Financial Market Report for the week ending January 27, 2011
1) … Currencies, stocks, and bonds are seen topping out this week.
Trading in Utilities, XLU, Housing, XHB, ITB, Small Cap Pure Value, RZV, Automobiles, F, GM, VROM, CARZ, Networking, IGN, Banking, KBE, KRE, Community Banks, QABA, Dividend Payers, DVY, Memory Chips, MU, Communications Equipment, QCOM, show that the way is now down in the stock market, as the benefit of neo liberal finance is exhausting. Many of the vehicle manufacturers seen in this Finviz Screener are now trading lower.
The cloud computing stocks seen in this Finviz Screener are either starting to fall lower, or appear ready to do so. Education stocks seen in this Finviz Screener and Tobacco stocks seen in this Finviz Screener have already turned lower.
The Eurozone Debt Contagion Safehaven Rally in US Stocks is ending, as communicated in the chart of Residential Reits, REZ, Dogs Of The Dow, DOD, Industrial Reits, FNIO, North American Infrastructure, PKB, Nasdaq Biotechnology, IBB, Paper Products, WOOD, Wildcaters, WCAT, Energy Partnerships, AMJ, Steel, SLX, Semiconductors, XSD, Health Care Provider, IHF.
The design, build, and construction stocks seen in this Finviz Screener have been the beneficiary of a flight to safety in US Infrastructure. And the chemical manufacturers seen in this Finviz Screener have seen an inflow of Euros as well, especially since the ECB turned on the LTRO spigot of credit liquidity. Some of the stealth QE provided carry trade seigniorage, that is carry trade moneyness, in these the US chemical manufacturers seen in this Finviz screener.
Both Shipping, SEA, and Airlines, FAA, have risen parabolically. The chart of US Infrastructure leader American Water Works, AWK, shows just how strong the rally in these stocks has been. I expect Preferred, PFF, and Biotechnology, XBI, to be fast fallers after weeks of steady rising.
Various commodity charts communicate that commodities, DBC, USCI, are fully leveraged out, these include base metals, DBB, tin, JJT, nickel, JJN, lead, LD, aluminum, JJU, copper, JJC, timber. CUT. These appear to be the beneficiary of Fed Announcement liquidity. The chart of oil, USO, shows it residing at the middle of a broadening top pattern; prices usually fall from such structures. The chart of Grains, GRU, and Corn, CORN, show completion, suggestion that the rally in agriculture, JJA, is complete. Insolvent sovereigns, and insolvent banks, and dead fiat money, brought back to life by the zombie wand of Neo liberal bankers are unable to support leverage. The age of leverage is history, and the age of deleveraging which is already here is soon going to once again pick up speed.
The full leveraging of timber suggests that the paper product manufacturers, WOOD, seen in this Finviz Screener have topped out. And the topping out of agricultural commodities suggests that the rally in agricultural implement manufacturers seen in this Finviz Screener, and in the US Agricultural stocks, MOO, and the Global Agriculture stocks, PAGG, is over as well. The run up in base metal commodities, suggests that Steel, SLX, the mining stocks seen in this Finviz Screener, S&P Mining, MXI, Copper Mining, COPX, Aluminum Mining, ALUM, Rare Earth Mining, REMX, Uranium, URA, have run their course. A falling oil price, USO, will certainly knock WCAT and PSCE down a goodly amount.
The debt economy maxed out this week on rising world currencies, DBV, and emerging market currencies, CEW, as the US Federal Reserve announcement debased the US Dollar, $USD, UUP. Currency traders brought the Yen, FXY, back up, resetting trades for disinvesting out of recent carry trade commitments in the zombified currencies FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, FXA, FXRU, CEW. I expect the US Dollar, $USD, to be higher from here in the first part of February 2012. The rise in currencies this week caused a 27% rise in the National Bank of Greece, NBG. That’s the wonder working power to Ben Bernanke inflationism fueled by free capital from Mario Draghi’s LTRO facility. Given the exhaustion of the US Federal Reserve’s monetary policies and the cheap credit of the ECB’s LTRO facility, there is now no money good.
Ambrose Evans Pritechard writes The more they use the facility, the more collateral they hand over to the ECB. Since the ECB has senior status, everybody else faces “subbordination”. At some point this dynamic may turn nasty, causing private credit to tighten. Mr Mandy frets about what will happen if Fitch and Moody’s join S&P in downgrading Italy to BBB+, triggering a 5pc margin call. Yes global subordination will commence as major currencies, DBV, and emerging market currencies, CEW, turn lower. International corporate bonds, PICB, will be turning parabolically lower. In particular, the Southern Europe, that is Latin Credit Bubble, is going to make all credit bad.
The chart of the 200% Dollar ETF, UUP, is at the edge of a head and shoulders pattern, and is likely to move once again higher. The rise seen in the chart of the ETF JYN, reflects the rise in the US Dollar. I expect JYN to be lower next Friday, and the USD/JPY, which traded down to 77.0, to be higher at that time. Yahoo Finance Daily FX reports Euro Propped Up On Hopes For Greek PSI Deal, USD Strength Ahead … Looking to Buy USD/JPY … Euro Chart Hints Down Trend vs US Dollar May Be Ready to Resume. The FX currency reports herald a rising dollar. A falling Brazilian Real, BZF, will cause a tumble in these Brazil Shares, SBS, CPL, FBR, GGB,SID, CBD, NETC, CPL, ERJ, SBS, BAK, VALE, CZZ, CIG, ITUB, BSBR, BBD.
It was anticipation and follow through of the Fed Announcement that goosed up China Industrials, CHII. Falling currencies globally will cause a strong deleveraging out of these as well. The US Central bank monetary policies have been a strong driver, like the Nile River in spring, of stocks.
Emerging market beneficiaries of rising currencies were Emerging Market Financials, EMFN, India Earnings, EPI, Brazil Financials, BRAF, Greece, GREK, Turkey, TUR, Emerging Asia, GMF, Latin America Small Caps, LATM, Argentina, ARGT, India Small Caps, SCIF, Brazil Small Caps, BRF, New Zealand, ENZL, Canada Small Caps, CNDA, Emerging Europe, CEE, Poland, EPOL, Vietnam, VNM, Philippines, EPHE, Egypt, EGPT, Russia Small Cap, ERUS, Emerging Market Small Caps, EWX, and Emerging Market Materials, EMMT.
The credit based fiat system is entering a debt deleveraging cycle. Small Cap Pure Value, RZV, and US North American Infrastructure, PKB, crested higher on rising currencies this week. These will be falling lower with world government bonds, BWX, and emerging market bonds, CEW, municipal bonds, MUB , as world currencies, DBV, and emerging market currencies, CEW, trade lower in a global debt deleveraging purge of fiat wealth. This is the natural economic cycle at work; they can be no further intervention to prevent fiat asset deflation.
The Bespoke Investment Group article Uh-Oh — Guidance Dips Too evidences that the Age of Leverage is shifting to the Age of Deleveraging.
Bullion Money presents two charts from the McKinsey Global Institute, which provide elegant snapshots of progress of debt and deleveraging by the 10 largest mature global economies. The first chart (but second in the report) shows the composition of debt by country. Notably Japan is leaps ahead by gross debt levels (but as argued later in the report at around Euro levels when netted off), as is the UK, mainly because of the City Of London’s insatiable diet for financial debt instruments.
Minority Opinion relates The long and painful road to deleveraging.
Gold, GLD, may go lower for a while, but it is going to explode massively higher. Silver, SLV, is likely to trade lower with base metals, DBB. Natural gas, UNG, is going to plummet. One will not be getting a natural gas hookup from the utility company, as these simply will not have the operating capital to install new infrastructure. In the age of deleveraging funding for US infrastructure investing, PKB, and Emerging Market Infrastructure and Smart Grid Infrastructure, EMIF, INXX, CHXX, GRID, BRAF, will plummet.
The three white soldiers seen in the chart of bonds, BND, and in the medium duration corporate bonds, LQD, and longer duration corporate bonds, BLV, suggests that Peak Credit has been achieved, confirmation comes from Municipal Bonds, MUB, has moved parabolically higher. Municipal bonds have been a safe haven investment risen parabolically in value ever since the major currencies, DBV, and the emerging market currencies, CEW, started to fall lower in May 2011 when investors started to fear that a debt union had started to form in the EU. This peaking of credit drove the Interest Rate on the US 10 Year Treasury Note, ^TNX, lower to 1.89% today, and caused US 10 Year Notes, TLT, 30 Year US Government Bonds, EDV, and the Zeroes, ZROZ, to trade higher. For those into trading it was a good place to start short selling the US Treasuries. And sent the most toxic of debt, Michigan Municipal Bonds, MIW, rose to a new high at 14.94. The chart of junk bonds, JNK, shows a parabolic move higher. Joseph Ciolli of Bloomberg reports Junk-bond trading volumes are rebounding to the highest level in 11 months as optimism the U.S. economy can weather Europe’s debt crisis kindles investor appetites for riskier assets. Sales of new junk bonds are accelerating at the fastest pace since September, and exchange-traded funds focused on the debt are growing at the fastest two-month pace since 2009. And Tim Catts of Bloomberg reports Corporate bond sales worldwide have slowed from their record pace in the middle of the month as everyone from the Federal Reserve to the International Monetary Fund cuts forecasts for economic growth. General Electric Co., SABMiller Plc and Bayerische Motoren Werke AG led $287.8 billion of offerings this month, the slowest start to a year since 2008.
Chris Cook in Back To The Future writes In or around 2007 the financial system reached a point of peak credit, at which the debt obligations taken on by populations exceeded their capacity to pay. This occurred because banks began to outsource credit risk and free their capital for further lending, to “shadow bank” investors:
a. Totally – through securitization and sale of debt;
b. Temporarily – through credit derivatives ie time limited guarantees;
c. Partially – through credit insurance eg by AIG or Ambac;
d. Toxic cocktails of these, such as collateralized debt obligations (CDOs); CDO squared and so on.
The result was a series of massive bubbles in property prices which imploded from 2007 onwards and led to a breakdown in trust in the banking system so that banks ceased to lend to each other. I believe that the collapse of Lehman Brothers in October 2008 will come to be seen as the definitive end of the centralized, but connected, Economy 2.0 paradigm operated by and for the profit of middlemen. At this point, through 2009, the flow of inflation-hedging dollars became a flood as banks queued to launch new funds and to set up the necessary support and trading operations. Commodity and equity prices became completely detached from the underlying reality of physical production and consumption, and of flows of profits and dividends, as funds took ownership – through purchases or leases – of commodities and equities purely as an alternative to holding dollars.
Dis-intermediation – Since the credit market is essentially dead, or at least on life support, the reason banks flocked to sell funds to clients is that market risk is not with the banks but with investors. Banks need relatively little capital to be service providers to the funds, and are able to make substantial profits in very short-term trading on behalf of the funds.
The banks have knowledge in respect of the ownership of market inventory which is not known to other market participants. These are the merchants who buy and sell physical commodities, and speculative financial traders such as hedge funds or even risk-taking individual investors, who attempt to make transaction profit. Through such information asymmetry, and the use of new trading tools such as high-frequency trading which provide often dubious liquidity, high profits may be made on minimal capital.
The adjacent possible – The point is that, as capital became scarce after October 2008, banks evolved their business model to the adjacent possible of marketing and operating new quasi-equity instruments. They transitioned from an intermediary role to a service provider role because it was and is profitable to do so.
But these instruments, and the presence in the markets of investors who aim to avoid loss rather than make profits, have now led to what are essentially two tier and false markets.
In my home turf of the oil market, all the signs are that in the absence of massive new flows of quantitative easing dollars from the Federal Reserve, and/or substantial cuts in oil production, especially from members of the Organization of the Petroleum Exporting Countries, there will be a collapse in oil market prices in the first quarter of 2012. Indeed, some market participants have already taken option positions in the oil market in anticipation (or in fear) of a fall in the oil price as low as $45 per barrel in 2012.
The coming collapse in commodity prices will lead to the next great regulatory scandal of mis-selling, when the risk-averse investors who bought these funds from the banks make massive market losses to which they never realized they were exposed. At that point the way will be open to go Back to the Future – to the next adjacent possible – which is direct people-based credit and direct asset-based credit.
I comment that Monetary Napsterization, a Jerry Cook term, after the music file sharing phenomenon, will never happen; but that I do agree there is risk to being long in oil through market disintermediation. And on Chris Cook’s statement. “I believe that the collapse of Lehman Brothers in October 2008 will come to be seen as the definitive end of the centralized, but connected, Economy 2.0 paradigm operated by and for the profit of middlemen,” I comment that a new paradigm, Economy 3.0 is coming, where public private partnerships led by monetary cardinals will manage the economy and fiscal commissioners will oversee government budgets, as they work together in regional global governance.
Solar Energy Stocks, TAN, rose strongly on likely short selling coveing. I expect these to be fast fallers next week. And the fall in the ten year interest rate sent a number of US Infrastructure companies rising strongly, the heavily debt laden MTW rose 8%. Small Cap Industrial, PSCI, shares rising included, ROLL, HEES, BRC, LECO, SNA, and BDC. The chart of Caterpillar, CAT, is quite stunning; and it communicates a grand finale in global growth stocks. Since the beginning of QE1 it has risen from a value of 20 to 111 today. As a leader in the debt contagion rally, it has risen 5% this week, and 22% this month. An inquiring mind asks, are these Residential Real Estate REITS, traded by REZ, ready for a fast fall?
Investment Postcards asks Investor Sentiment: Is this the end of the road for the rally? The Yahoo Finance Chart of VIXY, VIXM, and TVIX shows today’s a possible rise in volatility, and market turn in the making. A special thanks to Finviz for their free basic charting service. Today’s Finviz Map shows stock IFF rising strongly under Bernankeism. And today’s Finviz Map shows that Small Cap Pure Value, RZV, rose a stunning 16% in the last three months, as investors fled the European Sovereign Debt Crisis, and found safe haven in its portfolio, which includes business services company Synnex, SNX. And. today’s Finviz Group, shows this week’s leader was basic materials. The Finviz Elite Service is available for only $40 a month.
2) … Bible prophecy foretells, that out of chaos, political capital will rise to replace investment capital.
Inflationism has begotten destructionism. The dynamos of growth and prosperity are being replaced by the dynamos of security and stability whereby capitalism is giving way to regionalization where monetary cardinals will rise to replace Wall Street financiers; and regional fiscal commissioners will work in technocratic government for structural reforms to manage governmental budgets.
Through creative destruction regionalization and true socialism will arise to provider regional security and stability.
In as much as Greece has lost debt sovereignty, Germany is now demanding that Greece submit to a list of demands for structural reforms and abdicate fiscal sovereignty in order to receive another bailout. Reuters reports in this regard Reuters reports Germany Wants Greece To Give Up Budget Control. Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package. The Financial Times said it had obtained a copy of the proposal showing Germany wants a new euro zone “budget commissioner” to have the power to veto budget decisions taken by the Greek government if they are not in line with targets set by international lenders. And Bloomberg reports Euro Officials Discuss Greek Budget Veto Powers European policy makers are discussing plans to directly intervene in Greek budget decisions as the country struggles to cut its deficit, two euro-region government officials said today. Under the proposals, European institutions would have powers to implement austerity measures agreed under the terms of Greece’s bailout agreements, said one of the officials, who declined to be identified because the talks are confidential. The plan would accelerate decision making and strengthen the power of officials overseeing Greece’s budget as part of the so called Troika of the European Commission, the European Central Bank and the International Monetary Fund, the person said. European leaders meet in Brussels on Jan. 30 as they draw up a fiscal compact to strengthen governance of the euro region after Greece sparked a wave of financial turmoil that still threatens to splinter the bloc. With Greece struggling to meet the terms of bailout agreements struck over the past two years, European officials are trying to work out how to deal with countries that can’t meet the terms of bailout agreements. The Greek government rejects the plan because it’s contrary to national sovereignty, a Greek official said today. And the WSJ reports Germany Pushes for EU Budget Control Over Greece. Frustrated with the slow pace of implementation of budget overhauls in Greece, Germany is leading a push to force Athens to cede some control over its budget decisions to Europe, a move met by skepticism by European Union officials. A European official familiar with the matter said on Saturday that the reason for such a move, made as a condition of disbursing another round of bailout aid, is “the insufficient progress on Greece’s debt reduction, which in part is the result of the country’s extremely decentralized budget process.” And Zero Hedge reports Germany formally requests that Greece hand over fiscal independence. Furthermore, Zero Hedge reports Greece politely declines German annexation demands. It’s Official: German Economy Minister Demands Surrender Of Greek Budget Policy, Says It Is First Of Many Such Sovereign Requests. And Mike Mish Shedlock reports Text Of German Demands Detailed. Perhaps I am mistaken but I do not see any chance Greece will agree with this proposal. German and IMF demands make meaningless any hint of a deal “soon”. Germany has signaled it has had enough and will not throw another 130 billion euros down a rat hole. The IMF signaled the same thing but not as emphatically. Look for a bank holiday in Greece soon. an Mike Mish Shedlock reports Greek Debt Solution Likely to Trigger Credit Default Swaps.
Neo liberal finance, that is Ben Bernanke and Mario Draghi credit, will fail in February 2012, as currency traders sell the world major currencies, DBV, and the emerging market currencies, CEW.
The bursting of the global government fiance bubble bubble, BWX, bursts, will be the genesis that transforms democracy into diktat.
True socialism, that is totalitarian collectivism, will rise terminate all forms of economic and political life. The sovereign debt to GDP ratio is going to plummet fast, causing quick and fast deleveraging out of stocks and bonds, as the seigniorage, that is the moneyness, that came via national sovereignty fails.
Bible prophecy of Revelation 13:1-4, and Daniel 2:31-45, foretells that capitalism, also known as the Banker regime of Neoliberalism, which came via the Free To Choose script of Milton Friedman, is history. The 1974 Clarion Call of the Club of Rome is rising up the Beast Regime, out of the profligate Mediterranean Sea countries of Italy, EWI, and Greece, GREK, to occupy in mankind’s seven institutions, and rule in the world’s ten regions. The Beast regime showed its teeth in demanding that Greece submit to a list of demands for structural reforms, and abdicate its fiscal sovereignty and thus its national sovereignty in order to receive yet another bailout package. Choice is an epitaph on the tombstone of a bygone era. Freedom, free enterprise, and a free monetary system, as envisioned by Libertarians; these are called for by the Ron Paul agenda; yet they are mirages on the Neoauthoritarian Desert of the Real. The sovereign, junk, personal, and corporate credit boom that produced the debt economy, is history; the debt servitude experience will commence soon.
Bible prophecy of Revelation 13:3-4, foretells that out of financial armageddon, that is a credit bust and financial system collapse, sovereign leaders will arise from regional framework agreements to replace sovereign nations. Lacking any money good, people will place their trust and faith in the word, will and way of these leaders. The people will give their allegiance to the diktat of the new sovereigns who will meet in summits, waive national sovereignty, and establish a Federal Europe, with the ECB or the Bundesbank empowered as the EU’s bank, appoint monetary cardinals as stakeholders to manage the factors of production and provide credit as necessary; and appoint a EU wide technocratic government featuring fiscal commissioners who oversee structural reforms and manage government spending, and impose austerity measures for regional security and stability.
3) … Bespoke Investment Blog reports Recoveries Don’t Get Much Weaker Than This
While some investors and economists were surprised by this morning’s weaker than expected GDP report for Q4 2011, it was really just par for the course. Since the recession ended in June 2009, we have consistently seen growth rates that were weaker than estimated. Historically speaking, the US economy has typically shown growth of 3.0% during the 10th quarter of a recovery/expansion. Based on this morning’s Q4 GDP report, though, growth in the most recent quarter was only 2.8%.
4) … Conclusion
The debt debauchery practiced central bankers, has run up bad credit to grotesque levels. The monetization of debt by the world central banks is causing the death of fiat money, and a will now commence a most painful deleveraging and derisking out of all forms of fiat wealth.
Capitalism cannot be saved. Investopedia relates that Joseph Schumpeter fathered the term creative destruction. “A process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. Econolib relates Schumpeter believed that capitalism would be destroyed by its successes, that it would spawn a large intellectual class that made its living by attacking the very bourgeois system of private property and freedom so necessary for the intellectual class’s existence. And unlike Marx, Schumpeter did not relish the destruction of capitalism. “If a doctor predicts that his patient will die presently,” he wrote, “this does not mean that he desires it.” Capitalism is going to fall to regional global governance.
The dynamos of growth and profit that powered Neoliberalism, will give way to the dynamos of regional security and stability, that will empower Neoauthoritarianism.
The world is passing through peak money. The seigniorage of fiat currencies, will give way to the seigniorage of diktat. Diktat will serve as new credit, and new money, in the New Europe. In the soon coming deflationary collapse, all kinds of debt will be repudiated, but not forgiven; these debts will be applied to every man, woman and child on planet earth. Fitch says Greece is going to default on its sovereign debt. When the state defaults, the fiat becomes useless, and diktat arises to become de rigueur. Greeks cannot be Germans. The former are of the olive republic and the latter of the industrious state, but they will all be one in debt servitude.
The debt super cycle, is cresting higher, and will turning dramatically lower, creating an Elliott Wave 3 of 3 of 3 down in the S&P, $SPX, which is clearly seen in this daily SPY chart
Kerry Lutz relates We are living in the tail end of a 40 year global credit bubble. For the past four decades, the entire world has been growing credit/debt faster than underlying economies. Economic growth is measured by GDP, but GDP is a fraudulent measure. GDP doesn’t really measure the wealth creation of an economy; it measures consumption, which in our society has become synonymous with wealth. But wealth is really something totally different than consumption. Chris and I agree, the calculation of GDP should not include the effects of going into debt simply to consume. Consider, Bernie Madoff who contributed 65 billion to GDP, but now all that money has just disappeared. Same with other entities that contribute to GDP like MF global. The government continues to print money mostly for consumption, not investment. They are just kicking the can down the road, and overstating the wealth of the economy. We cannot print our way to prosperity.
Doug Noland of Prudent Bear relates It’s A Bubble. Unprecedented operations back in late-2008 took the Fed’s balance sheet from about $900bn to $2.2 TN. We were assured that the Fed had an “exit strategy.” I’ve always presumed “no exit,” and here we are today with Fed holdings at $2.9 TN. The economy is expanding, financial markets are strong and consumer price inflation is rather undeflationary – yet Dr. Bernanke is again signaling he is prepared for additional monetization.
The Fed has for years operated with the premise that aggressive “Keynesian” stimulus has been necessary to stabilize a system hamstrung by post-Bubble headwinds. I’ve for as many years argued that the problem was being dangerously misdiagnosed. From my perspective, it has been much more a case of ongoing misguided “inflationism” sustaining history’s greatest Credit Bubble. And history is unequivocal: inflationism has an end-game problem.
The power players in political circles and the securities markets have benefited tremendously, ensuring ongoing support for the Fed’s controversial reflationary policy course. The financial mania has reached the point where the completely unreasonable is accepted as perfectly reasonable.
When it comes to Credit and Bubble analysis, the Fed has proven itself incompetent. After the Fed-induced steep yield curve from 1991 to early-1994 fomented a destabilizing speculative Bubble, they should have focused keenly on how their policy measures were inciting leveraging and speculation. After the 1995 Mexican bailout further emboldened speculative excess and fomented the catastrophic Bubble throughout SE Asia (and beyond), policymakers should have been fixated on the risks associated with destabilizing “hot money” flows, derivatives and a ballooning global “leveraged speculating community.”
I have seen overwhelming support for the “global government finance Bubble” thesis. Fiscal and monetary policy has been out of control for going on four years now. And with parallels to the mortgage finance Bubble, the more prolonged the Bubble period the more dismissive the crowd becomes to the notion that they might be participants to a manic Bubble. That’s ok. As an analyst of speculative Bubbles, I am well aware of the nuances. Objectively, it is possible to recognize Bubble dynamics in real time. Realistically, however, it is the nature of things that this analysis will be dismissed and disparaged. As I’ve written in the past, “Bubbles tend to go to unimaginable extremes – and then double!” I am comfortable with the analysis that we are in the late stage of a historic global financial mania.
In a replay of mortgage finance Bubble dynamics – with only greater ramifications and inevitable consequences – the perception of ongoing government market intervention is allowing the self-reinforcing issuance of Trillions of debt at the most meager of risk premiums. Systemic risk rises exponentially, as the price of government finance is pushed to the floor.
It has reached the point where the Fed (along with fellow global central banks) has completely abrogated the market pricing mechanism – and with it the capacity for the self-regulation of debt issuance through higher borrowing costs.
Responding to the Fed announcement, Treasury, agency debt and fixed income prices rose; U.S. stock prices rose; gold, energy and commodities prices rose; and emerging debt, equity and currency prices rose. The dollar was one of the few losers.
And forgive me one last time for thinking that the invincible hand of the Federal Reserve – along with unfathomable global central bank liquidity creation – further bolsters boom and bust dynamics and heightens the risk of further rounds of global de-leveraging and de-risking. If it looks like a Bubble, smells like a Bubble.
The dollar index this week fell 1.6% (down 1.7% y-t-d). On the upside, the South African rand increased 2.5%, the Swiss franc 2.4%, the New Zealand dollar 2.3%, the Danish krone 2.3%, the euro 2.2%, the Mexican peso 2.1%, the Australian dollar 1.7%, the Singapore dollar 1.6%, the Canadian dollar 1.1%, the Brazilian real 1.1%, the British pound 1.0%, the South Korean won 1.0%, the Swedish krona 0.6%, the Taiwanese dollar 0.5%, and the Japanese yen 0.4%.
Freddie Mac 30-year fixed mortgage rates jumped 10 bps to 3.98% (down 82bps y-o-y). Fifteen-year fixed rates rose 7 bps to 3.24% (down 85bps y-o-y). One-year ARMs were unchanged at 2.74% (down 52bps y-o-y). Bankrate’s survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 4 bps to 4.46% (down 105bps y-o-y).
Federal Reserve Credit increased $1.5bn to $2.905 TN. Fed Credit was up $486bn from a year ago, or 20.1%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/25) jumped $14.4bn to $3.406 TN (19-wk decline of $69bn). “Custody holdings” were up $55bn year-over-year, or 1.6%.
Global central bank “international reserve assets” (excluding gold) – as tallied by Bloomberg – were up $939bn y-o-y, or 10.2% to $10.186 TN. Over two years, reserves were $2.371 TN higher, for 30% growth. M2 (narrow) “money” supply rose $8.0bn to a record $9.763 TN.
“Narrow money” expanded 10.2% from a year ago. For the week, Currency increased $3.0bn. Demand and Checkable Deposits fell $12.6bn, while Savings Deposits jumped $29.3bn. Small Denominated Deposits declined $2.4bn. Retail Money Funds fell $9.2bn.
Ty Andos writes in PDF TedBits Newsletter When Leverage Fails Private property rights were ended at Bretton Woods II in August 1971. Between regulation and taxation, private property is nothing more than a myth, as is the myth that the dollar is as good as gold or money. It is an IOU as are all FIAT currencies.
What will become known as the greatest depression in history has begun and will continue to unfold
“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 a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” ~ Ludwig von Mises
The Keynesians’ approach is articulated quite nicely by former Treasury Secretary, Larry “canary in the coal mine” Summers: “The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending”. ~ Of course, today’s government, elites and banking leaders have chosen the latter route as have all those who have gone before them. In the long run none have succeeded.
This downward wave will terminate fiat currencies, fiat wealth and democracy, and introduce the ten toed kingdom of regional global governance, where un dollar transactions, such as bartering and exchange of local currencies, and diktat as money, and diktat as currency, will govern economic and investment transactions. The investment demand for gold will soon quicken as fiat money continues to die, and capitol controls will be rapidly implemented on investment trading. I recommend that one dollar cost average purchase and take possession of gold bullion; one can purchase a gun safe to safely store these at home or in the office; and I recommend that one buy and sell gold at BullionVault as well; I have no connection what so ever to that company; nor do have any investments there.
4) … In Today’s News
Spiegel Online reports Revenge for EU Sanctions: Iran Set to Turn Off Oil Supply to Europe .
Open Europe reports
Handelsblatt: German government has begun preparing for the return of the Drachma
The front page of Handelsblatt claims that, despite its public position, the German government has been planning for a Greek exit from the eurozone, even engaging in discussions with business leaders over its potential impact on the German economy.
Meanwhile, the negotiations on the voluntary Greek restructuring started up in Athens again last night, with reports of progress being made. Greek bondholders may accept a lower starting interest rate with the possibility of an increase based on Greek economic growth, although even this will not be enough to allow Greece to reach the target of 120% debt-to-GDP ratio in 2020. Therefore a larger second Greek bailout may be needed. EU Economics Commissioner Olli Rehn said yesterday, “There is likely to be some increased need of official sector funding…[But] not anything dramatic.” FTD reports that the additional funds could total €15bn.
Dow Jones reports that eurozone governments are also discussing the possibility of asking the ECB to take losses on its holdings of Greek debt to aid the situation. Reuters reports that the ECB has ruled out taking losses voluntarily but is split over how to deal with forced losses. On his Telegraph blog, Mats Persson argues that an alternative to accepting outright losses, is for “ECB-held bonds to be bought by the euro bailout fund, the EFSF (at cost price), and then submitted by the EFSF to the voluntary restructuring. The EFSF could absorb the losses, though it too may have to deal with some very uncomfortable questions from taxpayers who will have lost money. But arguably it’s better than sacrificing the credibility of the ECB.”
Rehn also called for an increase in the total size of the eurozone bailout funds, possibly by allowing the temporary fund, the EFSF, and the permanent bailout fund, the ESM, to run in parallel. Finnish Prime Minister Jyrki Katainen said in Davos yesterday, “I don’t believe fresh money on the table is the only possible solution”. Italian ten year bond yields briefly dropped below 6% yesterday for the first time since early December, most likely due to the impact of the massive increase in long term liquidity from the ECB. Italy also managed to sell €11bn in short term debt this morning.
Dow Jones reports that the US Republican party is preparing to shoot down any request from the IMF for an increase in funds from the US. The FT reports that across Europe left leaning parties are coming out to criticise the austerity focus of the new European fiscal pact, led by French Presidential candidate Francois Hollande.
FT WSJ CityAM Reuters WSJ 2 Irish Independent Irish Times IHT Guardian Dow Jones FT 2 WSJ 3 FT 3 FT 4 Irish Times Telegraph Dow Jones 2 WSJ 4 EurActiv European Voice Telegraph Irish Independent Irish Independent BBC El País Handelsblatt Handelsblatt 2 Handelsblatt 3 Business Week Spiegel Reuters Handelsblatt 4 Welt FAZ Spiegel FTD FTD 2 Tagesschau Der Standard Handelsblatt 5 Telegraph blogs: Persson
In a speech at Davos yesterday, David Cameron called on eurozone leaders, and Germany in particular, to safeguard the single currency by recapitalising banks, increasing the bailout fund and resolving the issue of the write-down of Greek debt. He also strongly criticised the proposed Financial Transaction Tax – describing it as “madness”.
CityAM Independent IHT Le Figaro Cameron’s Speech FT WSJ Times Mail Guardian Telegraph Express Conservative Home Sun Les Echos Nouvel Observateur Nouvel Observateur 2 Welt
The Swedish minority government and main opposition party Social Democrats have agreed that Sweden should join the euro fiscal pact subject to several conditions, including that none of the budget rules apply to Sweden and that the pact makes clear that the labour market model in individual EU member states is respected.
Hahn: No spare money in EU’s structural funds to support struggling eurozone states
In an interview with Süddeutsche, EU Commissioner for regional policy, Johannes Hahn, has described Angela Merkel and Nicolas Sarkozy’s suggestion that spare money from the EU’s structural funds could be used to promote growth policies in struggling eurozone states as “unrealistic”, claiming that the total value of funds unused in 2010 and 2011 only amounted to €30m.
However, Expansión reports that Spanish Europe Minister, Íñigo Méndez de Vigo, has claimed that there were over €100bn of EU funds available to subsidise programmes aimed at boosting employment and growth across Europe, although he said it was up to the Commission to provide the exact figure.
Meanwhile, EurActiv reports that the Danish EU presidency has been criticised by MEPs for paying too little attention to regional policy in the EU’s upcoming long term budget for 2014-2020. The article cites Open Europe’s recent briefing on EU regional policy which found that the UK contributed roughly £29.5 billion to the EU’s structural and cohesion funds and received only £8.7bn in return. The report was also covered by WalesOnline, which noted that although West Wales was only one of two UK regions that was a net beneficiary from the funds, Wales overall paid £1.65 for every £1 it received back from the funds.
Open Europe Research Süddeutsche Expansión EurActiv WalesOnline
EU Internal Market Commissioner Michel Barnier has said he will delay plans to introduce rules forcing creditors to share some of the pain if a large financial institution fails until after the eurozone is “past the worst” of the fiscal crisis.
Socialist presidential favourite Francois Hollande called for a crackdown on the financial sector, pledging a 15% tax increase on banks, and threatened to upset relations with Berlin by pledging to renegotiate the fiscal compact in favour of a greater emphasis on growth. A leader in FAZ argues that “If the polls are confirmed the road between Berlin and Paris looks set to be bumpy. Hollande has presented a programme that is heavily influenced by redistribution and by the firm belief in the supremacy of the state.”
FT WSJ Times Times 2 FTD FAZ
Carlos Moedas, Portuguese Secretary of State, writes in today’s WSJ that Portugal is undergoing a rigorous program of reforms to boost competiveness and growth. He argues, “Last week, the government and social partners reached a comprehensive agreement for labour-market reform, an area previously marked by considerable rigidities.”
EU Internal Market Commissioner Michel Barnier will raise objections with US Treasury Secretary regarding the potential effects of the incoming ‘Volcker’ Rule, which could hamper the ability of US firms to trade European sovereign bonds, WSJ reports.
Barclays has criticised the EU’s new Capital Requirements draft legislation, which would place a single capital charge on trade finance loans, arguing that it will considerably harm the ability of SMEs to export their goods and services.
Romania and Bulgaria’s accession to the Schengen area will be delayed as the EU is set to publish a negative report on the issue in February, following Dutch opposition to their membership.
European Voice reports that 13 member states have failed to implement recent EU legislation concerning the welfare of caged hens.
Luxembourg’s Foreign Minister: Fiscal pact will not work without agreement of all 27 member states
In an interview with Der Spiegel, Luxembourg’s Foreign Minister Jean Asselborn said that “a lot of the time and energy it took to negotiate the fiscal compact could have been saved. Most of what they wanted to regulate could have easily been achieved in the existing system, via the so-called secondary EU law.” Asselborn also said he did not believe the compact would work in restraining states with excessive deficits, because “outside of the EU Treaties, the Commission can only initiate infringement proceedings before the European Court of Justice with the agreement of all EU Member States.”
Spiegel: Asselborn EUobserver
EU leaders reach crude agreement on Iran sanctions
Open Europe Blog
Euro Intelligence provides the best of Euro zone reporting; this comes at a cost; I recommend that one buy their email reporting services; it relates Ernst Elitz of Bild sees Angel Merkel Is Euorpes Powerfrau and reports Hollande Drops Keynes In Favour Of Joseph Schumpeter. Nicolas Sarkozy’s Socialist challenger Francois Hollande will today unveil his economic proposals. According to Le Monde there are several circles of economists who have elaborated Hollande’s economic policy proposals. Among the dominating figures are Harvard economist Philippe Aghion, Bruegel director Jean Pisani-Ferry, industrial policy specialist Elie Cohen and social policy expert Gilbert Cette, the paper reports. „The Socialists are today engaged in the transformation the Social Democrats in Scandinavia have already gone through several years ago“, Les Echos quotes Aghion.The Keynesian model of of relaunching consumption would today aggravate our external deficit. Our thinking is now much closer to Schumpeter who emphasizes the role of innovation for growth in the medium to long term.“ Francois Hollande came out with his economic plan: €20bn more expenditures, €29bn in higher taxes on the rich and large companies
Graham Summers, Chief Market Strategist, Phoenix Capital Research, The Fed Cannot Act Without a Crisis … And One is Coming. Well the Fed disappointed as I stated it would. How anyone could be surprised by this is beyond me. The Fed was admitting that the consequences of QE rendered it less “attractive” as an option as far back as May 2011. Moreover, the last six months have shown the Fed to be relying heavily on verbal intervention rather than direct monetary intervention. Every FOMC meeting (and any time the market takes a dive) some Fed official steps forward and promises that the Fed stands ready to help if needed.
The reasons for this are three fold:
1) Why bother with monetary intervention when you can get the same effect from verbal intervention?
2) The Fed is too politically toxic now to simply unveil a massive new monetary scheme without a Crisis hitting first.
3) The Fed is well aware of the consequences of QE (higher food and gas prices) and while it focuses on CPI as the measure of inflation, the political pressure engendered by higher costs of living are certainly on the Fed’s radar.
In plain terms, the bar for more QE is set much, much higher than the vast majority of analysts realize. The reason is that the Fed can no longer simply prime up the printing presses if the economy takes a dip.
We’ve seen this clearly in the last two Fed FOMC statements, in which the Fed downgraded its view of the US economy to posting “modest growth” (Fed speak for next to none) and then offered a “highly accommodative stance,” (Fed speak for “we’re out of ideas but can always hit the ‘print’ button”) as way of dealing with this.
Let’s cut the BS here. The Fed has maintained a more than highly accommodative stance for three years now and U-16 unemployment, food stamp usage, home prices, and virtually every other economic metric indicate that they’ve done little to boost the US economy in any meaningful way. QE has and always will be about boosting asset prices in the hope that the Fed can stimulate a recovery by getting the S&P 500 to some level.
The only problem with this is that people don’t engage in financial speculation to pay their bills. Incomes have and always will be the single most important metric for gauging consumer strength. And as the below chart from Morgan Stanley shows, the Fed’s policies of the last few years have done nothing to boost incomes (unless you work on Wall Street).
This chart goes a long way towards explaining the current political environment in which the Fed is about as popular as the bubonic plague. If you read headlines stating “Fed Gave Trillions to Banks” and you’ve been laid off and are living off food stamps, your blood pressure might tend to rise.
And you might tend to vote based on that.
Folks, the reality is that the Fed’s hands are tied. That’s why they keep issuing these innocuous policies (keeping interest rates low until 5056 or some insane future date) without actually doing anything. They know that additional easing means inflation soaring, which makes the Fed that much more a target of popular outrage.
So if you’re counting on the Fed propping the market up throughout 2012 as it did in 2011, you may be in for a rude awakening in the coming months. Every day that we get closer to the 2012 Presidential election, the bar for more QE goes higher and higher. Truly unless we get some kind of major Crisis, the Fed won’t be doing much of anything. So let the traders run their “end of the month” games this week. But don’t be surprised if stocks start to take a dive in early February.
This article has been posted on the Internet here.