again, he said: “The wheels of co-operation move too slowly. The centre must seize the initiative in all areas key to reaching the common destiny of the union, especially in financial, economic and social policy. Countries must be willing to cede more authority to the centre.”

Europe is plagued by crisis because member states put too much faith in banks and let their public finances run out of control. Greece has already been bailed out and Ireland is expected to agree a €100bn (£85bn) rescue within days. Portugal is also at risk.

Mr Strauss-Kahn did not name any individual eurozone members, but warned: “The sovereign crisis is not over.”

Reform is vital but, he said: “The area’s institutions were simply not up to the task of managing a crisis – even setting up a temporary solution proved to be a drawn-out process.

“One [solution] is to shift the main responsibility for enforcement of fiscal discipline and key structural reforms away from the Council. This would minimize the risk of narrow national interests interfering with effective implementation of the common rules.”

Handing greater powers to the centre would lead to a greater loss of sovereignty for each of the eurozone’s member states. Monetary policy is already under the control of the European Central Bank, with national governments holding on to fiscal authority.

In proposals that are likely to play into the hands of eurosceptics in the UK and elsewhere, Mr Strauss-Kahn recommended more tax harmonisation and a larger central budget. Reiterating a now common theme, he added that the euro area needs to rebalance – with Germany reducing its dependence on exports and other nations shrinking current account deficits.

To manage and monitor the changes, he argued for a larger central budget – funded by “more transparent EU-wide instruments—such as a European VAT, or carbon taxation and pricing”.

Alongside tighter fiscal controls, he said labour market reforms in the euro area need to be centralised. “The euro area cannot achieve its true potential with a bewildering patchwork of segmented labour markets,” he said.

“These barriers exacerbate the diverging economic fortunes that threaten the euro area today. It is time to create a level playing field for European workers, especially in the area of labour taxation, social benefits systems and portability, and employment protection legislation.”

He added: “The only answer is more cooperation, and greater integration.”

Concluding remarks

In as much as the IMF chief says we have a sovereign crisis, I believe a world sovereign will arise to address the crisis, this in fulfillment bible prophecy of Revelation13:5-10. I also believe this global leader will be complemented by a global seignior, an Old English term meaning top dog banker who takes a cut, as foretold in Revelation 13:11-17, and that he will implement unified regulation of banking globally, as well as a global currency system .


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