Currency Traders Sell The Resource Currencies And The British Pound Sterling On Sovereign Crisis Concerns … Causing Stocks, World Government Bonds, and International Corporate Bonds To Fall Lower

Financial market report for November 26, 2010

The currency traders sold most of the resource currencies on sovereign crisis concerns; and they sold the British Pound Sterling on the UK’s provision of seigniorage aid to Ireland, EIRL.

Currencies falling strongly today included:

Chart of the Euro FXE,

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 debt deflation is underway globally in all currencies.

World stocks, ACWI, fell lower today, as did the S&P, SPY, as well as the Nasdaq 100, QTEC and the New York Composite, NYC.

When one reflects that the emerging market world currencies, CEW, major world currencies FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, CYB, BZF, XRU, FXY, BNZ, have fallen as a group 3.7% since November 5, 2010 and that world stocks, ACWI, has fallen from 46.51 to 44.45 and Bonds, BND, have fallen from 82.61 to 81.82, it is reasonable to conclude that a global debt deflationary bear market is underway.

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.”

The global yen carry trade, ACWI:FXY, manifested a lollipop hanging man candlestick and has now fallen lower suggesting that world stocks are experiencing an unwinding of yen carry trade investing.

European shares, VGK, India shares, INP, India Earnings, EPI, Brazil, EWZ, South Korea, EWY, The Philippines, EPHE, Asia Excluding Japan, EPP, Asia High Yielding Stocks, DNH, New Zealand, ENZL, Thailand, THD, Poland, PLND, Columbia, GXG, Copper Miners, COPX, are all experiencing unwinding carry trade investment as risk appetite has changed to risk aversion and repayment of low cost Bank of Japan Yen carry trade and Wall Street Dollar carry trade loans has commenced.  

China shares, FXI, have turned down on China’s vows to stop inflation.   

China bank shares, CHIX, have turned down on China bank tightening.

International dividend payers, DOO, fell today. The chart of DOO says that all the value shares, big and small are done.

Basic Materials, DBN, and Australian Mining Giant, BHP Billiton, BHP, fell lower.

Today’s fall in the shares of global financial institutions, IXG, gives testimony that sovereign debt shocks are spreading like a deadly virus throughout the world’s banking and lending institutions. This week the Banks, KBE, have been near the top of “the leading down sectors”.  Home builders, ITB, has been another leading loss sector this week as well.  Emerging markets, EEM, has as well.  Weekly chart of the global financial institutions, IXG shows a 4.5% loss.

The Japanese small cap shares, JSC, similar in experience with the Russell 2000 shares, IWM, and the Canadian Small Caps, CNDA, have seen little debt deflation, that is currency depreciation; where as other small cap shares, such as the Emerging Market Small Cap Dividend Shares, DGS, the Korean Small Caps, SKOR, the Australian Small Caps, KROO, the Brazilian Small Caps, BRF, and the Indian Small Caps, SCIF, have experienced significant debt deflation, since November 4, 2010, when the bond vigilantes sustained the Interest Rate on the 30 US Government Bond, $TYX, above 4%, as Quantitative Easing 2 constitutes monetization of debt, and as sovereign crisis arose when Mrs Merkel called for a sovereign debt default mechanism.  

This week sovereign crisis deepened over the seigniorage aid package provided to Ireland, EIRL, and on Mrs Merkel’s even more recent call for bondholders to take a haircut on liquidation national bank debt. Three Black Crows appeared in the chart of the World Government Bonds, BWX, International Corporate Bonds, PICB, today. Emerging Market Bond, EMB, are breaking down significantly on falling Emerging Market Currencies, CEW, which are driving down the Emerging Market shares, EEM down.

Chart of the World Government Bonds, BWX

Chart of International Corporate Bonds, PICB, shows that interest rates are rising on corporation loans. This is destructive to business lending.

Taken together, the fall seen in the World Government Bonds, BWX, and the International Corporate Bonds, PICB, suggests that fiscal seigniorage and corporate lending died the week ending November 26, 2010, as a result of sovereign crisis and the rise of the UK, the IMF, and the EU to become a sovereign governing power and instituting economic governance over Ireland.

The defining metric of debt deflation is the ratio of the small cap pure value shares relative to the small cap pure growth shares, RZV:RZG. It fell sharply today continuing a trend that commenced on November 5, 2010, when it fell from 0.800.

A strongly rising US Dollar, $USD, has finally caused the USD/JPY to rise.

This has induced a fall in the USDJPY’s inverse ETF, JYN.

A rising US Dollar, and falling commodity currencies has finally taken a toll in gold, GLD, and silver, SLV. Even more so the HUI precious metals, ^HUI, traded by the ETF, GDX. The junior gold mining shares traded, GDXJ, down today as well.

The chart of the gold mining shares relative to the price of gold, GDX:GLD, GDXJ:GLD, shows that the gold mining shares are now disconnecting from the price of gold as carry trades unwind and the liquidity trade coming from QE 2 is finished. One can no longer profit by investing in gold mining shares such as NSU, NGD, GOLD, GFI, GBG, BVN, AZK, ASA, and ANV. The chart of AEM shows an evening star.

Historical research shows that the gold mining shares, $HUI, CONSISTENTLY turns down when US Treasuries, $USB, turn down. This is the case today, as is seen in the chart of $HUI:$USB.

The HUI precious metal stocks have now gone into the Investment Hall of Fame as perhaps the all stars of investment history; as has the many outstanding precious metal mining mutual funds such as Van Eck Intl Investors Gold C

Their peer in natural resource investing, the energy service companies, OIH, turned lower today, on a lower price of oil, USO. And the giant of energy production and distribution, XOM, fell lower as well. With rising interest rates and falling currencies beginning November 5, 2010, the world has entered into the age of deleveraging and the age of debt deflation. Higher natural resource stock prices cannot be sustained on a falling price of oil.        

The chart of the S&P shows that an Elliott Wave 3 Down commenced November 5, 2010, in the S&P, SPY, when the bond traders sustained the interest rate on the US 30 Year Government Bond, $TYX, above four percent in response to QE 2 and Mrs Merkel’s call for a sovereign debt default mechanism.

The twin spigots of credit liquidity were the ZIRP Bank of Japan lending for carry trades loans and quantitative easing by the US Federal Reserve, this being both QE 1 and the anticipation of QE 2; these spigots have been turned off; and in the case of quantative easing, has actually turned toxic, as Ben Bernanke’s actions monetize debt and destroys bond values. The MSN Finance chart of the 10 to 20 Year US Government bonds, TLT, relative to world shares, VT, TLT and VT, shows that as awareness of QE2 become well known and accepted, then Ben’s debt turned down and a liquidity trade developed in stocks. But November 5, 2010 is a day that will live in investment infamy, as both US Government bonds and world stocks turned down together, as currencies, the major world currencies, DBV, and the emerging currencies, CEW, fell lower, on a higher 30 Year US Government Bond Interest Rate, $TYX.       

The 30 10 US Government Yield Curve Monthly, $TYX:$TNX Monthly,communicates that the risk trade in sovereign debt is no longer being bought. The fall in 30 10 US Government Yield Curve from its November 4, 2010 high suggests that peak wealth has been achieved. The world has passed from an age of prosperity and Milton Friedman Free To Choose Neoliberalim; and into an age of austerity and Global Governance, where the word, will and way of the Leaders operating through framework agreements and bailout agreements is sovereign. As in the case of Ireland, the announcement of leaders, disannuls national sovereignty, and establishes a region of Supra Government, consisting of the International Monetary Fund, the UK and the EU. Those living in Ireland no longer are citizens living in a sovereign nation, they are residents, residing in a region of global governance, along with peers in the UK and Europe.      

Credit liquidity has been poisoned by the bond vigilantes calling the FOMC’s actions monetization of debt. The economic fathers, Milton Friedman, and Alan Greenspan, begot the floating currency regime, which as documented above, many want to replace with a new global economic order. But, global corporatism and the hand of the bond traders and the power of the currency traders is sovereign, and the currency traders will continue their global currency war bringing debt deflation to both bonds and stocks.

Scouring the Internet for insigthful comments, I came across this by Michael Pettis: “Once the dust finally settles Europe will either be a unified country with fiscal sovereignty firmly established in Berlin or Brussels, or it will be fragmented with little chance of reunion.

Very soon there will come a Götterdämmerung, that is a global financial system flameout. Then global governance will be established regionally, with a experienced politician rising to be Europe’s Sovereign, and also an established finance minister rising to be the Europe’s Seignior, which is an Old English word meaning top dog banker who takes a cut.

The Seignior will oversee all matters of debt and credit, and provide both credit and fiscal seigniorage to Portugal, Italy, Ireland, Greece and Spain, as they will have lost their sovereign debt seigniorage, and as the ECB will have stopped buying their debt.

Perhaps European Council President Herman Van Rompuy, will rise to be the Europe’s Sovereign 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.

Perhaps, EU Economic and Monetary Affairs Commissioner Olli Rehn, will rise to be Europe’s Seignior.

The chart of world government bonds, BWX, shows that the world governments have lost their national seigniorage. And the chart of International Corporate Bonds, PICB, suggests investing in corporate bonds is no longer profitable. These charts also suggests that the end of credit has commenced and that the world has passed through Peak Credit.  

Chart of the 10 to 206 Year US Government Bonds, TLT, shows that investing in longer out US Government Debt is no longer profitable.

Chart of the US Government Mortgage Backed Bonds, MBB, shows that this investment has turned sharply down.  

The US Federal Reserve’s QE 1 and QE 2 have had an unstated but commonly perceived goal of sustaining mortgage backed bonds, MBB as well as Mortgage REITS, REM. These have, as the chart suggests topped out as well.

The European Financials, EUFN, 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 4, 2010 as the global currency traders have undertook a plan to establish global corporatism and themselves as sovereign over humanity. The European Financial Institutions are now white washed tombs of a prior age of investment liquidity. Spanish shares, EWP, fell heavily today. Banco Santander Madrid, STD, is now a zombie bank. And as for the Euro, FXE, it is a walking dead currency.

In a world characterized by deleveraging, debt deflation, and sovereign crises, I believe that there will be an ongoing investment demand for gold, $GOLD, in spite of its nominal all in price today. The chart of gold in Australian Dollars, GLD:FXA, shows that gold has maintained its value since November 5, 2010, documenting that gold is the world’s sovereign currency and storehouse of investment wealth.


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