Have Quantative Easing and Competitive Currency Devaluations Achieved Full Economic Expansion?

Financial Market Report for January 25, 2011

I … Quantative Easing and Competitive Currency Devaluations have promoted artificial global business expansion from 2009 through 2010.
Richard Schulz relates in 2011 Forecast: The large international banks have been helped by Quantitative Easing and Competitive Currency Devaluation (QE/CCD) from 2008 through 2010.  QE/CCD promoted an artificial global business expansion 2009-2010.  That ends in 2011-2012.  In the emergency room, QE/CCD are equivalent to using a ventilator and dopamine to keep an essentially dead person alive.  For Developed nation’s governments, 2011 evolves quickly into the need for more desperate measures: 1) overt protectionism, and/or 2) defaults on debt.

China needs the Eurozone export market.  It supported the Euro when E7/USD fell to 119 in June.  All of the Eurozone (and especially Germany since it commands the direction of the Euro), wants to export.  A devalued Euro increases exports. That is CCD Warfare in action.  China will continue to support the Euro (as in the preliminary talks to buy Portuguese debt), as much as it can.  China cannot control Eurozone politics.  During 2011-2012, the Euro will likely decline under Eurozone valuation stress, resulting in a gain for Germany/Eurozone exports; China loses.

QE initially has exported inflation.  In 2011-2012, this inflation will be imported incrementally to the Developed nations, and, coupled with the Developed nation’s Debt load, will add to the Bond Bear market.

A …  Stocks came through earnings season having achieved strong and consistent gains.     
The ongoing chart of EWG, IWO, RWJ, VSS, EEM, and EEB  shows, the recovery in Germany, and the run up of the small cap growth stocks, IWO,  and the small cap revenue shares, RWJ, is over, and that all stocks, such as the emerging market shares, EEM, and the Brics, EEB, to be topping out and turning over.

The ongoing chart of the Morgan Stanley Cyclical Index,  ^CYC, shows that the rally in the economic growth stocks is over.

The ongoing chart of YAO, CHIX, CHIM, FRN, THD, and IDX  shows that China Tightening and inflation destruction has turned China,YAO, the Frontier Markets, FRN, Thailand, THD, and Indonesia, IDX, lower.

The ongoing chart of the XRT and FAA shows that the retail stocks, XRT, and the airline stocks, FAA, have turned severely lower.

B …  The growth in world stock value has been underwritten and sustained by the financial sector.
The ongoing chart VT, XLF, EMFN, and EUFN shows that the world stocks, VT, were underwritten and sustained by the financial sector; that is by the US Financial sector, XLF, the Emerging market Financials, EMFN, and the European Financials, EUFN. As the financial stocks fall, so go the world stocks.

C …  World Government Bonds and International Corporate Bond have attained a rally high.
The ongoing chart of BWX and PICB shows that world government bonds, BWX, and international corporate bonds, PICB, have peaked out.

D) … Carry trade investment has peaked out.
The three great levers of investment and economic expansion have been, first, the moneyness coming through sovereign debt seigniorage, second moneyness coming from quantative easing, and three, Japanese Yen carry investing at 0.50% and 0.25% interest from the Bank of Japan, as well as carry trade investing from banks for Swiss Frank and other currency based carry trade investing.

The Optimized Carry ETN, ICI peaked and turned lower with the formal announce of QE2 and then entered an Elliott Wave 3 Down at the end of 2010.   

The most famous and most powerful of all carry trade investments is the EUR/JPY as it carries investments not only in Europe, but globally as well. The chart of EURJPY seen in FXE:FXY, shows that it has risen to 200 day resistance at 1.134 suggesting that a turn lower in investments is at hand globally.

It is likely that a rising Yen, FXY, from 120.16, and a falling Euro, FXE, form 136.28, will destabilize investments world wide, causing an unwinding of carry trades and repayment of bank loans.

The chart of the emerging markets yen carry trade, CEW:FXY, shows imminent failure in an ascending wedge pattern suggesting a strong downdraft in emerging market, EEM, investments is at hand, as the chart shows that investment leverage has failed, as investment gains could not be successfully obtained in the emerging markets when the European leaders failed to resolve the European Sovereign Debt crisis on December 13, 2010, and as John Mauldin wrote the leaders were simply “kicking the can down the road”.  The failure of investment leverage is readily apparent in the chart of the Emerging Market Financial Institutions, EMFN,  which entered an Elliott Wave 3 Down in early January 2011, and also apparent the Emerging Market Bonds, EMB, which failed in early January 2011.

The spigots of investment liquidity are about to run dry.

E) … Commodity prices have topped out.
The ongoing chart of DJP, USO, and DBC communicates that commodity, DJP, oil, USO, and petroleum, DBC, prices have topped out and turned lower.  

Grant Smith of Bloomberg reports Oil Drops to Eight-Week Low Ahead of Forecast U.S. Inventory Gain, OPEC. Crude oil fell to its lowest in almost eight weeks amid speculation OPEC may boost output and before a U.S. report that may show supplies in the world’s biggest crude user rose last week. An Energy Department report tomorrow will probably show U.S. crude inventories climbed 1.25 million barrels last week, according to a Bloomberg News survey. Oil for March delivery declined as much as $1.57, or 1.8 percent, to $86.30 a barrel in electronic trading on the New York Mercantile Exchange, its lowest price since Dec. 2, and was at $86.72 at 1:24 p.m. London time. Al-Naimi’s comments “indicate that the Saudis find increasing discomfort as oil approaches triple digits,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “It’s not due to supply tightness that we have $90 to $100 oil. We do have a well-supplied market today, a lot of inventories, a lot of spare OPEC production capacity.” “OPEC’s policy, as is well known, is to meet any increase in oil demand to maintain the supply-demand balance,” al-Naimi said. “Some OPEC countries will increase their production capacities, thus maintaining OPEC’s spare capacity at approximately 6 million barrels per day.” (Hat Tip to Gary of Between The Hedges)

E) … The stock performance of Australia, India and Brazil has turned down.
The ongoing chart of EWA, INP, and EWZ, shows that the stock markets of Australia, EWA, India, INP, and Brazil, EWZ, have fallen lower.

F) … Real estate, IYR, which had sold off has recovered and has run up to a new high.

II … There was a strong selling of commodities today January 25, 2011.
Gold, GLD, -0.2%, hit its lowest level since October, as traders forced gold to a key support level.

Oil, USO, and Petroleum, DBC, were heavily sold, forcing speculators who bought in December out of their positions; stimulating a sell off in gasoline, UGA

Speculative interest is starting to be washed out of Base Metals, DBB.

Natural Gas, UNG, fell again today.

Grains, GRU, and Corn, CORN, led agricultural commodities, JJA, lower

Commodities, DJP, and Commodities, USCI, fell lower.

III … A number of stock ETFs fell lower on today’s falling commodities.
Uranium Miners, URA, -1.6%
Small Cap Energy Shares, XLES, -0.5%
Copper Miners, COPX, -1.6%
Gold Miners, GDX, -0.6%
Junior Gold Miners, GDXJ, -0.6%
Agriculture Industry, MOO, -0.6%
Wind Energy, FAN, -0.5%
Solar Energy, TAN, -3.7%
S&P Clean Energy, ICLN, -2.0%
Nasdaq Clean Energy, QCLN, -1.4%
China Materials, CHIM, -1.7% on inflation destruction

IV … Also falling lower today were
Networking, IGN, -1.4%
Latin America Small Caps, LATM,  -1.3%
Gaming, BJK, -1.0%
Semiconductors, XSD, -1.0%
Software, IGV, -1.0%
Nasdaq 100, QTEC, -0.8%
Biotech,  PBE, -0.7%

India, INP, -2.2% and India Small Caps, SCIF, -1.2% on inflation destruction.
South Africa, EZA, -1.8% on the falling price of gold and a falling South Africa Rand, SZR, -0.6%.
Brazil Small Caps, BRF, -1.7% and Brazil, EWZ, -1.0%.
United Kingdom, EWU, -1.3%, on a falling British Pound Sterling, FXB, -1.1%.
Shipping, SEA. -1.6%.
Canada Small Caps, CNDA, -1.3%l on the falling price of gold and a falling Canadian Dollar, FXC, -0.3%.
The BRICS, EEB, -1.0%
Emerging Markets, EEM, -0.6%, on falling emerging market currencies, CEW, -0.4%
Malaysia, EWM, -1.6% on inflation destruction.
South Korea Small Caps, SKOR, -1.1%, and Korea, EWY, -0.5%
China Small Caps, HAO, -0.6%, and China, YAO, -0.5% on inflation destruction.

European Financials, EUFN, -1.2%
Emerging Market Financials, EMFN, -0.6% on falling emerging market currencies, CEW, -0.4%
Brazil Financials, BRAF, -0.6%
India Earnings, EPI, -1.8%
China Financials, CHIX, -0.6%
Leveraged Buyouts, PSP, -0.6%
Bank of America, BAC, -2.1%

V … In today’s news
EuroIntelligence reports that Spain will turn its home loan savings banks banks into ordinary banks by September with minimal core capital of 8% of risk-weighted assets; remaining cajas will be nationalised, or forced to merge; the news service was quite upbeat in their script; I do not, repeat do not, share their optimistic reporting.   

“This by far the most far-reaching political action as a result of the crisis we have yet seen. Spain essentially abandons its molly-coddled and toxic savings banks industry, and turns them into ordinary well capitalised banks. The Spanish government yesterday announced the outlines of the plan. The following is from El Pais: Core capital of all financial institutions must be 8% (in excess of the minimum required under Basel), based on the end-2010 balance sheet. For unlisted savings banks, the requirements will be even higher. The deadline is September, and the government expects that the total amount of capital needed will be around €20bn. The FROB will buy up equity, at market prices, of those Cajas that have failed to raise sufficient capital, and may appoint its own directors to the board of the Cajas. This partial nationalisation is time-capped to five years. The article says that Spain is now following in the same direction taken by the US and the UK.

In a separate comment, El Pais writes that Zapatero’s main priority is to avoid the catastrophe that happened in Ireland. The strategy was to separate the good from the bad banks, which would result in three solutions for any ailing caja: a private-sector capital increase for the strong, and a merger or nationalisation for the weak. (This is big news and good news no doubt. It is the message that Spain is seeking a proper solution to its banking problems, rather than rely over-optimistic forecasts, which had been the strategy so far. The higher capital ratio is necessary as a protection against further losses that are likely to arise as a result of further price declines in the property market, and bankruptcies of property developers. The question is whether this will be enough. The €20bn recapitalisation estimate is hardly a worst case scenario.)”

EuroIntelligence continues: “Germany, like China, is hitting the speed limits. The interesting question about Germany is not so much whether the economic recovery is for real (it is), but it is whether it is sustainable. On Monday, the Ifo index reached a post-unification record, and yesterday, the eurozone PMI also raced ahead, based on good performances by Germany and France, but also showing a widening gap between core and periphery. The FT’s report makes an interesting reference to a survey by Ernst & Young, according to which almost three-quarters of small and medium-sized German companies are having difficulties in finding qualified workers – a sign that wage pressures are building up in the labour market.”

Ambrose Evans Pritchard supplies the news as to why the German, the European, and the European Financial shares have been so strong of late: Massive demand for first Euro bail-out bond. “Asian and Middle-East investors have thronged to buy the first issue of AAA-rated bonds by the eurozone’s new bail-out fund, marking a key moment in the evolution of Europe’s monetary union. The auction of €5bn (£4.3bn) of five-year bonds to fund the first stage of the Irish loan package was nine times subscribed, reflecting appetite for bonds ranked with core German or French debt but offering higher returns. The yield was 2.89pc, compared with 2.31pc for Bunds. The outcome was not in doubt after Japan said it would buy 20pc of this month’s total issue by the European Financial Stability Facility (EFSF), and China emerged as a white knight for EMU debt. Asian investors bought 38pc of the issue. “It is the biggest order book ever. We will check before notifying the Guinness Book of Records but nobody can remember anything like that in the world,” said Klaus Regling, head of the EFSF. Ralf Umlauf from Helaba said the auction was “a step in the direction of a eurobond”. Spreads on peripheral EMU debt rose regardless, chiefly over concerns that Spain’s package to recapitalise its savings banks does not go far enough. Olli Rehn, the EU’s economics commissioner, flew to Berlin on Tuesday to plead with the Free Democrat (FDP) party in Germany’s coalition to back a boost for the EFSF’s firepower and scope, with little success. “It is not convincing,” said Guido Westerwelle, the FDP’s eurosceptic leader.”

Finance Blog Range reports: “Successful debt sales helped maintain relative calm on European bond markets Tuesday, but top European Union officials urged governments not to procrastinate on new measures to tackle the crisis that has pummeled the continent over the past year.

Spain — the country that many analysts say could make or break the 17-country eurozone if it runs into financial trouble — auctioned euro2.2 billion ($3 billion) in short-term debt at much lower interest rates. Meanwhile, the currency union’s bailout fund effortlessly sold euro5 billion in five-year bonds to fund its first contribution to the euro67.5 billion rescue loan for Ireland.

But despite the good news from financial markets, EU officials and analysts warned that governments should not be tricked into thinking the current crisis is over.

“We have seen in the past that when there is no pressure there is a tendency for procrastination,” Jose Manuel Barroso, the president of the EU’s executive Commission, said at a conference of Brussels think tanks. “We at the Commission are doing everything, everything we can to create a sense of urgency.”
The yields, or interest rates, on the longer-term debt of Portugal and Spain, the two countries viewed as the eurozone’s next-weakest links, are off record highs reached just weeks ago, but still way above levels seen as recently as October, when the crisis was in its last lull. Yields not only indicate a country’s funding costs, but also reflect investor concern over its ability to repay its debts.”

OpenEurope reports Germans’ trust in the EU hits all-time low. “FAZ reports on a poll conducted by the Allensbach Institute, showing that German citizens’ trust in the EU has fallen to an all-time low. 63% of respondents had “little or no trust” in the EU, up from 51% in March 2010. Only 25% had “very large or large trust” in European integration, down from 37% ten months ago. 68% of respondents had “little or no trust” in the single currency, almost back to the level of 16 years ago. Only 4% could correctly answer the question “Who is Herman Van Rompuy?” (It is stunning to me that 96% of Germans do not know who this man is)

Alana Semuels of The Los Angeles Times reports California jobless rate ticks up to 12.5%


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