Financial Market Report for Friday February 1, 2013
1) … Peak Prosperity was achieved the week ending Friday February 1, 2013, as World Stocks, VT, Nation Investment, IFSM, EFA, and Global Producers, FXR, rose to rally highs, as FX currency traders took the EUR/JPY to a rally high of 126.83 at market close. AP reports Dow Tops 14,000 as Wall Street Rallies to Five Year Highs. The Dow stock market index, DIA, flirted with the 14,000 line Friday, dashing above it several times throughout the morning and bringing reminders of the last time it hit that mark, almost a different era, before the financial crisis rocked the world economy.
Yet, Liberalism’s paradigm of borrow, print and spend as a model of economic prosperity will be relegated to the dustbin of history, as the Major World Currencies, DBV, and the Emerging Market Currenciess, CEW, are likely topping out today, Friday February 1, 2013, and Total Bonds, BND, sold off on December 6, 2013. Now, Authoritarianism’s model of regionalism and economic austerity is already being rolled out, beginning in the Eurozone, to govern mankind’s economic and political activity
Liberalism’s Nation State, Banker, Free To Choose Floating Currency, and Democratic Regime is failing on the exhaustion of the world central banks’ monetary authority to stimulate global growth and corporate profitability, as well as on fears that monetary actions of debt monetization, have crossed the rubicon of sound monetary policy, and have finally resulted in making money good investments, bad.
The Yenification of the world has commenced, with investors derisking out of South Africa, EZA, South Korea, EWY, Taiwan, EWT, Finland, EFNL, and in the Emerging Markets, EEM, such as Peru, EPU, and deleveraging out of Emerging Market Bonds, EMB, as the US Dollar, $USD, UUP, has finally been pushed lower to $79.50, near its September 14, 2012 low of 78.75, thus forming for now, a double bottom of strong resistance/support, and will no longer serve as the world’s reserve currency.
Major World Currencies, DBV, and Emerging Market Currencies, CEW, are peaking out and soon will no longer be floating, they will be sinking on competitive currency devaluation. Bond vigilantes are calling the Interest Rate on the US Ten Year ^TNX, higher; it now stands at 2.01%; and they are steepening the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, as is seen in the Steepner ETF, STPP, steepening; and as a result investors are starting to derisk out of some stocks sectors, such as Airlines, FAA, Global Miners, PICK, Uranium Mining, URA, Coal Mining, KOL, Copper Mining, COPX, Rare Earth Miners, REMX, Steel Manufacturing, SLX, and Metal Manufacturing, XME.
Authoritarianism’s Regionalism, Totalitarian Collectivist, Competitive Currency Devaluation, and Diktat Regime, is rising from the Mediterranean countries of Greece, GREK, Italy, EWI, and Spain, EWP, to govern the world, as foretold in Revelation 13:3-4.
Friday February 1, 2013, was a fantastic yen carry trade rallying day, as the Euro, FXE, rose very strongly, to close at 135.49, and the Yen, FXY, plummeted to 105.56. This investment scheme gave seigniorage, that is moneyness, for nation investing in Italy, EWI, Spain, EWP, Phillippines, EPHE, Thailand, THD, China Small Caps, ECNS, and Mexico, EWW, as well as for investing in Global banks, IXG, as is seen in their combined ongoing Yahoo Finance Chart, rising higher. The demand for the Euro, FXE, caused Small Cap Pure Value Shares, RZV, to rise more than Small Cap Growth Shares, RZG, the former have gained 30% since June 2012, from the anticipation of the ECB’s OMT, the Fed’s QE4, and more recently the BoJ’s Unlimited Easing. Liberalism’s grand finale rally carry trade rally can be seen in the chart of Proshares 200% Inverse Yen, YCS, blasting vertically higher.
Sectors rising strongly higher on the Euro Yen carry trade today included the following:
Leveraged Buyouts, PSP,
Copper Miners, COPX
Nasdaq Biotechnology, IBB,
Small Cap Industrials, PSCI,
US Small Caps, IWM,
Internet Retailers, FDN,
Australian Dividend, AUSE,
North American Energy Partnerships, EMLP,
Dividend Appreciation, VIG
US Telecom, IYZ
Paper Producers, WOOD,
and Investment Bankers, KCE, such as JPMorgan, JPM.
US Infrastructure, PKB, has been a ongoing hedge against European Banking, EUFN, insolvency; its leaders have included the following
Building Material, AOS, WIRE, TREX, USG, BECN, APOG, MAS, seen in Yahoo Chatr here.
Rental Services, URI, SBAC
Diversified Machinery, TEX, GE, DRC
Specialty Chemicals, VAL, GRA, PPG, seen in Yahoo Finance Chart here.
Industrial Electrical Equipment, ROK, ETN, AME
Small Cap Industrials, BEAV, BGG, CSL,
Transportation, WAB, ARII,
Business Services, PRIM, ADS, FLT, TISI, seen in Yahoo Finance Chart here.
Scientific Instruments, ROP
Home Improvement Stores, LOW, FBHS, HD,
Metal Manufacturing, WOR
Paper Producers, BZ
Small Tools, SNA
General Contractors, EME
Heavy Construction, GLDD, MTZ
Appliances, LII, WHR,
Yen carry trade investment drove Semiconductors, XSD, to a new rally high. These included Switzerland, STM, France, ALU, Sweden, ERIC, United Kingdom, ADMH, Netherlands, ASML, NXMI, ASMI. Taiwan Semiconductors, TSM, and United States Semiconductors, LLTC, WFR, ADI, TXN, rose strongly as well.
And Yen carry trade investment drove Global Producers, FXR, to trade at an all time new high; top risers were, Industrial Electrical Equipment, ABB, Pharmaceuticals, NVO, Electronics, PHG, Telecommunications Equipment, TEL, Energy Service, WFT, Energy, NE, Industrials, IR, Medical Instruments, MTD, Software, SAP, Construction, FWLT, Agricultural Chemicals, SYT, Telecom, VZ,.
Pharmaceuticals, XPH, are currently a strongly yen carry trade driven investment, the monetary authority of the ECB has given strong seigniorage, that is moneyness to NVO, NVS, SNY, JNJ, PFE, LLY, as is seen in their combined ongoing Yahoo Finance chart.
Stock market leading sectors of the week ending February 1, 2013 included:
Gaming, BJK, 2.4%,
Semiconductors, XSD, 2.1
US Telecom, IYZ, 1.9
Energy Service, OIH, 1.9
Leveraged Buyouts, PSP, 1.7
Nasdaq Biotechnology, IBB, 1.5
Automobiles, CARZ, 1.5
Energy, XLE, 1.5
IPO, FPX, 1.0
Staples, KXI, 0.9
US Small Caps, IWM, 0.8
Pharmaceuticals, XPH, 0.8
The Too Big To Fail Banks, RWW, 1.7%
Australia Dividend, AUSE, 1.6
International Utilities, IDU, 1.5
Small Cap Real Estate, ROOF, 1.5
Regional Banks, KRE, 1.4
Emerging Market Financials, EMFN, 1.4
North American Energy Partnerships, EMLP 1.3
European Financials, EUFN, 1.2
Dividend Growth, VIG, 0.4
Global shares traded as follows:
Asia, EPP, 0.9%,
Carry Trade Nations, EFA 0.8,
Small Cap Carry Trade Nations, IFSM, 0.7
World Stocks VT, 0.7
Europe, VGK, 0.7
US Shares, VTI, 0.6, Dow, DIA, 0.7, S&P 500, SPY, 0.6, $SPX closed at 1,513
Yet of note, debt laden Italy, EWI, Spain, EWP, Greece, GREK, global trade dependent South Korea, EWY, and Taiwan, EWT, carry trade invested Turkey, TUR, and Peru, EPU, global growth China Small Caps, ECNS, and China Industrials, CHII, and Nokia nation Finland, EFNL, are trading lower from their recent highs, on the exhaustion of the world central banks’ ability to stimulate global growth and corporate profitability. And basic material stocks, IYM, XLB, such as, Global Miners, PICK, Copper Miners, COPX, Uranium Miners, URA, Coal Miners, COPX, Rare Earth Miners, REMX, as well as Steel Producers, SLX, Metal Manufacturers, XME, Paper Producers, WOOD, and Defense Contractors, PPA, are trading lower from their recent highs. Doug Noland notes Spain’s 10-year yields this week increased 3 bps to 5.18% (down 2bps y-t-d). Italian 10-yr yields jumped 20 bps to 4.32% (down 16bps). Japanese 10-year “JGB” yields rose 4 bps to 0.76% (down 2 bps). Home Builder, PHM, traded 6.1% lower this week, inducing Home Builders, ITB, 2.1% lower.
Xinhua reports Chinese stocks close mixed on property control speculation. Among real estate stocks, more than nine out of ten dipped on Thursday, leaving the sub-index down 3.78 percent from a day ago. And China Times reports China’s Beijing city has submitted a property tax trial plan to the State Council for approval, citing an unnamed person close to the local finance and tax department. The property tax may be imposed in the city as early as 1H, citing the person
LIsa Abramowic of Bloomberg News reports Pimco to DoubleLine leveraging as yields retreat. Junk bond yields have fallen so far that the world’s biggest debt investors are turning to borrowed money to juice returns, a practice that magnified losses during the worst financial crisis since the Great Depression. Bill Gross’s Pacific Investment Management Co, PIMCO, said it plans to sell as much as $3.3 billion of shares for its Pimco Dynamic Credit Income Fund, poised to become the largest taxable income closed-end fund. DoubleLine Capital LP is starting its Income Solutions Fund that may invest an unlimited amount of its assets in speculative-grade debt, according to a Jan. 15 filing. Leverage is staging a comeback for investors that oversee more than $2 trillion as speculative-grade yields reach record lows daily with the Federal Reserve holding benchmark interest rates at about zero percent for a fifth year. Blackstone Group LP, BX, debt investment arm obtained a $425 million line of credit last month for its Strategic Credit Fund, BGB, which started trading in September as part of the biggest wave of initial public offerings for closed-end funds since 2007. “Everybody’s looking for income,” said Sangeeta Marfatia, a strategist at UBS Securities LLC in New York. Closed-end funds “can go out and borrow really cheap and yet they’re able to invest at much higher rates.”
Business Insider reports Here are some horrific numbers out of Australia. It’s “a credit bubble built on a commodity market built on an even bigger Chinese credit bubble,” wrote strategist Dylan Grice.
The seven month long Euro Yen Carry Trade Rally underwritten by the world central banks’ holdings of the most toxic of debt has produced Peak Stock Wealth, VT, supported by Peak Currencies, DBV, and CEW, on Friday February 1, 2103, Alastair Marsh of Bloomberg reports “The Chicago Board Options Exchange Volatility Index, known as the VIX, touched a 5 1/2-year low of 12.43 on January 22, 2013”. Yet Volatility, VIXY, rose 0.73%, and VIXM, rose 0.83%, this week, suggesting that a market turn is at hand. Liberalism’s leveage has reached the point of maximum power.
Liberalism’s metrics of money, specifically sovereign wealth, are reported weekly by Doug Noland, these will be declining in value; and it appears that Peak Sovereign Wealth was achieved the week ending February 1, 2013. Doug Noland writing in Late-90s-Like reports” Global central bank “international reserve assets” (excluding gold) – as tallied by Bloomberg – were up $726bn y-o-y, or 7.1%, to $10.938 TN. Over two years, reserves were $1.667 TN higher, for 18% growth. While M2 (narrow) “money” supply dropped $55.0bn to $10.404 TN. “Narrow money” has expanded 6.7% ($655bn) over the past year.” And Gary of Between the Hedges Weekly Scoreboard reports Federal Reserve’s Balance Sheet $2.991 Trillion -.09%. Thus, while the world central banks stockpile of wealth increased, while the M2 money supply decreased, suggesting that Peak M2 Money or Peak Money has been achieved.
The World Major Currencies, DBV, and Emerging Market Currencies, CEW, will be be trading lower in competitive currency devaluation, on the exhaustion of the world central banks monetary authority. Currency traders will be turning risk adverse to the Euro Yen carry Trade, that is the EUR/JPY. And as they take profit on the their trade, the Yen, FXY, will start to rise. Investors will not only sell the Euro, FXE, but also, the Swedish Krona, FXS, the Swiss Franc, FXF, the Brazilian Real, BZF, the Indian Rupe, ICN, and the Emerging Market Currencies, CEW, causing derisking out of Stocks VT,and deleveraging out of Commodities, DBC. The commodity currency the Australian Dollar, FXA, will no longer be king of currencies; and as a result look for Australia Bank, WBK, and Asia iron ore mining giant, BHP, to trade quickly lower. Competitive currency deflation, at the hands of the currency traders, as the result of the monetization of debt by the central banks, will pivot the world from the Age of Fiat Asset Inflation to the Age of Fiat Asset Deflation. The Optimized Carry Trade ETN, ICI, traded lower to the edge of strong support, suggesting a soon coming disinvestment out of all carry trades.
Commodities, DBC, were driven higher by rallying Commodity Currencies, CCX, this last week. Business Standard Thomson Reuters reports Iron ore prices at two-week high on limited cargoes. The Base Metals, DBB, JJT, LD, JJN, JJC, seen in their ongoing Yahoo Finance Chart, rallied on the Euro Yen Carry trade to strong resistance. Cotton, BAL, rose parabolically. Lacking support from Major World Currency, DBV, and Emerging Market Currency, CEW, Unleaded Gasoline, UGA, will be trading lower in value. Look for Natural Gas, UNG, to be a commodity loss leader, as it once again disconnects from other commodities, and falls rapidly in value.
World central bank assets, consisting mostly of illiquid securities, like those in Fidelity’s FAGIX mutual fund, together with Junk Bonds, JNK, and Senior Bank Loans, BKLN, have been the basis of a two year risk on momentum rally in stocks such as the Global Producers, FXR, and the Carry Trade Nations, EFA, and IFSM, that has underwritten corporate profits. But all of the toxic debt turned lower the week ending February 1, 2013. Of note, the investment swell in the most toxic of debt, has been driving yields higher, and driving values down on other debt, such as US Corporate Debt, BLV, LQD, International Corporate Bonds, PICB, Government Debt, GOVT, Build America Bonds, BABS, Mortgage Backed Bonds, MBB, Sovereign Debt, BWX, since December 6, 2012, and the more risky Emerging Market Bonds, EMB, since January 2, 2013. Peak Credit, AGG, was achieved on December 6, 2012.
As World Stocks, VT, trade lower, it may be that Total Bonds, BND, which have been trading lower, may rise for a while, before they fall lower with World Stocks, VT, in a global seesaw destruction of Fiat Wealth.
The stock value of American Corporations, VTI, has grown 18% over the last two years on the world central bank’s monetary stimulus. These companies are sitting on $2 trillion in cash, which is maintained in short term bond funds, money market accounts, and in short term US Treasuries, or Treasury ETFs, such as Barclays 1 to 3 Year US Treasuries ETF, SHY,
Andre Damon writes in WSWS The stock market bubble. In the US, the three major stock indices have either reached or are within a few percentage points of their 2007 highs, despite the fact that the economy has stalled, contracting for the first quarter since 2009, according to figures released Wednesday. Europe is in a state of disintegration, with Greece and Spain facing conditions not seen since the Great Depression, while Germany is experiencing a sharp slowdown. In Britain, the economy is now 3.3 percent smaller than at the start of the downturn, but the benchmark FTSE 250 index has doubled. China, Brazil and India have posted sharply lower figures for economic growth, amidst a slowdown in exports. Yet global share prices have risen ten to twenty percent in the past year alone. These apparently contradictory phenomena, surging financial markets and economic stagnation, are in fact intimately linked. The continued rise in the markets is not a sign of health, but a particular expression of the diseased state of the world capitalist system.
And Scott Grannis relates The January ISM manufacturing report was a good deal stronger than expected (53.1 vs. 50.7). As the above chart suggests, it is reasonable to think that the economy is growing at a 2-3% pace given the health of the manufacturing sector. Things could be a lot better, but they are not getting worse … I relate that the every increasing strong monetary actions of the world central banks, have been necessary to continually stimulate manufacturing, and to sustain and/or grow investment assets; with the benefit of providing employment in exporting cities such as Austin, TX, (corporate home of Naiotnal Instruments), Boulder, CO, Seattle, WA, Silicon Valley, that is San Jose, CA all the way to San Francisco, CA, Irvine, CA, Raleigh, NC, (corporate home of Red Hat), Madison, WI, Plano, TX, The Oil Belt, that is Midland, TX to Odessa, TX, and Bellingham, WA. Bespoke Investment Group provides the details of Job creation under President Obama, where the jobs were really created by Ben Bernanke’s money printing programs of QE1 through QE4, as well as Mario Draghi’s money printing programs of LTRO 1, and 2, as well as OMT.
The world cental banks by making virtually unlimited sums of money available gave strong investment growth, that is seigniorage, to the FTSE 250, ^FTMC, comprised of Mid Cap stocks traded on the London Stock Exchange, in Global Producers, FXR, in Nation Investment, EFA, IFSM, in Emerging Market Investment, EEM; and in and in the case of Japan, NKY, to start a global competitive currency devaluation war, to bolster its exports of Automobile Manufactures, such as Toyota Motors, Machine Tool Manufacturers, such as Makita, MKTAY, and other industrial producers.
RIT Capital Partners, RIT, is a FTSE 250, is one of over 3000 Rothschild family businesses, headed up by Lord Jacob Rothschild, and has its headquarters in Spencer House, St James’s, London, England. Business Insider provides the details of how Mayer Rothschild and his five sons established an international banking dynasty. The NYT reports Rothschilds to combine French and British assets. Vigilant Citizen reports The Rothschilds and Rockefellers join forces in multi-billion dollar deal.
Ambrose Evans Pritchard writes Catastrophic EU Exit would leave City of London Financial District defenceless against regulatory attack. European regulators have the means to shut down key parts of London’s financial centre at a stroke if Britain left the European Union and would not hesitate to do so, leading central bank experts have warned. And he also writes Mario Draghi confronts Berlin over contagion from Cyprus default. Leading European Union officials have warned Germany it would be a grave mistake to let Cyprus default or to impose losses on private creditors, fearing a repeat of errors made when Greece first flew out of control.
Andre Damon continues, The social and historical catastrophe confronting mankind is not simply the product of an economic crisis in the abstract. This crisis is mediated by class interests, and these class interests find expression in definite actions. Behind the central banks and governments stand the interests of a financial elite whose relationship to the rest of society is fundamentally parasitic. A solution to the crisis must take a political form. To the interests of the ruling classes, the international working class must counterpoise its own program, its own solution. At the center of this program must be the understanding that a way forward is possible only through the transformation of society as a whole, placing it on new foundations.
2) … The Age of Fiat Asset Deflation will be defined by regional sovereignty and the seigniorage of diktat, that is the moneyness, of diktat.
I respond to Andre Damon by relating that the Stimulus Bubble, and the Fiat Weatlh Bubble is at the point of bursting, as bonds, BND, traded lower beginning on December 6, 2012, and as investors will come to fear that the World Central Banks’ monetization of debt, has crossed the rubicon of sound monetary policy, and has turned “money good” investments bad, with the result is that Great Depression II is inevitable, and that indeed a new economic and political foundation, that is a whole new paradigm, is already on the way.
Bespoke Investment Group writes Stocks doing well on earnings, and writes Earnings and revenues beat rates for Q4 2012 manifest strongly. The reason for this is the Euro Yen Carry Trade of a lifetime.
The Euro Yen carry trade, EUR/JPY, swell came courtesy of the Federal Reserves QE4, the ECB’s OMT, and the BoJ’s Unlimited Easing, which has provided a global flood of credit liquidity; this deluge, is similar to the Great Flood of Noah’ day, it will literally inundate the fiat money system, and has already introduce the diktat monet system in Euroland, that is specifically in Greece, GREK, Italy, EWI, and Spain, EWP, as well as in Ireland, EIRL. The weekly chart of the Japanese Yen, FXY, shows its waterfall value beginning in October 2012, from 125.0 to 105.5 which gave the trade power.
This week Major World Currencies, DBV, rose 0.1%, and Emerging Market Currencies, CEW, rose 0.5%, to new rally highs. Rising currencies included Swedish Krona, FXS, 2.6%, Brazilian Real, BZF, 2.3%, Swiss Franc, 2.1%, Euro, FXE. 1.5%, Canadian Dollar, FXC, 0.9%, Mexico Peso, FXM, 0.8%. Declining currencies included South Korean Won, KWON, -2.1%, Japanese Yen, FXY, -2.1%, New Taiwan Dollar, TWON, -1.5%, and the British Pound Sterling, FXB, -0.7%.
Peak Monetary and National Sovereignty has been achieved. Liberalism’s sovereignty was based upon the national sovereignty of democratic states and the monetary authority of the world central banks. The bankers’ sovereignty, through credit, AGG, begat the seigniorage, that is the moneyness, of choice, producing fiat asset inflation, and prosperity for those with jobs as well as for those on government assistance, such as Social Security Disability.
Jean Pisani-Ferry, Director of Bruegel, the Brussels based economic policy think tank asks Is the Euro crisis over? Reason to worry is that there is limited consensus in Europe on what, exactly, is needed to make the monetary union resilient and prosperous again. Banking union is a positive development, but there is no agreement on additional reforms, such as the creation of a common fiscal capacity or a common treasury. I comment that through the ECB’s LTRO1 and LTRO2, as well as the ECB’s OMT, were stopgap measures to prevents a dissolution of the EU, and provided shrew investors a carry trade bonanza. The European Sovereign Debt Crisis has been held in abeyance, but cannot be avoided. Insolvent sovereigns, and insolvent banks cannot provide seigniorage, that is moneyness . Spain, EWP, and Italy, EWI, traded lower in value the week ending February 1, 2013, suggested an end to the European Stock, VGK, rally, as well as to national sovereignty.
A new sovereignty and a new seigniorage is coming, as the age of fiat asset inflation, pivots to the age of fiat asset deflation.
Authoritarianism’s sovereignty will be based upon regional framework agreements, which renounce national sovereignty, and appoint both regional monetary and fiscal popes to work in public private partnerships, such as Macquarie Infrastructure Company, MIC, to oversee regional economic production. These regional nannycrats, will impose the seigniorage of diktat, mandating debt servitude and austerity.
Jesus Christ is at the helm of the economy of God, Ephesians, 1:10, and is pivoting the world from Liberalism’s Banker, Floating Currency, Free To Choose Investment, Democratic, Nation State, Regime … to Authoritarianism’s Beast, Competitive Currency Devaluation, Diktat, Totalitarian Collectivist, and Regional Governance Regime.
Jesus Christ produced the very fullness of economic prosperity, and is now introducing the very fullness of economic austerity. He as the All Sovereign One, Colossians 1:15-16, all sovereignty coalesces in Christ, Colossians, 1:17, and He has been acting as the Great Bubble Blower, and is now acting as the Great Bubble Deflator, Ephesians 1:10.
The great pivotal economic and political shift from Liberalism to Authoritarianism is foretold in both Daniel 2:25-45, and in Revelation 13:1-4, where the Beast Regime will rule in all of the world’s ten regions, and in all of mankind’s seven regions. Liberalism’s fiat money system will be replaced by Authoritarianism’s diktat money system, where diktat serves as currency, credit and power.
This development is unseen to practically everyone, as the Beast Regime has the feet of a bear, the mouth of a lion, and the coat of a leopard. In other words, the Beast Regime, is the ultimate predator, having feet which enables it to stand its ground as well as root out its enemies, a mouth to make authoritative statements, and a coat whereby it blends in with all of mankind’s media, technology, banking, educational, banking, government and religious and think tank institutions. This minotaur devours all who it chooses to consume.
Wealth can only be preserved by investing in and taking possession of physical gold, GLD, in bullion form or in Internet trading vault form such as Bullion Vault. The chart of Silver, SLV, shows a close at strong resistance of 31. When and if it ever becomes an invesment metal is anybody’s guess.
One is only free to the extent he knows and experiences genuine sovereignty. Christians belong to the All Sovereign Jesus Christ. Knowing His sovereignty, they experience the freedom He provides. Jesus said in John 8:36, “If therefore the Son shall make you free, ye shall be free indeed”. John Gill’s Exposition of the Bible relates “Men are home born slaves; the chosen people of God are such by nature; they are born in sin, and are the servants of it; Christ the Son makes them free; and then they are no more foreigners and strangers, but fellow citizens with the saints, and of the household of God. This suggests, that true freedom is by Jesus Christ, the Son of God; see Galatians 5:1. He it is that makes the saints free from sin; not from the being of it in this life, but from the bondage and servitude of it, from its power and dominion, and from its guilt and liableness to punishment for it, by procuring the pardon of their sins through his blood, and justifying their persons by his righteousness.”
Those who have life in Christ, are ever maturing in the only right there is, and finding genuine freedom therein, as put forth in John 1:12, “But as many as received Him, to them He gave the right to become children of God, to those who believe in His name.”
Perhaps one might enjoy my related article of the week The World Is Pivoting From Liberalism To Authoritarianism On The Exhaustion Of The World Central Banks’ Monetary Authority.
And perhaps one might enjoy Doug Noland of Prudent Bear who writes on monetary inflation, stating Late-90s-Like “Dow, S&P 500 Post Best January since the 1990s,” noted a USA Today headline.
(Then), It was out with “fractional reserve banking” and the “deposit multiplier” – and in with the “infinite multiplier” and the specter of an unlimited supply of finance. Out with the staid bank loan and in with the dynamic marketable debt security to be financed in the marketplace and leveraged for speculative profits. No longer would our central bank have to prod banking lending with reduced funding costs, when a brief statement has the power to immediately incite risk-taking and leveraging throughout the securities markets. Unlike traditional bank finance, this new marketable-based Credit could be easily manipulated. For the investment banker, market operator and central banker, the new finance was just too seductive.
With New Age Credit (Liberalism’s Credit) now available in limitless quantities, no longer would the system have the inconvenience of supply and demand determining the price of borrowing/finance. Now, it could largely be left to the judgment of a small cadre of (largely academic) central bankers – or, more simply, just leave it to their leader. Contemporary risk intermediation methods and securities financing outside of traditional bank lending and deposit channels had completely changed finance – and with it monetary policy doctrine.
And, almost to the individual, everyone back in the late-90s told me I was absolutely wrong. Conventional thinking held steadfastly to the view that “only banks create money and Credit.” I would explain how non-bank Credit expansion was no longer restrained by traditional bank capital and reserve requirements, and I was informed in no uncertain terms that my theory was flawed.
Yet it wasn’t really a “theory” as much as it was reality. Everyone was so enamored with “New Paradigm” and “New Era” thinking, it was easy to disparage my analysis. The markets were really strong – and the “naysayers” had become a joke. Candidly, I still have a bit of a chip on my shoulder from the whole experience. Some years later (2007), Pimco coined the phrase “shadow banking” and the analysis soon became obvious to everyone. The mortgage finance Bubble was transformed to obvious. It was all obvious, in hindsight.
Each passing week, the current environment seems more Late-90s-Like. Indeed, contemporary finance has gone through another momentous transformation, yet seemingly nobody is on top of the analysis. Perhaps no one wants to be. And my work has completely diverged from conventional thinking. I’m more comfortable in this lonely position these days – and by now well-versed in the idiosyncratic nature of conventional thinking/analysis.
A rather long book could be written on this subject, but I’ll do my best to muster a brief summary. The key to the new finance of the nineties was that it was predominantly market-based. The GSEs, securitizations, “repos,” and “Wall Street finance” were creating unlimited amounts of finance and directing it mostly to the assets markets (stocks, bonds, real estate, etc.). Accordingly, asset inflation and asset Bubbles were the prevailing inflationary manifestation throughout that particular Credit boom.
The technology and Internet stock mania burst in early-2000. The panicked Fed went into post-Bubble reflation/reliquefication mode. Unemployment rose to 6% in late-2002, and a new Fed governor spoke of the need for “helicopter money” and the “government printing press” to fight the scourge of deflation.
From my analytical framework, tech stocks were never THE “Bubble,” but rather the most conspicuous consequence of an unfolding Bubble in Credit. In 2002, I began my “mortgage finance Bubble” warnings. To say I was alone in talking “Bubble” back in 2002 was an understatement. Conventional thinking was fixated on deflation and economic stagnation. “Muddle through” was viewed as the best case in a “post-Bubble” deflationary environment. All risks were seen on the downside.
My analytical framework remained focused on this new “Wall Street finance” and its unique inflationary potential. Mortgage Credit and house prices had already commenced an inflationary cycle.
From this analytical perspective, aggressive (“activist”) central bank intervention/manipulation would likely rejuvenate Wall Street finance and push mortgage finance excess to dangerous Bubble extremes. Indeed, if the Federal Reserve was to orchestrate a systemic bailout for this asset-based Credit apparatus, one could expect the GSEs, securitizations, derivatives, hedge funds and “Wall Street finance” to bounce back fully emboldened and more powerful than ever. Such is the nature of Bubbles.
Mortgage Credit doubled in just over six years. Highly relevant to current analysis, this historic Bubble prolonged an epic economic restructuring. The deindustrialization of the U.S. economy gathered further momentum, while historic asset inflation and housing equity extraction helped spur only greater consumption and demand for services. Persistently large Current Account Deficits became enormous. Our “Bubble dollars” inundated the world. When the mortgage finance Bubble burst in 2008, there was seemingly no way to avoid a major financial and economic adjustment period – in the U.S. and globally. With U.S. household Net Worths trashed, the housing “ATM” shuttered, private-sector Credit contracting and huge job losses on the horizon, major swathes of the U.S. Bubble Economy were immediately made uneconomic.
Economic depressions have made regular appearances throughout history. Recessions are “cyclical” mechanisms that work to mitigate the buildup of system of excesses (spending and inventory, etc.) that accumulate during a boom period. Depressions, on the other hand, are more “secular.” Traditionally, depressions are the inevitable consequence of prolonged Credit booms and attendant deep economic structural maladjustment. Depressions are about Credit failure and resulting major economic adjustment and rebalancing (today, think Greece or Spain).
I believed at the time the U.S. economy faced a depression-like adjustment following the 2008 bursting of the mortgage finance Bubble. With Fannie and Freddie bust and “private-label” securitizations and Wall Street obligations discredited, the heart of “nineties” New Age finance was pretty much dead. It was clear that mortgage Credit would contract – and that private-sector Credit growth would be minimal at best. Most importantly, system Credit expansion would be insufficient to sustain income and spending levels that had inflated tremendously during the protracted boom period. Falling incomes would be trouble for the maladjusted economic structure and the U.S. Credit system overall. There were indications of how this dynamic would unfold in 2009.
In 2009, I began warning of the risks of fueling a “global government finance Bubble.” (Think QE 1)
I didn’t fully appreciate what was unfolding back in ’09. But it was clear that the Federal Reserve, Treasury and global policymakers were prepared to do just about anything. Similar to mortgage finance in 2002, government finance was already demonstrating powerful Bubble characteristics by 2008. The mortgage finance Bubble had collapsed, yet a potentially even greater Credit Bubble was gathering momentum. After all, government finance enjoyed greater “moneyness” than ever – and over-issuance began in earnest. Massive federal deficits coupled with Federal Reserve monetization held the possibility for the biggest Bubble of them all. It’s already historic.
In somewhat of a replay of the nineties, our Credit system has again experienced an historic transformation. The nineties version was about unfettered market-based Credit. Today, it’s unfettered government-based finance. Both are about risk obfuscations, misperceptions and mispricing. Few appreciated how this finance distorted asset markets and the structure of the real economy from the mid-nineties through 2008. Few appreciate the nature of today’s Credit Bubble. Seemingly no one recognizes how profoundly the government finance Bubble is inflating incomes
This is an age where our central bank sets interest-rates at artificially low levels, while monetizing Trillions of federal (and mortgage) debt. Unending dollar flows have, in particular, bolstered “developing” Credit systems, economies and Bubbles. China and “developing” central banks have, then, continued the recycling of Trillions of surplus dollar balances directly back into U.S. Treasury and agency debt markets, in the process helping to monetize U.S. income growth, inflate securities markets and sustain the U.S. Bubble Economy. All along the way, perilous global imbalances know only one direction: bigger. And the greater the imbalances, the lower global central bankers peg rates and the more they resort to unfathomable “quantitative easing”/“money printing. I’m OK if every analyst in the world disagrees. It doesn’t change the reality that we’ve experienced another historic transformation in U.S. and global finance – and we are these days witnessing the consequence: history’s greatest synchronized Credit, market and economic Bubbles.
3) … Summary … The grand era of the global asset class bubbles is over … The failure of the Mario Monti Euro Yen Carry trade will be the genesis of Financial Apocalypse
Benson te pegged it right in his April 27, 2012 article The coming global Yen carry trade, relating I earlier noted that Japan’s currency, the yen, may function as a funding currency for interest rate and currency value arbitrages, or known as the carry trade, that may augment the ongoing bubble process in Philippines, as well as, in other ASEAN asset markets. It appears that the Yen carry may well be a global phenomenon.
It has been primarily the ECB’s provision of LTRO 1 and 2, as well as OMT, that has not only has rallied the European Financials, EUFN, but also has given Currency Carry Trade, notably Euro Yen, EUR/JPY Currency Carry Trade, seigniorage to nation investment, EFA, and IFSM and to sector investment, seen in this Finviz Screener. That is the sectors BJK, CARZ, CHII, COPX, ECNS, FAA, FAN, FDN, FPX, FXR, IBB, IGN, ITB, seen in this Google Finance Chart and the sectors EUFN, IEZ, JJT, KWT, LD, PICK, PSCI, PSP, RZV, SDIV, TAO, WOOD, XRT, XLE, XSD, seen in this Google Finance Chart.
The most insolvent of banks rode the seigniorage wave higher from their 2012 summer lows, these included BAC, C, BCS, LYG, RBS, SAN, DB, IBN, HDB, NMR, MTU, UBS, WF, CS, GGAL, BFR, BMA, BPOP, IRE, CHIX, SMFG, MFG, BSMX, NBG, JPM, seen in this Finviz Screener.
Mario Monti’s ECB monetary authority, and OMT monetary policy, gave seigniorage, that is monetary inflation even to US Regional Banks, KRE, such as those seen in this Finviz Screener. And in leveraged response, drove the US Small Cap Shares, IWM, to a new high of 90.37.
The Mario Monti trade gave investors confidence to go long the most risky of yield bearing investments, Super Dividend, SDIV, and International Dividends, Excluding Financials, DOO, as is seen in the chart of FAGIX, JNK, BKLN, PFL, SDIV, DOO, as well as to speculate in Nasdaq Biotechnology, IBB, shares such as Celgene, CELG, and Gilead Sciences, GILD.
It was the Asset Management Companies BLK, WDR, EV, SEIC, AMG, AMP, IVZ, BK, STT, together with Investment Banks such as JPMorgan, JPM, coined Liberalism’s grand finale risk-on carry trade rally, underwritten by the toxic debt, such as FAGIX, JNK, BKLN, held by the world central banks. Most Hedge Funds had gone “totally in”, either in equities and credit or both, and profited greatly..
Ilya Spivak of Daily FX writes Prices for the EUR/JPY broke above resistance at 125.67, that is 76.4% Fibonacci expansion, to close at 126.85, exposing the 100% level at 127.08. The 125.67 mark has been recast as near-term support, with a reversal back below that targeting the 61.8% expansion at 124.83
Inasmuch as Mario Monti’s Euro Yen carry trade rally is over, on the peaking out of Major World Currencies, DBV, and Emerging Market Currencies, CEW, and the US Dollar, $USD, falling to strong support at 79.12, the age of monetary expansion is over. The Milton Friedman Free To Choose Floating Currency Regime, also known as the fiat money system, will be sinking like quicksand, yes collapsing like a house of cards. Investors will be derisking out of nation investing, EFA, IFSM, and Global Producers, FXR, as well as the most currency driven small cap stocks nation stocks, EWX, EDIV, DLS, such as the Russell 2000, IWM, Vietnam, VNM, Thailand, THD, Greece, GREK, Mexico, EWW, Ireland, EIRL, Brazil, EWZS, China, ECNS, New Zealand, ENZL, Britain, EWUS, Russian, ERUS, Australia, KROO, Germany, GERJ, China, ECNS, Finland, EFNL, Chile, ECH, Peru, EPU, India, SCIN, Singapore, EWSS, Japan, EWJ, Phillippines, EPHE, Hong Kong, EWHS, and Argentina, ARGT, seen in this Finviz Screener. Benson te asks Is the Phisix in a Mania?
The combined ongoing Yahoo Finance Chart shows the best of breed mutual funds, PRSVX, Small Cap Value, VDIGX, Dividend Growth and FDGRX, Large Cap Growth, and communicates the demand for currencies, for yield and for growth at the very end of the Fall Season of Liberalism’s Business Cycle.
Liberalism began in 1948, that is Liberalism’s Spring Season commenced in 1948. Andrew Gavin Marshall writing in February 02, 2011 Global Research article The Political Economy of Global Government sheds some light on those who have been pushing for the development of the beast system in Europe. Nearing the end of the 19th century, American bankers and industrialists, specifically J.P. Morgan, were gaining close connections with major European banking interests. On the European side, specifically in Britain, the elite was largely involved in the Scramble for Africa at this time. Infamous among them was Cecil Rhodes, who made his fortune in diamond and gold mining in Africa, monopolizing the gold mines with financial help from Lord Rothschild.
Interestingly, “Rhodes could not have won his near-monopoly over South African diamond production without the assistance of his friends in the City of London: in particular, the Rothschild bank, at that time the biggest concentration of financial capital in the world.” As historian Niall Ferguson explained, “It is usually assumed that Rhodes owned De Beers, but this was not the case. Nathaniel de Rothschild was a bigger shareholder than Rhodes himself; indeed, by 1899 the Rothschilds’ stake was twice that of Rhodes.”
The Bilderberg Group acts as a “secretive global think-tank,” with an original intent to “to link governments and economies in Europe and North America amid the Cold War.”
One of the Bilderberg Group’s main goals was unifying Europe into a European Union. Apart from Retinger, the founder of the Bilderberg Group and the European Movement, another ideological founder of European integration was Jean Monnet, who founded the Action Committee for a United States of Europe, an organization dedicated to promoting European integration, and he was also the major promoter and first president of the European Coal and Steel Community (ECSC), the precursor to the European Common Market.
Declassified documents (released in 2001) revealed that “the U.S. intelligence community ran a campaign in the Fifties and Sixties to build momentum for a united Europe. It funded and directed the European federalist movement.”
Furthermore: America was working aggressively behind the scenes to push Britain into a European state. One memorandum, dated July 26, 1950, gives instructions for a campaign to promote a fully-fledged European parliament. It is signed by Gen William J Donovan, head of the American wartime Office of Strategic Services, precursor of the CIA. Washington’s main tool for shaping the European agenda was the American Committee for a United Europe, created in 1948. The chairman was Donovan, ostensibly a private lawyer by then. The vice-chairman was Allen Dulles, the CIA director in the Fifties. The board included Walter Bedell Smith, the CIA’s first director, and a roster of ex-OSS figures and officials who moved in and out of the CIA. The documents show that ACUE financed the European Movement, the most important federalist organisation in the post-war years.
Wikipedia relates On May 14, 1948, the day on which the British Mandate over Palestine expired, the Jewish People’s Council gathered at the Tel Aviv Museum, and approved a proclamation, declaring “the establishment of a Jewish state in Eretz Israel, to be known as the State of Israel“. Thus the global hegemonic power of the British Empire, a company of nations, ended. The first of two iron legs of global power ceased, so that the second of the two legs of global power, as foretold in bible prophecy of Daniel 2:25-45, could begin its rise to global dominance, establishing the rise of Liberalism.
The stock markets, VT, are in a blow off top. Credit bubble mania is coming to an end. The twin spigots of Liberalism lifespring, central bank credit liquidity, read ZIRP, and yen carry trade investing, read EUR/JPY, are running dry and are turning toxic. Bill Gross of PIMCO writes Credit Supernova.
Liberalism’s Winter season will commence with a soon coming Financial Apocalypse, that is a credit bust, and financial system breakdown; it is foretold in Bible Prophecy of Revelation 13:3. And The Golden Truth Blog relates Ludwig Von Mises spoke of this as well in Human Action in 1949 relating “What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. The final outcome of the credit expansion is general impoverishment.”
The era which Krugman might call “good economics”, which is really bubble economics, and “good governance”, which is really libertine governance, is coming to an end, as the world central banks’ monetary policies, have crossed the rubicon of sound monetary policy, and have made “money good” investments bad. The days of easy money and free lunches is coming to an end.
As Financial Apocalypse, that is the credit bust and financial system breakdown comes, national sovereignty, nation investing, EFA, and Global Production FXR, will collapse. A new sovereignty, that of regional governance is coming to replace sovereign nation states and traditional central bank monetary authority and monetary programs. Also a completely new money system is coming, as leaders meet in summits, and announce regional framework agreements, which renounce national sovereignty, and pool regional sovereignty, to provide regional security stability, security and sustainability. The diktat money system will replace the fiat money system where the seigniorage of diktat, that is the moneyness of nannycrat mandates, will serve as currency, credit, power and wealth.
4) … The short selling opportunity of a lifetime has developed; these include
.. Sector ETFs .. such as PSP, IBB, RZV, FAA, CARZ, BJK, KWT, FXR, TAO, COPX, WOOD, IGN, ITB, FEMS, SEA, FAN, REM, JJT, CHII, FLM, AUSE, XPH, DLS, VIG, EMLP, IHF, IYZ, FDN, XRT, ZIV, seen in this Finviz Screener
.. Country ETFs .. such as EPHE, EWW, THD, TUR, ECNS, VNM, GREK, URTY, EWY, ARGT, EIRL, EWP, CAF, SCIN, FPX, seen in this Finviz Screener
.. and Banks .. such as BAC, C, BCS, LYG, RBS, SAN, DB, IBN, HDB, NMR, MTU, UBS, WF, CS, GGAL, BFR, BMA, BPOP, IRE, CHIX, SMFG, MFG, BSMX, NBG, JPM, seen in this Finviz Screener
I see opportunities in going long in the following:
.. Proshares 200% Inverse ETFs .. such as BIS, FXP, SQQQ, SMK, SDD, EEV, EFU, KOLD, SMDD, SSG, DUG, seen in this Finviz Screener.
.. Direxion 300% Inverse ETFs .. such as EDZ, YANG, RUSS, DPK, MIDZ, ERY, TZA, seen in this Finviz Screener.
.. Metal Based ETFS .. such as FSG, UGL, NUGT, seen in this Finviz Screener.
5) … An unwinding Euro Yen Carry Trade will at some point create an investment demand for gold.
Wealth can only be preserved by investing in and taking possession of physical gold, GLD, in bullion form or in Internet trading vault form such as Bullion Vault. The chart of Silver, SLV, shows a close at strong resistance of 31. When and if silver ever becomes an invesment metal is anybody’s guess.
The largest competitive currency devaluation of history is about to occur on the seven month long monetization of debt by the world central banks. Andrew Hoffman of Miles Franklin communicates that QE to Infinity, that is the Federal Reserve’s ZIRP, and ongoing and even increasing purchases of Treasury, GOVT, and Mortgage Backed Bonds, MBB, is starting to turn “money good” investments, such as Naiton Investing, EFA, and IFSM, and Global Producers, FXR, bad.
The monetary policies and programs of Liberalism’s pied pipers, Alan Greenspan, Ben Bernanke, Mario Draghi, and Shinzo Abe, while have creating a financialization credit boom, have resulted in rising U6 Unemployment, Negative Real GDP Growth, over 9.0% Real US Inflation (per Shadowstats.com) and prospective Sovereign and other Defaults, as well as leading the world away from genuine wealth. Please consider that gold re-monetization is about to commence on global debt saturation. The flagship of gold as sovereign wealth is about to rise and set sail, as the Global Central Bank Balance Sheet lowers its mast as Business Insider writes Mario Draghi Can’t Stop The Bubble From Bursting.
Countdown to the Collapse – Financial Sense
A Stock Market Top Mike Mish Shedlock
Is a Major Stock Market Sell-Off Coming? Robert Wenzel of Economic Policy Journal writes The way we see things at EPJ, there is no indication that the US stock market will end up where it started. In fact, at least for the first few months of the year, we expect the stock market to continue to climb in spectacular fashion.
Ernest Scheyder of Reuters reports New miner wants in on the chummy global potash club. Potash miner Prospect Global Resources, PGRX, won’t open its first mine until at least 2015, but the American upstart is already upsetting the multibillion-dollar fertilizer industry where a few players control a crucial ingredient in the global food chain. China, with an insatiable appetite for fertilizer to help feed its growing population, has long been dependent on Canpotex, the Canadian sales agency that supplies a third of the world’s potash. But in December, Canpotex reluctantly agreed to a six-month supply contract with China at $400 per tonne, a $70 per tonne discount from its last contract price and a steeper cut than expected. China got the cheaper price partly because it used as leverage a separate 10-year agreement inked last October with Prospect.
Michael Ivanovitch, is president of MSI Global, a New York-based economic research company. He served as a senior economist at the OECD in Paris, and an international economist at the Federal Reserve Bank of New York and writes in CNBC Global Economy living off the Fed’ gravy train.
How does the Fed drive the world economy? The US Dollar is the channel through which the impact of the Fed’s policy is transmitted to the rest of the world. Transmission mechanisms are very wide and instantaneous. About 90 percent of international trade and financial transactions are conducted in dollars; some economies are fully dollarized through currency boards or dollar pegs, the dollar accounts for 62 percent of world currency reserves, and the overwhelmingly dollar-based foreign exchange market has an estimated daily turnover of $4 trillion.
Pushing Export-Driven Free Riders. That is the framework where the Fed operates as a de facto coordinator of international economic policies. Conceptually, this policy coordination process is grounded on the idea that countries at different points in the global business cycle should conduct restrictive or expansionary economic policies depending on their fiscal and balance-of-payments positions. For example, countries running budget and trade surpluses (or very low budget and trade deficits) should stimulate their domestic demand because they may also have sluggish growth and low inflation. Conversely, countries with high budget and trade deficits should increase taxes, cut government spending and raise interest rates because they may be experiencing an overheating economy and rising inflation.
The question is: While running the U.S. economy, how can the Fed influence that the four largest world economies – U.S., China, Japan and Germany (45 percent of global GDP) – follow these broad policy coordination criteria? (Read More: Fed to Trigger ‘Collateral Financial Damage’: Lavorgnia)
Starting with the U.S., one can observe that its policy mix consists of a loose monetary and restrictive fiscal stance. The Fed’s expansionary monetary policy is addressing problems of slow economic growth, while fiscal restraint aims at reducing budget deficits and slowing down America’s rapidly rising public debt.
Germany is in a much better fiscal position to rev up its recessionary economy. With stable prices, balanced budget and a whopping 6 percent of GDP trade surplus, Germany could cut taxes and step up government spending to stimulate domestic demand. That would spur Germany’s buying of foreign goods and services and help its struggling euro zone partners. But Germany does not want to do that. It is killing its domestic demand by fiscal austerity, counting on exports to ride out the cyclical downturn.
Japan is another clear case where a deflationary economy and a small trade surplus call for a properly targeted stimulus to domestic demand. Unlike Germany, Japan has come up with a stimulus package – an inauspicious action plan mainly based on repeatedly tried and failed programs of public works. And exports may not help either. Indeed, export sales are unlikely to pick up strongly enough to lead the Japanese economy out of its current recession.
China is maintaining its growth rate within the targeted policy range of 7-8 percent, but a relatively large trade surplus – nearly 3 percent of GDP – suggests that a much bigger part of its aggregate demand should be generated by private consumption and business investments. Such a compositional change of China’s economic growth is an official policy objective. Some progress along these lines is being made, but there is still a long way to go. (Read More: Why China Will Underpin the Global Economy in 2013)
All this shows that – whether structurally (China) or by design (Germany and Japan) – three of the four largest world economies (which account for a quarter of global GDP) are living off the U.S. and the rest of the world. No amount of “talking shop” meetings has been able to wean these countries off their export gravy train.
The Fed, however, has been doing something about that.
Fed Deserves a Thank-You Note From France and Spain
When Germany recently complained about Japan’s drive to push the yen down, it sounded like Berlin actually meant to complain about the Fed’s soaring dollar liquidity and the Washington’s fiscal saga pulling the euro up nearly 10 percent against the dollar since the beginning of last summer.
But if German officials appeared to have their currency wires all tangled up, the former Euro group chairman and Luxembourg’s Prime Minister Jean-Claude Juncker strengthened that out last week by worrying about the euro’s rising exchange rate against the dollar.
That is putting Germany on the spot, both because the euro’s rise against the dollar is hitting the competitive standing of its exporters vis-a-vis their American, Japanese and South Korean rivals, and because downward pressures on Germany’s huge export sector – nearly 50 percent of its GDP – will make it difficult to keep the economy afloat in the run-up to September elections. (Read More: South Korea, Thailand Warn of Easy Money Fallout)
Again, Berlin is looking to exports for a way out. Here are some signs. Suddenly, Germany has gone quiet about ECB’s easy money policies, no doubt because rising euro supplies could moderate competitive losses against the Fed-operated global dollar area. And, in a surprising about face, Germany is now accepting the idea that France and Spain should have more time to reduce their budget deficits in order to give some oxygen to their moribund economies. Such a pro-growth switch, however modest, will benefit Germany because these two countries take about one-third of German exports to the euro area. So, what Germany loses in the fiercely contested dollar trading area, it hopes to partly offset by exports to improving euro markets it dominates.
China and Japan Will Be Buying More Treasurys
While the ECB will not intervene to keep the euro down against the dollar, China and Japan make currency interventions part of their normal monetary management. Here is how much the Fed has pushed these two countries last year to increase their holdings of U.S. assets as they sought to keep their currencies down against the dollar.
Japan stopped its rundown of U.S. Treasurys in December of last year. Since then, the total amount of Treasury securities increased $74.4 billion to stand at $1132.8 billion in November 2012. The spikes in Japan’s purchases of U.S. government bonds closely mirror the periods of yen’s surges against the dollar. Quietly, the Fed was doing what was good for Japan – forcing the Bank of Japan to expand its money supply – without the threats from the Japanese government that it may review the central bank’s charter if it did not print enough money to move inflation from -0.1 percent to 2 percent.(Read More: Weak Yen Yet to Reach Corporate Japan’s Bottom Line)
China also continued to buy U.S. debt last year to keep its currency’s virtual dollar peg. After a huge (more than $100 billion) selloff of U.S. Treasurys toward the end of 2011, Beijing changed its mind and kept increasing modestly its dollar assets to a total of $1170.1 billion at the end of last November. That is still 7 percent below its year-earlier level, but these dollar purchases, growing currency swap lines with many of its trading partners and stringent capital controls kept the yuan (Exchange:CNY=) stable against the dollar in 2012.
The Fed’s policies are still difficult to resist. In spite of all these currency defenses, China’s quest for a stable dollar-yuan exchange rate has made its trade and financial flows increasingly dollarized – a trend that will continue to strengthen for lack of any suitable alternatives. The Fed will, therefore, be able to have a direct and increasing impact on China’s monetary policies as Beijing continues to open up its capital account on its long, but inevitable, road to making yuan a convertible global currency.
Apart from the euro zone, Japan and China, the Fed’s monetary policy has had a large impact on Brazil, India and Russia, the countries complaining about the “currency wars.” Mexico and Canada, Washington’s free-trade partners, have also had to significantly step up their purchases of U.S. Treasurys to maintain their dollar pegs in response to the growing dollar-denominated money supply.
(Read More: Currency Wars Can’t Be Won: Bank of Korea Chief)
Investment strategists would probably make better asset allocation decisions by taking into account global ramifications of Fed’s policies. The dollar bears may also wish to reconsider: the greenback will have no match as the world’s key transactions currency for as far as the eye can see. And while there may be some competition for the dollar as a store of value, the Fed’s commitment to price stability in the United States should be taken seriously.
Dr Housing Bubble asks Where Did All The Housing Inventory Go?
This article Euro Yen Carry Trade Investing Produces Liberalism’s Peak Prosperity … http://tinyurl.com/aothrwx, has been posted to the Internet.