Thoughts On The Yield Curve At The Beginning Of The Mother Of All Bear Markets

One should be short not long the stock market; an even better position is to be invested in gold.

1) … Yields today are very low by historical standards, but the yield curve is almost as steep as it’s ever been.
The  2 10 Yield Curve is as steep as it has ever been. Yields today are low because the US Federal Reserve Chairman is very concerned about the health of the economy, particularly the risk that a lot of economic slack might produce deflationary pressure.

To avoid economic deflation and to give the economy a boost, the Fed has promised to keep short-term interest rates very low for a long time.

As of this article’s writing on the morning of March 1, 2010, immediately before the Fed Chairman gives his semiannual testimony before Congress, the market currently expects the Fed funds rate to remain at 0.25% for at least the rest of this year.

Economic production reports show that Ben Bernanke’s QE 1 and 2 have been very economically stimulative.  Alex Kowalski of Bloomberg reports Business Activity in U.S. Grew at Fastest Pace in 20 Years. Businesses in the U.S. unexpectedly grew in February at the fastest pace in two decades, indicating manufacturing remains at the forefront of the recovery. The Institute for Supply Management Chicago Inc. said today its business barometer rose to 71.2 this month, the highest level since July 1988, from 68.8 in January. The Chicago group’s production gauge rose to 78.2 from January’s reading of 73.7. The gauge of new orders climbed to 75.9 from 75.7. The employment measure fell to 59.8 from 64.1 the prior month.Posted by Prieur du Plessis reports Eurozone PMIs: up, up and away! And Bespoke Investment Group Blog reports Chicago PMI Shoots the Lights Out.

Econophile in Zero Hedge writes “Friday on Bloomberg TV, Rosenberg said he sees rising oil and food prices taking 1% off GDP. He said that 2 of the 3 times that oil and food went up together resulted in a recession. It didn’t happen in 1996, he says, because of the forces of the tech boom.

“It all depends, as they say. The issue is: how long will political roiling in the Middle East continue? Quien sabe? My point is that we will see stagflation regardless of oil. As I pointed out in “A Note on Inflation: It’s Here,” the forces of inflation are already in motion and its effects are starting to show up, one of which is price inflation.”

“Again, we need to be mindful of what is “inflation:” it is always an increase in money supply. One of the effects of inflation is price increases. Other effects, even more serious, include the destruction of real capital (that is, capital saved from production or labor, not from printing fiat money). The destruction of real capital accompanying inflation is the only explanation for stagflation. The result of an oil shock will add to our economic woes, compounding the recessionary side of stagflation.”

“The risk of further unrest is rising, especially with sectarian issues in full force in Bahrain. This means that oil prices at a minimum will retain a geopolitical risk premium — most oil experts now peg this at $10-$15 a barrel. The thinking used to be that you’d have a jump in crude-oil prices, leading to an increase in inflationary expectations, and that would push the long end of the yield curve higher,” said Howard Simons, strategist at Bianco Research near Chicago said Howard Simons, strategist at Bianco Research near Chicago. “Nice theory, but it hasn’t worked over the last 10 or so years.” … But , I add that now the theory is working  as the  bond vigilantes have seized control of the Interest Rate on the 10 Year Government Note, $TNX as well as the 30 Year Government Bond, $TYX.

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, right through yesterday February 28, 2011.

The exhaustion of The Central Bank’s seigniorage came on February 22, 2011, as is seen in distressed securities, FAGIX, failing to rise higher, which decreased demand for stocks, ACWI.

2) … With the failure of the US Central bank’s seigniorage, risk appetite has turned to risk avoidance and the bear market of all bear markets commenced on February 22, 2011.
The rise in stocks on February 28, 2011 manifested as a short selling opportunity.

The chart of the transportation shares, IYT, communicates they are damaged beyond repair and that they will not be available to help drive the market higher; and as a result the stock market will be turning lower. Confirmation comes from the three black crows in Genesee and Wyoming Railroad, GWR as well as the topping out in Air Transport Services Group, ATSG.

Inflation Destruction is now making its first appearance. Urban Dictionary relates Inflation Destruction is the fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies.

Ben Bernanke’s quantitative easing has exhausted, as is seen in its seigniorage of distressed securities, FAGIX, turning lower. The failure of Quantitative Easing is seen in that a bear stock market commenced February 22, 2011 with a number of sectors such as Solar, KWT,  leading the charge lower.

The rise in world stocks, ACWI, the S&P, SPY, the Dow, DIA, the New York Composite, NYC, on February 28, 2011 was a short selling opportunity as one sells into strength in a bear market and buys into weakness in a bull market.

3) … Currency traders signal another stock sell off, coupled with a currency sell off is imminent.   
The currency leverage curve, that is the ratio of the small cap pure value shares, relative to the small cap pure growth shares, RZV:RZG, manifested a lollipop hanging man candlestick, signaling a currency will fall lower, or a number of currencies are going to fall lower. I have no crystal ball and cannot tell you if the US Dollar, $USD, will be one of these currencies. Only the currency traders know what they will sell next.   

With the announcement of QE 2, the FX currency traders have successfully been conducting a global currency war against the world central bankers and have successfully implemented competitive currency deflation, that is competitive currency devaluation, with the US Dollar, $USD, and the Emerging Market Currencies, CEW, falling in value; and a number of currencies such as the Australian Dollar, FXA, the Canadian Dollar, FXC, the Euro, FXE, and the Yen, FXY, rising in value as is seen in the Google Finance chart of UUP, CEW, FXA, FXC, FXE, and FXY and the Yahoo Finance chart of UUP, CEW,FXA,FXC,FXE, FXY.
  

The Euro, FXE, reset up higher into its Elliott Wave 2 Crest, manifesting a darkened candlestick.

The Canadian Dollar, FXC, rose strongly higher. I call this “loading” and suggests some type of global currency event is at hand.

The currency traders are loading for a big unload or dump of some currency or a number of currencies.The Indian Rupe, ICN, manifested the lollipop hanging man candlestick, suggesting a change of trend is at hand.  

The Swedish Krona, FXS, is a very volatile currency; it manifested an evening star candlestick. I hope those with Forex accounts went short this currency today. The chart of the Swedish Krona Yen Carry Trade, FXS:FXY, looks topped out. Sweden, EWD, rose strongly displaying what may be an evening star.    

The US Dollar, $USD, manifested bearish engulfing at support of 76.91; will it hold or will it break loose and fall lower? I have no idea. Notice on the chart how it failed to rise on February 14, 2010.

4) Out of a soon coming economic and investment flameout, a Chancellor, and a Banker will arise to provide a common EU Treasury and a universal seigniorage with austerity providing fairness for all.
Shaun Richards relates in article Equities Rally With Oil Prices Commodities And Inflationary Pressure And Is Equality Necessarily Fair?  “This morning has seen the publication of the purchasing managers index for manufacturing in February and the figures are strong with the number confirmed at 59 on a scale where a number above 50 indicates growth. So good news except for two main influences. The first links directly with the news on commodity prices reported above. Input price inflation climbed to record rates in Germany, France, Italy, Spain, the Netherlands and Austria, reached a near-survey peak in Ireland and the fastest since July 2008 in Greece.”

“Greece: I will just give you the main points here as they are fairly self-explanatory. Latest data from Markit showed that February progressed much as 2011 began, with manufacturing output, new orders and employment all falling sharply, and price pressures increasing. We are again seeing signs of a two-speed Europe or perhaps even worse a three-speed one. Whilst these are only survey results and therefore some caution is required they do reflect other data. As there are now signs of increasing inflation put yourself right now on the Governing Council of the European Central Bank. What level of interest-rates would you set for the seventeen nations of the Euro zone? My contention is that at this time there is not a correct interest-rate as the concept of one size fits all needs much more economic convergence than we are seeing. If you raise rates to prevent Germany over-heating you will be hurting Greece, Ireland and Portugal in particular and if you do not you may be letting inflation into her system. As the Alan Parsons Project put it “Damned if I do, damned if I don’t” Crossing your fingers and hoping for the best is hardly a strategy at all.”

Bruno Waterfield in the Telegraph article Ireland’s New Government On A Collision Course With EU reports: “Enda Kenny, Fine Gael’s leader, will later on Sunday, start to form a new government, almost certainly with Labour, after full election results under Ireland’s complicated PR system come through.”

“Both Mr Kenny and Eamonn Gilmore, Labour’s leader, have promised Irish voters that they will renegotiate the EU-IMF austerity programme to reduce the burden for taxpayers and to force financial investors to shoulder some of the bank debts currently paid out of the public purse.”

“At a summit of centre-right EU leaders in Helsinki next Friday, Mr Kenny will use his position as Ireland’s new Prime Minister to beg the German Chancellor, Angela Merkel, and French President, Nicolas Sarkozy, for concessions ahead of an emergency March 11 Brussels summit to restructure the euro zone.”

“But neither the two European leaders nor the European Central Bank or EU will permit any substantial changes, despite the huge popular Irish revolt against the bailout.”

“Chancellor Merkel will tell Mr Kenny that if he wants to reduce the high, punitive 5.8 per cent interest rate charged on EU loans then Ireland will have to give up its low corporate tax rates – a measure regarded as vital to Ireland’s recovery and one of the few economic policies it has not yet handed over to Brussels or Frankfurt.”

Could Mrs Merkel arise to be The Sovereign? Perhaps so. Team Europe relates that European federalist Romano Prodi, EU Commission President said on October 13, 1999:  “We must now face the difficult task of moving towards a single economy, a single political entity .. For the first time since the fall of the Roman Empire we have the opportunity to unite Europe.”

Out of a soon coming economic and investment flameout, a political and economic unified Europe, a United States of Europe, will soon be a reality, as a Chancellor, that is a Sovereign, and a Banker, that is a Seignior, will arise to establish a new seigniorage with austerity for all. Their rule will be fair, in that all get the same autocratic treatment; yes democratic deficit for everyone. It will very much be a revived Roman Empire, in as much as the German people, an many others are descendants of those living in the previous world wide Roman Empire, and in as much as two European leaders Angela Merkel and Jean-Claude have received the highly valued Charlemagne Prize.

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