Will Angela Merkel’s Competitiveness Pact Resolve The Eurozone’s Issues?

Financial market report for March 4, 2010

1) …Angela Merkel’s “Competitiveness Pact” is a diktat for German and France led economic governance of the Eurozone.
Ralitsa Kovacheva’s, Sofia, EU Inside article A Pact Under Cover provides the history of the Competitiveness Pact.

The Competitiveness Pact will be presented as a Framework Agreement and paradigm for economic governance of the Eurozone the week of March 7, 2011 in Brussels.     

The phrase Competitiveness Pact is doublespeak, that is evasive, ambiguous, high-flown language intended to deceive or confuse. Doublespeak says one thing, but means something else.

The Competitiveness Pact is an attempt of re-engineering of Europe’s economic and political paradigm for German’s interests; it is an attempt to bring the periphery nations into better alignment with Germany through fiscal fascism; it is a mandate for austerity.

Germany has and always will have a competivive advantage by nature of governance, nature of people, as well as technological and productive capability over the people of Portugal, Greece, Italy, Ireland and Spain. Germany is technocratic, and manufacturing capital intensive; where as the PIIGS are agrarian and labor manufacturing intensive. The Nordic countries have an industrious attitude; whereas the Latin countries are known as Club Med for a reason. The cultural differences are as stark as day and night, as Christopher Torchia in AP article writes, Greece’s Debt Woes Show A Continent Divided

The reason why the PIIGS wanted to join the Euro were that two-fold.  First, there were Federalists who have wanted political power, well before World War II. And second, the PIIGS wanted lower interest rates on sovereign debt; hese did come with the adoption of the Euro. The Club Med countries coasted on the bond prices of Germany. But now spreads between the PIIGS and Germany have exploded higher, especially after Angela Merkel raised the specter of a sovereign debt default mechanism. The Comptitivensss Pact does nothing to address the fact that the ECB is an insolvent bad bank, as it is laden with ill-liquid debt taken in banks across Europe, and these banks are really insolvent as well, as they refuse any kind of stress test that involve the idea of haircuts on debt.        

Leigh Phillips in EUObserver February 9, 2011 article Eurozone Summit Looms Amid Growing Hostility to Franco German Pact reports that Berlin and Paris would mandate a common corporate tax base, harmonise retirement ages, eliminate indexation of wages to inflation, and establish a debt brake on government debt via constitutional amendments.  

EuroIntelligence in March 4, 2011 Daily Briefing reports: “There is a major inter-institutional battle brewing, between the ECB and the European Parliament on the one side, and the European Council on the other. Trichet is furious that the Council is in the middle of watering down the Commission’s already ultrasoft proposals on economic governance, FT Deutschland reports. An unusually blunt Trichet said yesterday that the ECB was counting on the European Parliament to do whatever it takes to draw the necessary lessons from the crisis – in other words he is hoping that the EP will reject the proposals with a view to make substantial amendments.”

“The EP is also becoming furious about being sidelined in the competitiveness pact. In a joint cross-party statement the EP made it clear that it will use the powers it has obtained under the Lisbon Treaty. “The discussions on a potential competitiveness pact between the President of the European Council and the President of the Commission clearly overlap with the ‘economic governance package’, mainly with the new macro economic imbalances procedure. Given the gravity of the crisis, Europe’s citizens are awaiting clarity and concrete actions that should be embedded within a clear, coherent single framework.”

I am neither an Austrian economist, nor a collectivist, I say a better competitiveness pact would provide a value added tax on all German exports; but then again, German industry is so far advanced at this point, that comparing German manufacturing capability to that of the PIIGS, is like comparing NASA to the stone-age.

Ambrose Evans Pritchard in The Telegraph article EMU Policies Are Pushing Southern Europe Into Systemic Political Crisis writes on the German and Club Med competitiveness differences stating: “The 30pc gap in labour competitiveness that has built up between Germany and Club Med since the eurozone currencies were locked together in perpetuity will remain. Greece, Portugal, Spain, and Ireland will stay trapped in structural depression through this year, and well into next, rotating from a liquidity crisis to a chronic political and social crisis that exposes the inability of elected governments to counter 1930s job wastage. Unemployment is 28pc in Andalucia, and 30pc in Cadiz. There is an awful possibility, or probability,  that German über-growth will increase the pain for peripheral Europe before it offers a meaningful lifeline to Club Med through trade stimulus.”

I believe Germany’s Angela Merkel and France’s Nicolas Sarkozy will be unable to establish a coordinated competitiveness plan that will be accepted by Eurozone members, as well as be unable to propose a solution to an even greater problem, that being a European Sovereign Debt and Bank Debt Crisis.  

Gero von Randow, an editor with the Hamburg Die Zeit, in June 21, 2010 article Squabbling Makes Europe Insignificant wrote: “We have now reached a point where exasperation in Franco-German relations threatens to undermine the symbolic foundations of the EU, which were laid by Charles de Gaulle and Konrad Adenauer, and later reinforced by Giscard d’Estaing, Helmut Schmidt, François Mitterrand and Helmut Kohl. And it is for this reason that the future of Europe may be in jeopardy.”  I say nothing has changed, because Germany will now and forever more be able to economically out-compete all Eurozone nations; and because the European Financial Institutions, EUFN, are laden with ill-liquid sovereign debt.     

Peter Zeihan in Stratfor March 18, 2010, article Germany Mitteleuropa Redux writes of the ever growing power of Germany: “Part of being within the same currency zone means being locked into the same market. One must compete with everyone else in that market for pretty much everything. This allows Slovaks to qualify for mortgage loans at the same interest rates the Dutch enjoy, but it also means that efficient Irish workers are actively competing with inefficient Spanish workers-or more to the issue of the day, that ultraefficient German workers are competing directly with ultrainefficient Greek workers.”

“The chart below measures the relative cost of labor per unit of economic output produced. It all too vividly highlights what happens when workers compete. (We have included U.S. data as a benchmark.) Those who are not as productive try to paper over the problem with credit. Since the euro was introduced, all of Germany’s euro partners have found themselves becoming less and less efficient relative to Germany. Germans are at the bottom of the graph, indicating that their labor costs have barely budged. Club Med dominates the top rankings, as access to cheaper credit has made them even less, not more, efficient than they already were. Back-of-the-envelope math indicates that in the past decade, Germany has gained roughly a 25 percent cost advantage over Club Med.”

“The implications of this are difficult to overstate. If the euro is essentially gutting the European-and again to a greater extent the Club Med-economic base, then Germany is achieving by stealth what it failed to achieve in the past thousand years of intra-European struggles. In essence, European states are borrowing money (mostly from Germany) in order to purchase imported goods (mostly from Germany) because their own workers cannot compete on price (mostly because of Germany). This is not limited to states actually within the eurozone, but also includes any state affiliated with the zone; the relative labor costs for most of the Central European states that have not even joined the euro yet have risen by even more during this same period.”

“It is not so much that STRATFOR now sees the euro as workable in the long run-we still don’t-it’s more that our assessment of the euro is shifting from the belief that it was a straightjacket for Germany to the belief that it is Germany’s springboard. In the first assessment, the euro would have broken as Germany was denied the right to chart its own destiny. Now, it might well break because Germany is becoming a bit too successful at charting its own destiny. And as it dawns on one European country after another that there was more to the euro than cheap credit, the ties that bind are almost certainly going to weaken.”

“The paradigm that created the European Union-that Germany would be harnessed and contained-is shifting. Germany now has not only found its voice, it is beginning to express, and hold to, its own national interest. A political consensus has emerged in Germany against bailing out Greece. Moreover, a political consensus has emerged in Germany that the rules of the eurozone are Germany’s to refashion. As the European Union’s anchor member, Germany has a very good point. But this was not the “union” the rest of Europe signed up for-it is the Mitteleuropa that the rest of Europe will remember well.”

Guy Verhofstadt, former Belgium Prime Minister, and, Jacques Delors and Romano Prodi, and former presidents of the European Commission, in FT.com article Europe Must Plan A Reform, Not A Pact write: “Instead of the competitiveness pact, EU leaders should adopt a “Community Act” for economic convergence and governance.”

Risqi of GETS ACC relates the Reuters report Trichet Signaled Support For Merkel Competition Pact:  “European Central Bank chief Jean-Claude Trichet has Angela Merkel for her support for greater competitiveness pact signaled the Federal Chancellor. “If it seeks to improve the functioning of the economic union through greater coordination and integration, we will support him,” Trichet told the weekly newspaper Die Zeit, according to a preliminary report on Wednesday. Currently, however, he did not know what exactly.  The president of the European Central Bank do more to promote economic cooperation continued, “Our message is clear: We need to go so far as possible to strengthen economic governance in Europe at all levels,” Trichet was quoted as saying. In the fall called from office outgoing ECB president of Germany’s efforts to regain competitiveness in the last ten years is remarkable. “Your country is now reaping the fruits of his ongoing effort to inform and also benefits the euro area. A strong German economy is good for Europe.”

Economic governance of the Eurozone will not come by means of the Competitiveness Pact; rather it will out of the failure of the economic and political paradigm of Neoliberalism, which occurred, February 22, 2011, as seigniorage failed, with the downturn in distressed securities, like those held in FAGIX, which caused the stock market, ACWI, to turn lower.

Neoliberalism is a dead man walking; it is a bankrupt, burned out and zombie economic and political paradigm, that has turned toxic with the exhaustion of quantitative easing, and with the onset of “inflation destruction”. Thus neither investment or growth can be sustained or achieved.

Lacking seigniorage, world stocks, ACWI, have turned lower from their February 18, 2011 value of 49.24.     

The chart of US Stocks Relative To The US 10 Year Government Note, VTI:TLT, and the chart of the chart of World Stocks relative to World Government Bonds, VT:BWX, shows that stocks have lost their leverage on sovereign debt.

A sovereign crisis on a global scale, is just now starting to develop, as is seen in the value of world government bonds, BWX, turning lower today March 3, 2011. The Morgan Stanley Cyclical Index Stocks, $CYC, have not recovered from their February 22, 2011 fall evidencing that the stocks which precede growth have topped out. I recommend that one buy and take possession of gold, GLD, and silver bullion, SLV.
A new political and economic paradigm, that being rule of the sovereigns, will emerge out of Götterdämmerung, an investment flameout, where a Chancellor, that is a Sovereign, and a Banker, a Seignior, will arise and govern through global corporatism. Such leadership may come out of Germany heralding the strength of a revived Roman Empire, as Germany has its ancestral roots in that former empire. National leaders will waive national sovereignty and announce Framework Agreements. These Agreements will appoint stakeholders to oversee regional economic governance. The two leading Sovereigns will provide a new seigniorage, that is a new moneyness, with austerity and democratic deficit for all.  Perhaps one of these two leaders will be EU Council President Herman Van Rompuy as he has defends the European Union as being the “fatherland of peace” euobserver.com, January 17, 2011. The word, will and the way of the sovereigns will be law replacing constitutional as well as historical rule of law.

Welcome to the post QE World where the ability of a country to print globally acceptable scrip,  especially enhanced script, and have that nation’s currency serve as the reserve currency, is history. Sovereign Nations and the Milton Friedman Free To Choose Currency Regime stand as white washed tombs to a bygone era of fiat prosperity.

The Greek Bail Out Agreement and the Ireland Bail Out Agreement established European economic governance and established a European Treasury, and a European Monetary Authority, that being the EFSF, which is in the process of issuing Euro Bonds. A Federal Authority exists in the Eurozone, that being the Leaders’ Bail Out Framework Agreements. European Federalism is also seen as Leaders announced the European Semester process where state budgets are now vetted before they are submitted to national legislatures.

The article Annika Breidthardt and Axel Bugge, Reuters article Merkel Hails Portugal Reform, Cool On Ireland, conveys the reality that the Leaders Agreements waived national sovereignty: “Merkel poured cold water on the incoming Irish government’s hopes of significantly renegotiating the terms of an 85-billion euro rescue it received from the European Union and the International Monetary Fund in December. “We cannot artificially reduce interest rates. Ireland and Greece have taken aid,” she said, noting that the Irish package was only a few months old. If Ireland said it had problems with the interest rates, she would consider the issue, but there were benchmarks. Dublin could not expect to pay less for rescue loans than Portugal paid to refinance itself in the market, Merkel said. Ireland’s loans from the European Financial Stability Facility (EFSF) were granted at about 5.8%. Portugal is having to pay about 7.5% on 10-year bonds in the market.”

Now there is squabbling about whose bonds the EFSF should buy. I’ve always assumed that the EFSF would buy bonds from insurance companies and the European Banks, but now German based Der Spiegel reports European Central Bank Wants to Unload PIIGS Bonds. During the crisis, the European Central Bank began buying up bonds from debt-ridden countries like Greece. Now the bank wants to transfer responsibility for those securities to the EU’s euro rescue fund.     

Doug Noland of Prudent Bear writes in Favorable or Unfavorable: “I have posited that severe structural fiscal issues from the early nineties were papered over by an unprecedented expansion of private-sector borrowings – debt that was intermediated through innovative “Wall Street finance.”  It’s now payback time.”

“Corporate Credit expanded 9.9% in 1997, 11.7% in ’98, 10.7% in ’99, and  9.3% in 2000.  During this four-year Credit boom, corporate debt surged 49% to $6.595 TN.  Credit growth slowed meaningfully following the bursting of the tech/corporate debt Bubble, although policy-induced reflation ensured double-digit growth returned in 2006 (+10.5%) and 2007 (+13.1%).”   

“Yet corporate excesses pale in comparison to the binge perpetrated by the American consumer.  Household debt expanded 8.4% in ‘99, 9.1% in ‘00, 9.6% in ‘01, 10.8% in ‘02, 11.8% in ‘03, 11.0% in ‘04, 11.1% in ‘05, 10.1% in ‘06 and 6.8% in 2007.  A historic Credit Bubble saw Household debt balloon 134% in nine years to $13.803 TN.  This surge in finance spurred consumption and consumer-related investment, along with fostering a surge in asset prices and attendant capital gains.  Tax receipts inundated government coffers from local municipalities to the halls of Congress.  Politicians at all levels luxuriated in the windfall, expanding spending programs while trumpeting fiscal soundness.”

“The new found – and seemingly unending – capacity to intermediate risky mortgage, household, and corporate borrowings was integral to prolonging the boom.  U.S. Financial Sector debt basically expanded at double-digit annual rates from 1993 through 2007.  During this period, Financial Sector Credit market borrowings jumped from $3.024 TN to $16.208 TN, or 436%.  The “golden age” (1993 through 2007) of Wall Street finance saw GSE assets jump 474% to $3.174 TN; Agency MBS 251% to $4.464 TN; Asset-Backed Securities 1,080% to $4.532 TN; Broker/Dealers assets 709% to $3.092 TN; Net Repurchase Agreements 447% to $2.157 TN; and Wall Street off-balance sheet “Funding Corps” 465% to $1.849 TN.”

“It is today an analytical imperative to appreciate some of this Credit inflation’s key effects.  Importantly, federal government receipts inflated from $1.148 TN in 1992 to $2.655 TN by 2007.  A federal deficit of more than $300bn in ’92 was transformed into surpluses – and talk of paying down the entire federal debt – by the end of the nineties.  More importantly, the expansion of private sector debt inflated expenditures and price levels throughout the economy and markets – spending and imports; home, stock and private business values; household incomes; corporate revenues and cash flows; and government receipts and expenditures.   In the single best illustration of the scope of Bubble inflationary effects, non-financial debt growth expanded from less than $600bn annually in the mid-nineties to $2.5 TN by 2007.”

“The concept of “payback time” rests on the thesis that the incredible inflation of mortgage and Wall Street finance nurtured a maladjusted Bubble Economy (with myriad inflated price levels/distorted spending patterns/imbalances/Credit dependencies) that became reliant on $2.0 TN or so of annual system Credit expansion.  Not only did the “private” sector boom dramatically inflate the amount of system Credit required to sustain spending, incomes and asset prices (to hold downward debt spiral dynamics at bay), it also severely impaired the creditworthiness of non-governmental debt issuers.  Moreover, important facets of Wall Street risk intermediation were discredited (GSEs, CDOs, auction-rate securities, etc.).  Large swaths of private sector debt have lost “moneyness” in the marketplace, and it will be quite some time (think Japan) before the moon and stars line up again for a replay of this Bubble.”

“As we’ve witnessed for going on three years, massive government sector borrowings now completely dominate system Credit creation (more than 100% of total non-financial Credit growth).  This public sector borrowing and spending binge has indeed sustained/reflated Bubble economy price levels, although the prospect for any handoff to the private sector remains bleak.  To be meaningful on a systemic basis (promoting a “handoff”), annual private sector debt growth today would have to grow from around zero to many hundreds of billions.  Yet in today’s post-Bubble environment for private Credit (with household and corporate borrowers hesitant to borrow and the marketplace disinclined to finance another boom) the likelihood of a major resurgence in mortgage and corporate Credit expansion is remote.”

“I would argue that the government’s (Treasury and Federal Reserve) reflationary policymaking is fomenting systemic risks that actually ensure that the marketplace will lack the sufficient future appetite for private financial obligations – a prerequisite for a Credit creation “handoff.”  Federal Reserve liquidity operations have been fundamental to the marketplace’s accommodation of escalating federal borrowing requirements.  And each passing year of rising federal deficits ensures an even larger gulf between the total amount of system Credit creation required to sustain the boom and the limited capacity of the private-sector to begin carrying the load.  Furthermore, the longer the government finance Bubble is prolonged, the greater the systemic dependency for this type of finance both from a financial and economic system perspective.  Or, explained somewhat differently, the larger the government finance Bubble the smaller the potential private sector Credit impact.”

“Federal Reserve monetization has also exacerbated global financial system liquidity excess, as increasingly speculative global finance comes further unhinged from even a semblance of a stable “reserve” currency.  Surging global food and energy prices are an increasingly conspicuous consequence of activist global policymaking, a dynamic that is no friend to U.S. household vitality or creditworthiness (or, inevitably, bond prices).  And here the dimensions of the previous “private” Credit Bubble (as opposed to the seemingly favorable federal debt position) are the determining factor with respect to the scope of quantitative easing operations.  Irrespective of government debt ratios, post-Bubble economic maladjustment and Credit impairment create fragilities that ensure our central bank errs on the side of ultra-low rates and aggressive monetization.  I see the unfolding boom in federal finance as anything but mitigating our structural debt and economic problems.”

“The federal government sector did commence the post-mortgage/Wall Street finance Bubble period with manageable marketable (not including contingent liabilities) debt levels.  From a Credit Bubble perspective, however, this is proving a liability.  The marketplace has accommodated the greatest 3-year expansion federal debt in history, reinvigorating Bubble dynamics and re-inflating systemic fragilities.  And despite Fed-induced artificially low borrowing  costs, our government’s so-called “favorable” debt ratio has deteriorated rapidly.”

“The government sector is now well on its way toward impairing its creditworthiness.  And while diminished, the dollar’s status as reserve currency (“ability of a country to print globally acceptable scrip”) has been instrumental in the ability of global central bankers to “recycle” the unending surfeit of dollar balances right back into our securities markets.  In this respect, I would argue another “asset” is proving a quite unfavorable Bubble-fomenting “liability.”  These days, our government finance Bubble has counterparts all around the world, in an environment of Monetary Disorder and increasingly unwieldy global finance.”

In the final analysis, when it comes to gauging the probability of “ultimate success,” I fear that our policymakers have pilfered our nation’s assets for the perpetuation of problematic – and in the end unsustainable – Bubble Dynamics.”

2)  … Quantitative Easing 1 and 2 have resulting in an explosion of commodity prices, stimulating social revolutions in Middle East, MES, and African, AFK, countries, which have driven oil prices, USO, to the Septemeber 2008 level, and which have in turn, caused inflation destruction, turning down stocks prices, and creating a loss of seigniorage, that is moneyness.

Urban Dictionary defines inflation destruction as 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. Companies falling massively to inflation destruction included.

Bruce Krasting reports on the stimulate nature of QE2 which has taken interest rates negative:  “Senator Shelby asked Bernanke to explain how he came to the $600b QE2 program. The answer came at minute 32 of this C-SPAN clip. Ben explained that he felt that a monetary ease equivalent to a 75 BP reduction in the Fed Funds rate was in order to avoid deflation. He equated $150-200 billion of QE as being equivalent to a 25BP reduction in short term rates. The justification for QE all along has been that monetary policy is range bound by zero interest rates. QE brings us below “0” in equivalent policy.” The sum of QE 1, QE lite (the top off of QE1) and QE2 is $2.35 trillion. Using Bernanke’s formula you get a range of 4% to 5% as the approximate interest rate consequence of QE. (2.35/.15 or 2.35/.2) That is an extraordinary number. The Fed’ ZIRP policy set interest rates at zero. QE has brought that to -4.5% (average) based on Ben’s numbers.”

Today, March 4, 2011, with oil moving above $103, world stocks, ACWI, succumbed to inflation destruction; strong fallers of the day included the following:
Airlines, FAA, -1.8%
Small Cap Pure Value, RZV, -1.2%
Semiconductors, XSD, -1.2% The seigniorage, that is the moneyness, that came with investment in the Apple ecosystem has also failed turning the semiconductors, XSD, lower.    
Small Cap Industrial, XLIS, -1.1%
Steel, SLX, -1.1%
Home Builders, ITB, -1.1%
Environment Services, EVX, -1.1%
Nanotechnology, PXN, -1.1%
Software, SWH -1.1%
Real Estate, IYR, -1.1%
Small Cap Consumer Discretionary, XLYS, -1.1%
S&P Clean Energy, QCLN, -1.0%
Wood Producers, WOOD, -1.0%

Dow Industrial, DIA, -0.7%
Nasdaq 100, QTEC, -0.8%
Russell 2000, IWM, -0.4%
Morgan Stanley Cyclical Index, $CYC, -1.1%
New York Composite, NYC, -0.9%
Hard Asset Producers, HAP, -0.5%

Silver Miners, SIL, Gold Miners, GDX, Silver Exploration, SSRI, Junior Gold Mining, GDXJ, traded higher These have been the great swing stocks of QE 1; but the announcement of QE 2 has meant a topping out in these stocks. These always make turns lower with the US Treasuries, as is seen in the chart of the HUI Gold Mining Stocks relative to the 30 Year US Government Bond, $HUI:$USB. The gold mining stocks are disconnecting from the price of gold as is seen in the chart of GDX:GLD with a disconnect date of December 13, 2010 and February 22, 2011 clearly seen in the chart. The inflation trade, that is the anticipation trade in and upon quantitative easing is ending. Those who own the precious metal mining stocks and funds should consider investing in and taking possession of physical gold and silver. The 30 10 US Sovereign Debt Leverage Curve, $TYX:$TNX, which is the inverse of the 10 30 Treasury Curve, traded up today, giving investment boost to the gold mining stocks, where as all other stocks suffered inflation destruction.    

Banks, KBE, -1.5%
Nasdaq Community Banks, QABA, -1.5%
Investment Bankers, KCE, -1.5%
Financial stocks, XLF, -1.2%
European Financial, EUFN, -1.2%
Citigroup, C, -3.0%Bank of America, BAC -1,1%

Spain, EWP, -1.9
Sweden, EWD, -1.2%
Europe, VGK, -1.2%
Germany, EWG, -1.2%
Austria, EWO, -1.2%
Italy, EWI, -1.1

Gulf States, MES, -1.2%
Africa, AFK, -1.3

This week the Euro, FXE, rose, causing the European shares, VGK, to rise.

The Emerging Market Currencies, CEW, rose causing the Emerging Markets, EEM, to rise. These crested up into an Elliott Wave 2 high, setting them for a fall lower. The US Dollar, has fallen 3.3% this year. This fall in the US Dollar has destabilized the first of countries to have benefited from QE 1, such as Turkey, TUR, and the Phillippines, EPHE, as is is seen in the chart of EEM, TUR, and EPHE. Now all countries will participate in inflation destruction. It will be the banks, KBE, led by Bank of America, BAC, investment banker, Morgan Stanley, MS, and those banks that traders run up strongly having benefited from revival by trading out their distressed for formerly money good US Treasuries such as Fifth Third Bancorp, FITB,  Huntington Bankshares, HBAN, Regions Financial, RF, Suntrust Banks, STI, as well as European Banks such as Banco Santender, STD, and the Emerging Market Financials, EMFN,  

The chart of the Emerging Market Financials, EMFN, together with Latin America Banks, EMFN, ITUB, IBN, BBD and BSBR, reflects that inflation destruction coming from US Federal Federal Reserve policies, is causing deleveraging from Emerging Market Banks, and has caused disinvestment from emerging market countries such as Brazil, EWZ.  The chart of Brazil Financials, BRAF, communicates that it is the fall in the Brazilian Banks, that is undermining investment in Brazil, EWZ, especially the Brazil Small Caps, BRF. Announcement of Ben Bernanke’s QE 2 at Jackson Hole, caused a Tsunami of Disinvestment out of the world’s small cap stocks, EWX, and a Gusher of Investment in the Russell 2000 Growth, IWO, the small cap revenue shares, RWJ, such as Options Express, OXPS, World Acceptance, WRLD, Morningstar, MORN, Dollar Financial, DLLR, and in the small cap energy shares, XLES. Of note, Matthew Bristow and Andre Soliani of Bloomberg report:  “Brazil’s central bank signaled it will raise the benchmark interest rate for a third straight meeting next month, after pushing borrowing costs… to a two-year high to cool inflation.  Policy makers raised the overnight rate to 11.75% from 11.25% in a unanimous vote.”

The Brazilian Real, BZF, rose causing Brazil, EWZ, to rise.

The Mexico Peso, FXM, rose causing Mexico, EWW, to rise.

The Indian Rupe, INR, rose causing India, INP, to rise.

The Canadian Dollar, FXC, rose causing the Canadian Small Caps, CNDA, to rise.

The British Pound Sterling, FXB, rose causing the UK, EWU, to rise.

The Swedish Krona, FXS, rose causing Sweden, EWD, to rise.

The South African Rand, SZR, rose causing South Africa, EZA, to rise.    

The Russian Ruble, XRU, rose causing the Russian shares, RSX, to rise.

The Swiss Franc, FXF, rose causing the Switzerland shares, EWL, to rise.

The Australian Dollar, FXA, traded lower, causing Australia, EWA, to trade lower.

Doug Nolan reports that the Nordic currencies rose, the Danish krone 1.7%, the Norwegian krone 1.3%, and the Swedish krona 1.2%. The chart of the Nordic 30, GXF, together with the S&P, SPY, and the European stocks, VGK, shows that the Nordic shares benefited from QE 2 more than the S&P and were not troubled like their Euro dependent southern peers by sovereign debt crisis. These nations were very wise to not participate in the Euro currency union …. GXF, SPY, VGK  Johan Carlstrom and Janina Pfalzer of Bloomberg report:  “Sweden’s government raised its forecast for economic growth this year after it cut taxes and as the largest Nordic economy benefits from demand for its exports.  Gross domestic product will expand 4.8% this year.”

The New Zealand Dollar, BNZ, traded lower for a second week; which caused New Zealand, ENZL, to trade lower as well. New Zealand shares have seen both inflation destruction and currency destruction, that is debt deflation.

The US Dollar, $USD, traded lower 0.1% lower, as Ben Bernanke’s QE constitutes monetization of debt.  US Treasuries, EDV, and TLT, traded up today as some investors moved out of stocks and into Bonds, BND.     

Jody Shenn of Bloomberg reports: “Investors are pouring the most money in at least five years into publicly traded funds that buy mortgage assets, bolstering the market for the debt and reducing borrowing costs for homeowners.  Annaly Capital Management, NLY, led real estate investment trusts that have raised almost $6 billion in share sales in the past three months. JPMorgan Chase & Co. estimated in a Feb. 26 report that this ‘surge’ of equity investment may fuel purchases of as much as $50 billion of additional government backed mortgage bonds.” The chart of Mortgage Backed Bonds, MBB, shows that they have entered an Elliott Wave 3 Down; the herd always makes the wrong choice immediately at market turns and goes on to slaughter and destruction. The bond vigilantes and the FX currency traders are the greatest butchers of all.

Neither the 2 10 Yield Curve, $UST2Y:$TYX, nor the the10 30 Yield Curve, $TNX:$TYX, have been rising because industrial production has been growing, and consumer activity is picking up; rather they have been rising as the bond vigilantes have seized control of the interest rate on the 30 Year US Government bond, $TYX, when Ben Bernanke announced QE 2 at Jackson Hole in August 2010; and then seized control of the Interest rate on the 10 Year US Government Note, $TNX, on August 8, 2010, when QE 2 was formerly announced.  This enabled the FX currency traders to sell the US Dollar, $USD, beginning in September 2010, and to start to drive the price of oil, USO, up in October 2010.

The chart of Oil, USO, shows that investors knowing that when a central bank monetizes debt, commodity price inflation follows. Ben Bernanke’s quantitative easing policy has given seigniorage to oil as a globally sovereign currency.   

As a result of the Fed Chairman’s policies inflation destruction came to Airlines, FAA, on announcement of QE2. Javier Blas and Pilita Clark of FT.com report: “US airlines are being forced to rethink their fuel hedging policies because of a rare divergence between the cost of jet fuel and the oil benchmark they traditionally use to insure against high energy costs.  The unusual disconnect has seen a number of US airlines raise fares even though in theory they were well hedged.   US airlines hedge their exposure to energy costs mostly through the popular West Texas Intermediate oil contract.  While WTI prices have risen 11.6% since the beginning of the year, the cost of jet fuel in the US has risen by nearly 28% in the same period.”

And QE 2 inflation destruction came to US Dollar dependent Phillippines, EPHE, as risk appetite turned to risk avoidance.

Formerly hot money flows into Turkey, TUR, Indonesia, IDX, Chile, ECH, and China, YAO, ceased and deleveraging commenced with a few exceptions such as Chinese high tech company Focus Media Holding, FMCN.

Stuart Wallace of Bloomberg reports “World steel prices rose 10% last month, according to MEPS (International) Ltd., a U.K.-based industry consultant.” This as steel manufacturers, SLX, fell dramatically on February 22, 2011, and traded 1.1% lower today Friday March 4, 2011 on inflation destruction.  

Wendy Pugh of Bloomberg reports: “Cotton buyers have purchased more than 80% of the coming harvest from Australia, the fourth-largest shipper, stepping up the pace of advance sales as a shortage pushes prices to a record. The amount of so-called forward sales compared with usual levels of 50% to 60% at this time, Phill Ryan, a director of the Australian Cotton Shippers Association, said ‘The U.S. is the biggest exporter in the world and they are sold out,’ Ryan said” … And Chris Prentice and Jae Hur of Bloomberg report:  “Cotton, BAL, futures surged to a record on signs that global demand from textile mills will continue to outpace supplies.  Output in China, the world’s biggest consumer, fell 6.3% last year.   U.S. sales surged 56% to 403,341 bales in the week ended Feb. 24 from a week earlier… Prices have more than doubled in the past year.  ‘It’s a worldwide scramble,’ said John Flanagan, the president of Flanagan Trading.  ‘The last holdouts realized there was no way out other than just buying, trying to find cotton to keep their mills running.’ Best of textile manufacturers, Interface, IFSIA, and Unifi, UFI, have come under the power of inflation destruction and are starting to sell off.

I’ve written extensively that solar stocks, KWT, will be fast fallers during the Age of Deleveraging. Vietnam News reports that First Solar is planning to build a massive solar manufacturing plant just as investment in solar stocks is topping out.  First Solar, FSLR, has been given permission by the Ho Chi Minh City People’s Committee to build a solar panel factory. The plant will be built in the Dong Nam Industrial Zone in Ho Chi Minh City’s Cu Chi District with a total investment of $1.2 billion.

The chart of the Flattner ETF, which is the inverse of a steeping yield curve, together with the hot money flow countries, shows inflation destruction, that is the deleveraging and disinvestment, coming from the QE 2.  Soon all nations and all sectors will show the same, as loss of  seigniorage goes mainstream …. FLAT, TUR, ECH, IDX, YAO, KOL, and FAA

The bond vigilantes have seized control of the bond markets globally as is seen in world government bonds, BWX, falling in value with the announcement of QE2. They have declared a global currency war on central banks, by commencing competitive currency devaluations, that is competitive currency deflation with the US Dollar being the first victim. The US central bank has lost its debt sovereignty, that is its debt seigniorage to a small handful on individuals operating out of Caribbean pirate islands such as Guernsey, Bermuda or the Cayman Islands and secluded away in major financial trading centers such as London as Elaine Meinel Supkis writes.       

The longer end of the yield curve, the 10 Year 30 Year Bond Spread, violently reversed and steepened in the end of 2010, which came through both anticipation of and execution of QE 2. This can be seen in its reverse, the 30 10 Leverage Curve, $TYX:$TNX, cresting and falling.

Ben Bernanke’ cool aid leverage investors out of 30 Year US Government Bond, EDV, as well as the 10 Year US Government Note, TLT,  and propelled astute investors to use margin to go long the Russell 2000 Growth shares, IWO, the Morgan Stanley Cyclical Index, $CYC, Consumer Service, VCR, Small Cap Consumer Discretionary, XLYS, and Small Cap Energy, XLES, as is seen in the chart of IWO, VCR ,XLYS, and XLES … But as the chart also shows, inflation destruction, came February 22, 2010, causing disinvestment except for the case of the Small Cap Energy, XLES, which put in a new high on a higher price of oil, USO. Clayton Williams Energy,  CWEI, rose 5.4%      

Up until this week, the Federal Reserve Chairman’s easing policy has enabled the value of junk bonds, to expand, as is seen in the chart of Junk Bonds, JNK, and in the Doug Noland Prudent Bear report that  “Junk bond funds saw outflows of $1.8 million (from EPFR), the first week of negative flows this year.”  

The monthly chart of Junk Bonds, JNK Monthly, shows that since QE 1 was announced, the value of junk has doubled in value.

Anne-Sylvaine Chassany of Bloomberg report : “Henry Kravis, co-founder of KKR & Co., said his firm got the cheapest financing ever to fund its $5.3 billion takeover of Del Monte Foods Co. after credit markets rebounded from the global financial crisis.  ‘It’s probably the most attractive financing that we’ve ever done,’ Kravis said ‘The financial markets rebounded much faster than the economy.’”

Ben Martin and Bryan Keogh of Bloomberg report: “Corporate bond sales worldwide fell 28% in February, the second-biggest decline since Europe’s fiscal crisis roiled markets last May, as turmoil in North Africa and the Middle East drove away borrowers.  Issuers sold $252.7 billion of company notes last month, down from $352.5 billion in January.”  The chart of both corporate bonds, show that they have entered an Elliott Wave 3 Decline. Disinvestment from corporate bonds, LQD, started with the formal announcement of QE 2; and disinvestment from the longer duration corporate bonds, BLV, commenced with the first announcement of QE 2 at Jackson Hole.

The chart of the longer maturity corporate bonds, BLV, together with corporate bonds, LQD, the 10 Year US Government Note, TLT, the 30 Year US Government Bond, EDV, and the 200% Dollar ETF, UUP,  
BLV, LQD, TLT, EDV, and UUP, communicates that the US Federal Reserve’s Quantitative Easing has monetized US sovereign debt, with a loss in 10 Year Notes of 16%, and debasement of the US Dollar, $USD, with a loss of 9%. And the chart communicates the debilitating effect of QE 2 has come to corporate bonds with inflation destruction now commencing a fast deteriorate in corporate finance.

Scott Lanman of Bloomberg summarizes the Federal Reserve Chairman’s testimony before Congress:  “Ben S. Bernanke signaled he’s in no rush to tighten credit after the Fed finishes an expansion of record monetary stimulus, seeing little inflation risk and still-slow job growth.  A surge in the prices of oil and other commodities probably won’t generate a lasting rise in inflation, Bernanke told lawmakers yesterday in semiannual testimony on monetary policy.  A ‘sustained period of stronger job creation’ is needed to ensure a solid recovery, and the Fed’s benchmark rate will stay low for an ‘extended period,’ he said.”

And Caroline Salas of Bloomberg reports:   “Federal Reserve Bank of New York President William Dudley said the ‘considerably brighter’ economic outlook isn’t yet reason for the central bank to withdraw its record monetary stimulus.  ‘We provided additional monetary policy stimulus via the asset purchase program in order to help ensure the recovery did regain momentum,’ Dudley said.   ‘A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course.’”

The 1.1% trade lower in the currency leverage curve, that is small cap pure value shares relative to the small cap growth shares, RZV:RZG, this week communicates that a run on a currencies is underway: the currencies being the New Zealand Dollar and the US Dollar. Whether a run on the Euro will commence next week when turmoil arises of the presentation of the Competitiveness Pact is yet to be seen.  

Exhaustion of quantitative easing commenced inflation destruction in world stocks, ACWI, on February 22, 2011. The “mother of all deflation”, the most massive deflation mankind has ever seen has commenced and there is nothing anyone can do except buy gold and silver bullion to have some hard financial assets.     

Volatility, VXX,  has commenced an Elliott Wave 3 Up.

The chart of world stocks monthly, ACWI Monthly, shows that an Elliott Wave 3 Down has commenced in stocks globally in March 2011.


The chart of the S&P Weekly, SPY Weekly, shows that an Elliott Wave 3 Down has commenced in the S&P the week ending February 18, 2010

Inflation destruction came to the world small cap stocks, EWX, when QE 2 was announced in November 2010.


The Morgan Stanley Cyclical Index, $CYC, fell from 1127 to 1073 today, Three of its components have experienced significant deterioration; these being packaging, container, and building products manufacturer, Temple Inland, TIN, paper manufacturer International Paper, IP, and Copper and Gold Producer, Freeport McMoran Copper and Gold, FCX. The chart of the Morgan Stanley Cyclical Index communicates an end to the rally in the economic and growth stocks, that is those stocks which investors purchase immediately before and during economic expansion. The end of investment here will feed throughout the world economies to produce disinvestment and deflation.    

Failure of Ben Bernanke’s QE 1 and QE 2 seigniorage, has turned the banks, KBE, Nasdaq Community Banks, QABA, investment bankers, KCE, and the financial companies, XLF, lower. It was US Federal Reserve policies of QE 1 and QE 2 that revived these engines of finance to restart investment globally.

The turning down of Banks means that the world has passed through an inflection point. The world has passed from the Age of Leverage and into the Age of Deleveraging with the exhaustion of Quantitative Easing and with the failure of yen carry trade investing, as seen in the failure of the Optimized Carry ETN, ICI, on the very day that QE 2 was announced.

The Age of Leverage was characterised by debt expansion, credit liquidity, stability, economic growth and expansion and prosperity … The Age of Deleveraging is characterised by inflation destruction, debt deflation, credit ill-liquidity, instability, economic contraction and austerity.

One impact of the failure of seigniorage and inflation destruction, and debt deflation will be that in the age of deleveraging people will simply not have the financial where-with-all to buy homes. Renting, that is leasing of homes, will be a privilege extending by banks to a select group of individuals.

The old political and economic paradigm supporting seigniorage, and ponzi economics, was neoliberalism, specifically the neoliberal Milton Friedman Free To Choose floating currency regime, which has been based upon US Treasuries, and most recently QE 1 with its TARP Facility, in which money good US Treasuries were traded out for distressed securities like those held in Fidelity Mutual Fund FAGIX, with most of the banks placing the Treasuries in Excess Reserve, as well as QE 2, where Ben Bernanke used his authority to print money out of thin air and buy US Treasuries.

Evidence of the failure of seigniorage also comes from the Jody Shenn Bloomberg report:  “Securities backed by option adjustable-rate mortgages, the home loans that allow borrowers to decide how much they pay each month, dropped for a second week as investors speculated a rally pushed values too high.  Typical prices for the senior-most option-ARM bonds fell as much as 4 cents to about 62 cents on the dollar, according to Barclays Capital”

Neoliberalism failed February 22, 2011, as seigniorage failed with the downturn in distressed securities, like those held in FAGIX, which caused the stock market, ACWI, to turn lower. Wealth can only be preserved by investing in and taking possession of gold, GLD, and silver, SLV, bullion.

3) … Many “key stocks” manifested bearish engulfing or traded strongly lower in value communicating that a market change lower has commenced; these stocks included:
Basic Materials: Natural Gas Partnership: Cheniere Energy Partners, QCQP,
Basic Materials: Natural Gas Partnership: DCP Midstream Partners, DPM,
Semiconductor Equipment Manufacturer: Aixtron, AIXG,
Semiconductors: Atmel, ATML,
Semiconductors Entegris, ENTG,
Communications Equipment Manufacturer, Vodaphone, VOD,
Consumer Goods: Clean Technology: Batteries: Exide Technologies, XIDE,
Semiconductors: Cypress Semiconductors, CY
Steel Industry: American Rail Industries, ARII,
Homebuilders: Lennar, LEN,
Pharmaceuticals: ISTA Pharmaceuticals, ISTA,
Pharmaceuticals: Impax Laboratories: IPXL
Machine Tools: Timken, TKR,
Asset Management: Principal Financial Group, PFG,

4) … Today’s news
Tyler Durden relates Fed Balance Sheet Hits New Record At $2.55 Trillion As Bank Reserves Hit $1.3 Trillion All Time High

Ambrose Evans Pritchard reports ECB Prepares Rate Rise As Global Tide Turns The European Central Bank has surprised markets by signalling a rate rise as soon as next month, brushing aside warnings that this may compound damage from the oil shock and push EMU debtor states deeper into crisis.”

“We are in a posture of strong vigilance: an increase in interest rates at the next meeting is possible,” said ECB president Jean-Claude Trichet, following a meeting of the governing council. The code word “vigilance” sent the euro rocketing to almost $1.40 against the dollar.”

“The ECB is the first of the big central banks to signal a rate rise to curb inflation, marking a major turning point in the global policy cycle. “

“This is a shock,” said Silvio Peruzzo from RBS. “This raises risks for the eurozone periphery through all kinds of channels. Most mortgages in Spain are on floating rates.”  Santiago Carbó from Granada University said the shift was “very worrying” for Spain. “It catches us at a bad time: we haven’t finished cleaning up the financial system.”

“Mr Trichet said the ECB aims to stop inflation psychology gaining a foothold, though he played down fears of a “series” of rate rises. As a concession, the ECB once again extended its unlimited 3-month liquidity for “addicted” Irish, Greek, and Iberian banks.”

“The eurozone recovery remains fragile. The M3 money supply has been contracting for two months; fiscal policy is tightening across much of EMU; and there is no deal yet on the EU bail-out fund. Albert Edwards from Societe Generale said the ECB is repeating the error of July 2008 when it met the oil spike with a rate rise, even though the eurozone economy was too weak to cope. “China’s leading indicators are already tipping over, which will have a big impact on German exports. All we need now to push the world back into the recession is an ECB rate rise.”

5) Keywords
Credit Bubble, Monetary Disorder, EFSF, Framework Agreements, Competitiveness Pack, European Economic Governance, Economic Governance, Seigniorage, The Failure of Seigniorage, Moneyness, Neoliberalism, Morgan Stanley Cyclical Index, Rule of the Sovereigns, Post QE World, Age of Deleveraging, Austerity, European Federalism, European Semester, Inflation Destruction Apple Ecosystem, Leverage Curve, Currency Leverage Curve, global currency war, competitive currency deflation,  competitive currency deflation, Debt Sovereignty, Sovereign Crisis, Sovereign Debt Crisis, Monetization of Debt Exhaustion of Quantitative Easing, QE Exhaustion, QE Failure, Failure of QE, The Sovereign, The Seignior, Global Corporatism, Revived Roman Empire, Milton Friedman Currency Regime, Bond Vigilantes


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