The End Of The Liquidity Trade And The Emergence Of A Sovereign Crisis Means Fiat Asset Deflation And The Rise of Regional Governance

Financial Market Summary Report For The Week Ending November 19, 2010:

I … Stocks fell from their October 2007 high only to have risk acceptance return in March 2009, through a liquidity trade of quantative easing, as well as dollar carry trade and yen carry trade investing.  

The monthly chart of the S&P, SPY, reached an all time high in October 2007, but fell sharply in June 2008 and September 2008 as concerns grew over the banking, KBE, sector.  The S&P closed on November 19, 2010, at 122.29, hitting resistance at the middle of a broadening top pattern going back to August 1, 2006.

The daily chart of the S&P, SPY, shows a fall from an island reversal high of 122.72, suggesting that a bear market is now underway.

In July and August 2008, Euro Yen carry trade investment washed out of metal manufacturing, XME and energy services, OIH.  Bear Stearns was forced to sell for next to nothing to JP Morgan Chase bank, and Merrill Lynch suffered a shotgun wedding with Bank of America, and Lehman Bros. went bankrupt in September 2008, relates John Mauldin.

Risk appetite took stocks, ACWI, higher beginning in March 2009, as Quantitative Easing, commenced a liquidity trade, and as 0.25% Bank of Japan lending returned, providing yen carry trade investing, as is seen in the chart of ACWI:FXY rising from 0.240 to its current value of 0.384. The chart shows that yen carry trade investing is tightly wound up in the S&P, suggesting that when the yen carry trade investing really starts to unwind, it will carry a wallop, sending stocks sharply lower.

Over the last 18 months the liquidity trade, as well as dollar carry trade and yen carry trade investment, provided returns ranging from 29% to 270%; the greatest returns came from rises in the Australian Dollar, FXA, the South African Rand, SZR, the Brazilian Real BZF, the Indian Rupe, ICN, and the Emerging Market Currencies, CEW, as is seen in the MSN Finance chart of FXA, SZR, BZF, ICN, CEW.  

United States, IWM, rose from 40 to 72.5 …. 80%
US Home Construction, ITB, from 6 to 12 … 100%
Australia, EWA, from 10 to 24 … 140%
Asia, Excluding Japan, EPP, from 20 to 46 … 130%
Europe, VGK, from 27 to 51 … 115%
Brazil, EWZ, from 30 to 77 … 150%
Russia, RSX, from 10 to 35 … 250%
India, INP, from 25 to 75 … 200%
China, FXI, from 22 to 44 … 100%
South Africa, EZA, from 30 to 70 … 130%
Sweden, EWD, from 12 to 29 … 150%
South Korea, EWY, from 20 to 56 … 180%
Canada, EWC, from 15 to 29 … 100%
Mexico, EWW, from 22 to 60 … 180%
Turkey, TUR, from 20 to 74 … 270%
Thailand, THD, from 20 to 64 … 220%
Emerging Markets, EEM, from 20 to 46 … 130%
Metal Manufacturing, XME, from 20 to 60 … 200%
Energy Services, OIH, from 70 to 130 … 85%
Solar Energy, TAN, from 5 to 7.5 … 50%
Centerpoint Energy, CNP, from 9 to 16 … 80%
Commodities, DBC, from 19 to 26  … 37%
World Government Bonds, BWX, from 48 to 62 … 29%
Gold, GLD, from 72 to 132 …. 83%

II … The liquidity trade, dollar carry trade. and yen carry trade investing ended November 5, 2010, as is evidenced by the parabolic fall lower of key ETFs this week.  
1) Solar Energy, TAN, -6.4%, on the end of yen carry trade and dollar carry trade investing.
2) China, FXI, – 3.0%, on China money tightening.
3) India, INP,  – 4.0%, on the India Telecommunications Scandal.
4) US Home Construction, ITB, – 4.5%, on the of yen carry trade and dollar carry trade investing.
5) Emerging Markets Financials, EMFN, -1.7%, European Financials, EUFN, -0.9%, and  
Banks KBE, -2.0%, on rising interest rates globally, as is seen in the GreenFaucet presentation of Tyler Durden’s chart of the 30 Year Freddie Fixed-Rate Mortgage, where he states this “is a direct reaction to the recent drubbing in the 10 Year bond which continues to see an unwind of the QE2 frontrunning trade”.
6) Commodities, DBC, -2.3%, and Oil, USO, -3.4%, on falling commodity currencies, such as the Australian Dollar, FXA, the Brazilian Real, BZF, and the Euro FXE, since November 5, 2010. World stock ACWI, relative to Commodities, DBC, ACWI:DBC, is at an all time high of 1.84. Stocks cannot maintain their price given that commodities have now turned parabolically lower. Peak commodity wealth, DBC, was achieved on November 10, 2010, as commodities fell from an island reversal high of 26.58.

Malcolm Morrison, of The Canadian Press, in October 13, 2010 article Resource stocks take TSX higher as weak U.S. dollar helps lift oil, metals, quotes Colin Cieszynski, market analyst at CMC Markets Canada:  “I thought that with earnings season starting up that people actually might go back to focusing on stocks and how companies are doing, but right now it just seems to be this whole liquidity trade driving markets.”

Well, beginning on November 5, 2010, the bond traders seized control of both long-term interest rates, such as the Interest Rate on The US 30 Year Government Bond, $TYX, and short term rates that were formerly under the control of the world central bankers. Municipal bonds experienced severe deflation as Mike Mish Shedlock reported Full Year Of Muni Gains Wiped Out In 2 Weeks. Bond vigilantes will continually be taking interest rates higher as the US Federal Reserve’s Quantative Easing constitutes monetization of debt and European Sovereign debt and other sovereign debt issues remain substantially unaddressed.  Peak bond wealth, BND, was achieved on November 4, 2010 at 82.96

There is a trigger for all things economic. It was the Leaders’ Announcement of a Debt Default Mechanism – a crisis mechanism which would be used in the event of a sovereign default, as Econogirl reported on October 28, 2010, that lead to a blast higher in periphery European sovereign debt interest rates in November 2010, as well as a run on Ireland’s banks, that brought about the negotiation of seigniorage aid for Ireland.  

The currency traders have established themselves as the world’s sovereign governing power; their rule over the world’s governments began on November 5, 2010 when the Interest rate on the US Government Bond, $TYX, sustained above 4%, and as they sold the major currencies, DBV, and emerging market currencies, CEW, which has been called the US Dollar, $USD higher, rising from its low of 75.88 to close at 78.50.

Competitive currency deflation, that is competitive currency devaluation coming at the hand of the currency traders, has terminated liquidity trade, dollar carry trade and yen carry trade investing.

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 0.788, down from November 4, 2010 high of  0.8047, provides 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.

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.”

Peak fiat wealth was achieved November 4, 2010 as the 30 10 US Government Debt Yield Curve, $TYX:$TNX, flattened from 1.628.

A steepening yield curve came from the anticipation of Quantative Easing 2, as well as Yen based carry trade investing and US Dollar carry trade investing; and that rallied the world stocks since June 7, 2010, as is seen in the monthly chart of world stocks, VT Monthly, with a close at 47.02.

The weekly chart of  world stocks, ACWI Weekly, shows world stocks are in their second week of decline with a close at 45.54 — stock deflation is well underway as peak stock wealth occurred November 4, 2010 at 46.60.

World Corporate Bonds, PICB, fell 1.4% and World Government Bonds, BWX, fell 1.5, this week, as EU Observer reports EU President Herman Van Rompuy warns that sovereign debt shocks create a Eurozone survival crisis, and as The Telegraph reports that the International Monetary Fund chief Strauss-Kahn, says the EU is in Sovereign Crisis, as Watchman Newsletter relates: “In what are likely to prove controversial proposals, Dominique Strauss-Kahn, the IMF managing director, called on the European Union to move responsibility for fiscal discipline and structural reform to a central body that is free from the influences of member states. 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.”  And Alfred Woody Wang relates: “A federal Europe, with more sovereign power ceded to the centre, is the best defence against any future crisis, the head of the International Monetary Fund has declared.”  I say that the chorus for the sacrifice of national sovereignty grows louder by the day, in answer to the call of The Club of Rome in 1974, for ten regions of global governance.   

In as much as the IMF chief says we have a sovereign crisis, I believe a global 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, provide seigniorage as well as a global currency system, and a global currency system given that global debt deflation is now underway.

The MSN Finance Chart shows that CenterPoint Energy, Sweden, India, Poland, Italy, Turkey and the foreign small caps have seen six percent debt deflation since November 4, 2010, as is seen in the chart of CNP,  EWD, INP, PLND, EWI, HAO, SKOR, KROO, BRF, TUR, OIH, IWM, while the liquidity trade and yen carry trade has continued strong in energy services, OIH and in the Russell 2000, IWM.

These twelve ETFs: CNP, EWD, INP, PLND, EWI, HAO, SKOR, KROO, BRF, TUR, OIH, IWM will likely be loss leaders as debt deflation grinds on; here are their daily charts with cause of deflation shown:
CenterPoint Energy, CNP, ….. carry trade investing.
Sweden, EWD, ……… currency volatility.
India, INP,  ……… currency volatility.
Poland, PLND ……. carry trade investing and hot money flows.
Italy, EWI, ….. on balance sheet and off balance sheet debt; it its a poster nation for over indebtedness.
China Small Caps, HAO , ……. carry trade and hot money flows.
South Korea Small Caps, SKOR, …….. currency volatility.
Auatralian Small Caps, KROO, ……… currency volatility.
Brazil Small Caps, BRF, ………. currency volatility.
Turkey, TUR, ……… currency volatility.
Energy Services, OIH,  …….. hot money flows.
United States IWM …….. carry trade and hot money flows.

III.  Gold holds the best investment potential

One could short sell the above, or one could invest in the bear market mutual funds DXESX, and DXRSX, which have provided profit since November 5, 2010; but I believe that ownership of physical gold will provide the best and safest return over time. 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. As the sovereign crisis grows larger, I believe that gold will rise nominally in value.

Keywords: Liquidity trade, debt deflation, sovereign crisis, seignior, global seignior, sovereign, global sovereign, seigniorage, sovereignty, peak wealth, monetization of debt, debt monetization QE 2, currency ware, competitive currency deflation, competitive currency devaluation, sovereign debt, sovereign default bond vigilantes, Ireland banking crisis, yield curve


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