Is A Liquidity Crisis In Municipal Bonds Imminent?

Facts one needs to know for financial market activity for the week beginning February 28, 2011

1) … The US Federal Reserve has been successful in exporting speculative debt.
Ash writes “George Melloan recently wrote an article entitled “The Federal Reserve is Causing Turmoil Abroad”, in which he stated that the tsunami of debt-dollars unleashed via quantitative easing over the last year has caused food and energy prices to skyrocket in countries around the world … That fact exposes the true nature of the exported “inflation” in these countries – it’s all speculative sizzle and no steak.”

To that, I add,  quantitative easing has decreased demand for the US central bank’s long maturity assets, EDV, held in the public sector, which has increased rates across the board, but especially at the longer end of the yield curve, $TYX; which is seen in the 30 10 leverage curve, $TYX:$TNX, which is the inverse of the 10 30 yield curve, falling in value.

As quantitative easing has continued in duration and accumulated in amount, the central bank’s seigniorage, which is based upon both distressed securities, FAGIX, acquired via the Fed’s TARP and other Facilities, and held at the Federal Reserve, together with the US Treasuries, EDV, and TLT, held in Excess Reserve, finally started to exhaust on February 11, 2011, as some investors sold stocks, and bought bonds, BND, up until February 25, 2011.
2) … The US central bank’s seigniorage exhausted on February 22, 2011, commencing a global bear stock market.
The exhaustion of the US Central Bank’s seigniorage came on February 22, 2011, as is seen in distressed securities, FAGIX, and Junk Bonds, JNK, failing to rise higher, which decreased demand for stocks, ACWI.

The  Steel, SLX, Solar, -4.3%, KWT, -4.3%, Homebuilding, ITB, -4.3% and Transportation, IYT -4.2%, defines and establishes that a bear market is now underway.

Aggregate demand for both stocks, ACWI, and bonds, BND, has likely come to an end February 25, 2011, as bonds, BND, has reached strong resistance at 80.24.  

With the failure of the US Central bank’s seigniorage, risk appetite has turned to risk avoidance, and although gold, GLD, may fall lower in value in the short term, falling stock, ACWI, and bond, BND, values, will create an ongoing demand for gold.

Once can see completion of rally in numerous stock charts. For example the world stocks, ACWI, shows a three white soldiers advance running up to an Elliott 5 Wave Up High to 49.24 on February 18, 2011.

The Morgan Stanley Cyclical Index, $CYC, fell lower; its fall communicates an end to the current growth cycle. Given that this growth cycle, and the rise in the Morgan Stanley Cyclical Index, came via the extreme use of the seigniorage of QE, its reasonable to believe that there will be a dramatic fall lower in stock value, and very soon a downturn in economic reports such as Capitol Goods Orders, Industrial Production, Exports, and Bloomberg Financial Conditions Index, as quantitative easing continues to exhaust, effecting deleveraging both in stock market value and in economic activity as well.

The fall lower in the Industrial stocks, IYJ, comes at the same time as the fall lower in the Transportation stocks, IYT, and communicates the Dow Theory principle that a bear market has commenced — as industrial stocks and transportation stocks make market turns together.

This bear market will be the bear market of all bear markets, as the seigniorage of the long-enduring Milton Friedman Free To Choose Currency Regime developed over the last forty years has failed.

The where-with-all since the last financial collapse, that is the subprime collapse, has come via quantitative easing 1 and quantitative easing 2. The seigniorage, that is the moneyness, came via an asset swap, where Ben Bernanke, traded out money good US Treasuries for distressed securities, like those traded by mutual fund FAGIX. For the most part, then the banks placed the US Treasuries into Excess Reserve with the US Federal Reserve.

The distressed investments, and the Excess Reserves, held at the US Federal Reserve, have been the great springboard of investment growth; but now, with an exhaustion of QE, there is no longer any money good Federal Reserve seigniorage, and as a results stocks globally have turned lower in value.    

The snap declines in the 200% ETNs, and ETFs, give clear, cogent, and convincing evidence that a market turn has occurred:  Agriculture, DAG, -3.7%,Russell 2000, URTY, -5.0%, Utilities, UPW, -1.0%, and Semiconductors, USD, -3.7%.

The chart of Base Metals, DBB, clearly shows a turn lower; turning global industrial metal miners, such as Companhia Vale do Rio Doce, VALE.
The chart of Sunrise Living, SRZ, gives a finale salute to the Age of Leverage that came through US Central Bank Seigniorage as well as Yen Carry Trade Investing courtesy of the Bank of Japan, as the chart of the optimized carry ETF, ICI, shows a fall lower in an Elliott Wave 3 Decline.

The chart of the S&P Weekly, SPY Weekly, as well as World Stocks Weekly, ACWI Weekly, both show that an Elliott Wave 3 Down has commenced in each; with the S&P, SPY, falling this week to 132.33.

The wave structure of the S&P shows a rally completion with a three white soldiers pattern finale, and the last day manifesting a dragonfly candlestick, to close at 134.53. The dragon-fly doji is one where the open and close price are at the high of the day; like other doji days, this one normally appears at market turning points.  The rise of the S&P to 132.33 on February 25, 2011, presented a short selling entry opportunity, as in a bear market one sells into rises, whereas in a bull market one buys into dips.

Gary of Between the The Hedges reports “Best Performing Style, Small-Cap Value -1.07%, and Worst Performing Style, Mid-Cap Growth -2.08%”. This is significant because with the best, being a fall of 1.07 in Small Cap Value, RZV, means that a major currency event was held in abeyance by the FX currency traders as world government bonds, BWX, rose in value to an Elliott Wave 2 of 2 High.

Global currency debasement, that is global currency deflation, also known as competitive currency devaluation, commenced February 11, 2011, as the value of the major world currencies relative to the emerging market currencies, DBV:CEW, fell, in and Elliott Wave 3 of 3 of 3 Down.

The US Dollar, $USD, fell this week to head and shoulders support at 77.28. Major world currencies, DBV, fell to the middle of a broadening top pattern at 23.78; emerging market currencies, CEW, fell lower in an Elliott Wave 3 of 3 Decline to 22.39; and commodity currencies, CCX, rose to an Elliott Wave 5 High at 26.28.

I do not know if the US Dollar,$USD, is going to plunge through support, beginning the week of February 28, 2011, or if it is going to bounce up, and a large number of these currencies FXY, FXF, SZR, FXE, FXB, FXS ,ICN, FXA, BZF ,BNZ ,FXM ,FXC ,BZF, and CEW, fall lower, as FX currency traders renew their global currency war against the world central bankers, in a new round of competitive currency deflation. One can use this Finviz Screener to create a portfolio of currencies to track currencies.

Tyler Durden reports S&P To Withdraw All US Rating On May 24, Convert Everything To “Unsolicited“. In offering unsolicited ratings, will it release them from any legal liability when currencies collapse?

3) … Is A Liquidity Crisis Imminent In Municipal Bonds Imminent?
Municipal bonds, MUB, crested up into what is likely an Elliott Wave 2 high at 100.67 on February 25, 2011. Are these headed into a dramatic downturn?

Serena NG and Erik Holm of the WSJ in article Bailed-Out Insurer, Planning an IPO in May, Begins Selling Itself to the Street relate that AIG is the insurance company owned by the US Government (I have to ask why, just why didn’t this behemoth get sold during the July through February massive stock market rally?): ”AIG’s next big test will be to convince skeptical investors that it can attain stability and growth in the long run. On Friday, AIG shares slumped $1.89, or 4.6%, to $38.54 and are down more than 30% so far this year.”

“The U.S. government’s bailout left taxpayers with a 92% stake in AIG. A stock offering of possibly more than $20 billion planned for this spring is a big part of the company’s plan to extricate itself from government ownership.”

“After ruling out a March sale, AIG now intends to begin formally marketing shares to investors sometime in May, after reporting first-quarter results, according to a person familiar with the matter. The stock sale would come after marketing efforts that include so-called road shows to potential investors.”

“Launching that sales pitch after first-quarter results are announced will give investors more time to digest AIG performance before being approached about possibly buying shares in the stock sale, dubbed a re-IPO because it will resemble an initial public offering.”

“Chartis is important to the future of scaled-back AIG and the looming stock offering. Asked about the unit’s market position, which one analyst described as an “800-pound gorilla” before the financial crisis, Mr. Benmosche quipped: “I would say we are about 780 pounds and on our way back.”

“We’ve come through a horrible period of time, with questions about the survivability of AIG,” he said. “Client retention was extremely strong,” helping Chartis shift away from less-profitable products such as workers’ compensation and excess casualty insurance. The business continues “to hold the line on pricing,” he said.”

Tyler Durden asks, Will AIG Implosion 2.0 Lead To QE 3.0?  “There was a time when everyone thought CDOs are perfectly safe. That ended up being a tad incorrect. It resulted in AIG blowing up, recording hundreds of billions in losses and almost taking the rest of the financial world with it, leading ultimately to the first iteration of quantitative easing. A few years thereafter, several blogs and fringe elements suggested that munis are the next major cataclysm and will likely require Fed bail outs (some time before Meredith Whitney came on the public scene with her apocalyptic call). It would be only fitting that the same AIG that blew up the world the first time around, end up being the same company that does so in 2011, and with an instrument that just like back then only an occasional voice warned is a weapon of mass destruction: municipal bonds. AIG dropped over 6% today following some very unpleasant disclosures about its muni outlook, and corporate liquidity implications arising therefrom: “American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity.” We can’t wait until it is confirmed that Zero Hedge readers (or at least 36% of them) were right, and the Fed will have no choice but to bail out AIG (again) this time by buying up muni bonds.”

4) …Who provides seigniorage? and what provides seigniorage?
Saibal Dasgupta of The Times of India reports Banks of India Becomes First To Offer Trade Settlement In Yuan: “Indian buyers are at present making payments in US dollars.” I ask: Is seigniorage, that is moneyness, to be found in the Chinese currency. Can it be found in any currency?  And what constitutes money good?

The chart of gold relative to the Australian Dollar, GLD:FXA, communicates that gold provides good seigniorage.

5) … Irvine Renter relates Banks Extend Limbo For Mortgage Squatters To Manage MLS Inventory
In his article, he communicates the details of how the lending cartel uses FASB 157 and its market seigniorage of marking residential real estate at mark-to-manager’s-best-estimate rather than at mark-to-market, to sustain prices far in excess of than what they would be in a free market place; and how the bank’s, KBE, collective action enables those with mortgages to squat, and live payment-free in shadow inventory.   

Irvine Renter relates: “The number banks carefully watch is the percentage of distressed sales. Numbers over 30% stymie appreciation. Distressed sales over 40% make prices go down. Lenders have collectively decided that massive shadow inventory is superior to prices in free fall.”

“Some of the properties are being held in limbo because servicing agreements provide greater incentive to keep shadow inventory than to process the foreclosure. Also, as i have written about many times, lenders simply are not in a position to write down the loans.”

“In the past, the inefficiencies of the system were part of the carrot and stick approach lenders would use to get delinquent borrowers to pay. The last thing anyone with equity wants to do is let the house go to auction where they may lose everything. In an appreciating market, the threat of foreclosure motivates borrower compliance. Once borrowers go underwater, this threat turns to work against lenders who now face a low capital recovery at foreclosure.”

6) … Keywords and symbols
FASB 157, money good, liquidity crisis, seigniorage, exported inflation, money good seigniorage, EDV, BND, TLT, ACWI, SPY, IYJ, IYT, ICI, RZV, RZG, DBV, CEW, CCX, UUP, SLX, KWT, ITB, IYT, KBE, AIG, MUB

2 Responses to “Is A Liquidity Crisis In Municipal Bonds Imminent?”

  1. James Says:

    I personally believe QE3 is as sure as the sun rises.

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