Failure Of Seigniorage Intensifies Driving Developed Market Small Caps, Commodities, And Commodity Currencies Lower

Financial Market Report for March 15, 2011

1) … Failure of the seigniorage of neoliberalism intensified today, driving developed market small caps, commodities, commodity currencies, major world currencies, and emerging market currencies  lower. Bonds appear to be topping out once again, and thus the world is on the verge of entering Kondratieff Winter.   

European shares, VGK, traded 2.5% lower, being led lower by Germany, EWG, which traded 3.3% lower and Deutsche Bank, DB, which traded 4.0% lower as its nuclear power plants came under review today.

European Financials, EUFN, traded lower on a Bank for International Settlement report that they have £1.6 trillion exposure to ailing quartet of Greece, Ireland, Portugal and Spain sovereign debt

Ambrose Evans Pritchard.   

The failure of quantitative easing is seen in the trading lower of the distressed Fidelity mutual fund FAGIX, which approximates the value of the US Federal Reserves’ assets taken in under TARP, and which together with Excess Reserves, serves as the basis of Neoliberalism’s seigniorage. Junk bonds, JNK, fell sharply lower today.   

Continued exhaustion of Neoliberalism’s seigniorage turned world stocks, ACWI, and commodities, DJP, down. And appears to have stopped out bonds, BND, which manifested a dark cloud cover candlestick. Falling stock prices turned commodity currencies, CCX, major currencies, DBV, and emerging market currencies, CEW lower.  

Australian Shares, EWA, fell lower on BHP Billiton, BHP, which traded 2.3% lower, which turned the  Australian Dollar, FXA, a commodity currency, CCX, lower..

South Africa, EZA, fell lower on lower gold mining shares, GDX, which traded 2.3% lower, and turned the South Africa Rand, SZR, a commodity currency, CCX, lower.

Russia, RSX, fell lower on lower commodity prices, turning the Ruble, XRU, a commodity currency, CCX. lower.

The world small caps, excluding the US, VSS, traded 2.6% lower, on the continuing failure of quantitative easing seigniorage.

Canada Small Caps, CNDA, and Australia Small Caps, KROO, turned lower on lower basic material stock prices. Taiwan Small Caps, TWON,  and South Korea Small Caps, SKOR, fell lower on the exhaustion of quantitative easing.  Japan Small Caps, JSC, fell lower on the tragedy of the reactor failures.

Taiwan, EWT, and South Korea, EWY, fell lower on a lower Japan, EWJ, and on failing seigniorage.  

The UK, EWU, fell lower on a lower British Pound Sterling, FXB, and on a high rate of inflation.

Switzerland, EWL, fell lower on lower Credit Suisse, CS, and a lower UBS Bank, UBS.,

New Zealand, ENZL, fell lower on a lower New Zealand Dollar, BNZ.

Commodities turned lower on accumulated lower stock, ACWI, prices. Commodities, DJP, -3.3% and US Commodities, USCI, -3.7%.
Its been the continuing fall in paper manufacturing stocks, like, Kapstone Paper, KS,  that drove Timber, CUT, -1.7%, lower today.
Its been falling energy stock prices, XLE, that turned Oil, USO, -3.7%; Petroleum, DBC, -3.7; Gasoline, UGA, -4.6 lower today.
Its the accumulated price decline in agricultural stocks, MOO, that drove agriculture commodities , JJA, down 5.7 and Food, FUD,  down 4.5% today..
It was the falling price of textile manufacturer, Unifi, UFI, that drove cotton, BAL, down 4.9% today.

The US Dollar, $USD, traded unchanged at 76.33. Currencies traded lower on falling stock prices as follows:

Major Currencies, DBV, -1.8
Commodity Currencies, CCX -1.3

South Africa Rand, SZR. -2.2
Australian Dollar, FXA -2.2
Canadian Dollar, FXC -1.2
New Zealand Dollar, BNZ -1.1
Russian Ruble, XRU -0.9
Mexico Peso, FXM -0.8
Indian Rupe, ICN -0.6
Emerging Market Currencies, CEW-.0.6
British Pound Sterling, FXB, -0.6
Swedish Krona, FXS -0.6
Chinese Yuan, CYB – 0.4; this is a significant fall for the Chinese currency.

The Yen,  FXY, rose 1.1%
The Swiss Franc, FXF rose 0.7%

The Optimized carry ETN, ICI fell 0.9%, lower from its November high, further documenting that quantitative easing with its negative real interest rate has turned toxic destroying carry trade investing.

The fall lower in the currency leverage curve, RZV:RZG, came from a fall lower in the currencies listed above and a fall lower in silver mining stocks, SIL, and gold mining stocks, GDX, as these are considered value shares. The fall lower in the currency leverage curve means that debt deflation is underway. The FX currency traders have instituted competitive currency deflation, taking a number of currencies lower with the US Dollar, a strong exception so far is the Swiss Franc, FXF. and strangely the Euro, FXE.

Wealth is best preserved by investing in and taking possession of gold, GLD, and silver bullion, SLV, as is communicated by the chart of gold relative to the Australian Dollar, GLD:FXA.   

In summary, inflation destruction continued to turn stocks and commodities lower today; and finally has started to turn currencies lower.

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.

Inflation Destruction may precede Debt Deflation which is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

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

2) … Failure Of Seigniorage As Well As Failure Of US Treasuries As An Investment Means Leasing Of Homes Will Be Common Place
Dawn Kopecki in March 8, 2011 Bloomberg article BofA Segregates Almost Half of its Mortgages Into ‘Bad Bank,  relates that Bank of America, BAC, the biggest U.S. lender by assets, is segregating almost half its 13.9 million mortgages into a “bad” bank comprised of its riskiest and worst performing “legacy” loans, said Terry Laughlin, who is running the new unit.

Irvine Renter writes the insightful March 14, 2011 article B of A To Establish Special Home Investment Trust As A Bank To Hold Toxic Assets and questions: “Will lenders maintain their properties to a reasonable standard, or will they all become slumlords?”

I expect to see a kind of leased property living like that presented in the 1973 movie Solyent Green.

In my March 11, 2011 article European Leaders Affirm Angela Merkel’s European Economic Governance And Austerity Plan, I relate: Neoliberalism was the political and economic regime that governed mankind from the time that the Free To Choose economic theory of Milton Friedman replaced the gold standard in the early 1970s, to the exhaustion of Ben Bernanke’s quantitative easing 1 and 2 on February 22, 2011, which was reflected in the fall in value of the distressed securities, which underwrote quantitative easing, and which are approximated by the Fidelity Mutual Fund FAGIX. It was on February 22, 2011 that the value of FAGIX, and world stocks, ACWI, both fell lower.

The fall lower in world stocks, ACWI, commodities, DJP, world major currencies, DBV, and today in emerging market currencies, CEW, documents the failure of seigniorage of the neoliberal economic and political regime, as well as entrance into Kondratieff Winter. It is reasonable to expect desperate economic conditions and great austerity with evaporation of lending and falling investment prices.

30 Year US Government Treasuries, EDV, appear to be cresting in an Elliott Wave 2 of 2 high, and appear ready to fall lower in an Elliott Wave 3 of 3 Decline at a price of 80; and the 10 Year US Government Note, TLT, appears to be cresting at and Elliott Wave 2 of 2 high and ready to fall lower in an Elliott Wave 3 of 3 Decline at a price of 92.88.  The beginning of the Elliott Wave 3 of 3 Down in US Treasury values means the likelihood of failed Treasury auctions. We are witnessing the end of credit as it has traditionally been known. Both bank lending and home lending will be a thing of the past.

All of the following bonds seem very much a transitional point ready to turn lower: Corporate Bonds, LQD, Long Duration Corporate Bonds, BLV, Mortgage Backed Bonds, MBB, Build America Bonds, BABS, International Corporate Bonds, PICB, and world government bonds, BWX. I believe the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, will steepen on risk aversion to US Sovereign Debt.  

3) The failure of seigniorage of Neoliberalism means a Sovereign and a Seignior will arise to provide a new seigniorage.
The European Leaders Pact on Competitiveness, which will be formally announced, will be yet another Leader’s Announced Framework Agreement such as the Greek Debt Bail Out Agreement of May 2010, the vetting of national budgets before national legislatures meet, and the Ireland Bank Bailout.

Germany has all the strong cards and is playing its hand fully to its advantage; and from my perspective is even laying the groundwork for a future exit from the Euro if needed. In so doing Germany is further entering into a most dangerous embroglio, which will reach out and engulf and consume this fiercely strident country.  

The European Leaders are effecting a bloodless political economic coup which draws out an important concept that the rule of the sovereigns replaced neoliberalism and democracy in February and March of 2011. The rule of the sovereigns is now the governing political and economic regime and construct.  

Neoliberalism was the political and economic regime that governed mankind from the time that the Free To Choose economic theory of Milton Friedman replaced the gold standard in the early 1970s, to the exhaustion of Ben Bernanke’s quantitative easing 1 and 2 on February 22, 2011, which was reflected in the fall in value of the distressed securities, which underwrote quantitative easing, and which are approximated by the Fidelity Mutual Fund FAGIX. It was on February 22, 2011 that the value of FAGIX, and world stocks, ACWI, both fell lower.

Under the rule of the sovereigns, leaders meet in task groups such as the Pact for Euro, that is the Pact for Competitiveness, to develop Framework Agreements. Then leaders meet in summits to formally announce Framework Agreements, which set forth regional political and economic governance which replace treaty, constitutional and historic rule of law. The Leaders’ Agreements waive national sovereignty.  One is no longer a resident of a sovereign nation state; rather one is a resident living in a region of global governance, as called fro the Club of Rome in 1974. Government minsters and business leaders appoint stake holders who effect the mandate of the leaders which promotes global corporatism, that is combined state corporate rule. Policies are enacted which promote the security and prosperity of corporations, and enforce austerity for the people. Neoliberalism and democracy are replaced by the rule of the sovereigns, where the word will and way of the leaders is law.  

The European sovereign crisis will intensify, and out of  Götterdämmerung, an investment flameout, a Sovereign, and a Seignior an Old English term for top dog banker who takes a cut, will emerge to establish a common EU Treasury with fiscal sovereignty, as well as a new seigniorage replacing the currently failing US Federal Reserve’s Quantitative Easing seigniorage; and the Bank of Japan’s failed Yen Carry Trade seigniorage. These two will assure the security and prosperity for select corporations while providing austerity for all people. Global Corporatism and the Rule of the Sovereigns will replace Neoliberalism as the world’s economic and political regime.

Götterdämmerung, Rule of the Sovereigns, The Sovereign, The Seignior, Currency Leverage Curve, Yield Curve, Leverage Curve, Age of Deleveraging, Kondratieff Winter, Pact on Competitiveness, Pact For Euro, Debt Deflation, Quantitative Exhaution, Inflation Destruction, Failure of Seigniorage,


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