Yen Carry Trade Unwinds Causing Massive Liquidity Meltdown And Stock Market Freefall As House Votes To Defeat Bailout
Tuesday, 30. September 2008, 06:44:50
The Yen Carry Trade Unwound In Trading In Asia Before The US Stock Market Opened
An unwinding yen carry trade, EUR/JPY, FXE:FXY, sent the Euro, FXE, lower which induced a sell off in Asia shares, before the US stock markets opened, as is seen in the ongoing Yahoo Finance Chart of AIA relative to EWJ, JSC, and FXI ... FXE:FXY Daily ... FXE:FXY Weekly ... AIA relative to EWJ, JSC and FXI
Stocks gapped lower upon opening, and immediately went into freefall, ahead of the vote on the President's bailout plan, the Emergency Economic Stabilization Act of 2008, EESA, providing TARP, as can be seen in the five day Yahoo Finance chart of the Nasdaq, QQQQ ... QQQQ
Foreign shares fell on a lower Euro, FXE, as can be seen in the on going six month Yahoo Finance chart of the Proshares 200% inverse ETFs, EFU, EEV, and FXP ... EFU, EEV and FXP
The natural resource shares also fell on a lower Euro, FXE, as can be seen in the ongoing six month Yahoo Finance chart of SLX, XLE, KOL, OIH, GDX and XME ... SLX, XLE, KOL, OIH, GDX, and XME
The MSN Chart of URR, compared to EEM and EEB documents how an unwinding yen carry trade beginning in June 2008, caused terrific destruction to stock market value in the emerging markets, EEM, and in the BRICS, EEB, as carry traders went about to buy yen and repay their 0.5% Bank of Japan loans ... URR as a proxy for the Euro, and EEM, and EEB
The BRICS, EEB, fell as can be seen in the ongoing six month Yahoo Finance chart of RSX, EWZ, FXI and INP ... RSX, EWZ, FXI and INP
Alternative energy fell as can be seen in the ongoing six month Yahoo Finance Chart of ICLN, TAN and FAN.
World real estate shares fell as can be seen in the ongoing six month Yahoo Finance Chart of WPS, TAO, IYR, and EEM ... WPS, TAO, IYR, EEM
Mortgage REITS, REM, fell 9% on risk aversion to mortgage backed securities.
Semiconductors, SMH, fell 9% lower, leading the Nasdaq, QQQQQ, down as the yen carry traders had massive amounts of monies in stocks such as Cypress Semiconductors, CY, and sold today at any price they could get ... CY
On July 14, 2008, the carry traders, sold commodities, RJI, gold, GLD, and oil, USO, to take profit and go long the financial sector, causing a dollar rally, and a US stock rally, but today the carry traders were forced out of their financial sector positions by the unwinding of EURJPY.
Financial shares, IYF, fell 9%; and thus value shares fell more than growth shares. Rydex S&P 500 Pure Value, RPV, fell 11% and Russell 2000 Value, IWN, 8%.
Regional Banks, IAT, fell 11%. Among losers, Fifth Third Bancorp, FITB, dropped 44 percent, FirstFed Financial Corp, FED, gave up 25 percent, and KeyCorp, KEY, slumped 33 percent, Regions Financial, RF, 41%, Ohio based National City 63%.
Money Center Banks, KBE, fell 15%. Citigroup, C, fell 12%, and Bank of America, BAC, 18%.
Shares of investment bankers tumbled: Goldman Sachs Group Inc, GS, fell 13% and Morgan Stanley, MS, fell 16%; they had dropped by as much as 24 percent and 19 percent.
The Dollar Rally stocks fell: Retail, XRT 6%, Homebuilding, ITB 11%, Consumer Discretionary, XLY 7%.
Trader Tim Knight in article The Best Is Yet To Come relates: The risk/reward on my index puts got so extreme that I sold all of them a few minutes before the close ... Today was the best trading day of my entire life, and, again, the terrific community here is a major part of that. I hope that, in turn, millions of dollars in profits were made amongst the audience here. Thanks, everyone, and I'll write more later today!
Peak US Treasuries Was Likely Achieved Today
Charts of US Government Debt and Interest are as follows:
TLT closed at 97.25
BTTRX closed at 60.08
SHY closed at 83.89
$TYX closed at 41.61
DXKSX, which is 250% inverse of $TNX, closed at 13.22
The 3 month ongoing Yahoo Finance chart of TLT compared to WIP and TIP ... TLT, WIP and TIP
Trust Has Left The Financial System
The Foreign Exchange Currency Outlook article How $200 Billion Of Bad Mortgages Could Have Created Such A Falling Pyramid Effect relates: It’s conceivable that if oil were still falling and if gold were not rallying so strongly that the US dollar could survive this latest “fix” for the financial sector mess.
But oil is rising and gold is rallying, and the perception is spreading that we are probably only half-way through the plans that will be needed, and haven’t even started the economic consequences of the failure. Many other shoes are out there to be dropped, especially now that the Feds have their wallet open for the picking.
We wrote last week that we are happy to see a vigorous initiative from the US government and a comprehensive one instead of the case-by-case situation we have had since Bear Stearns. But don’t be misled—nobody in his right mind can be “happy” about this outcome.
It’s awful in just about every way imaginable.
It favors the institutions that created this mess in the first place (those still standing, that is) and nowhere is there a single provision for the ordinary Joe, whether as mortagee or investor. It may just manage to resolve the liquidity crisis, but it doesn’t solve the problem of under-capitalization of the banks, which still need to raise more funds. With the Middle East and Asian investors already licking their wounds from having jumped in with both feet at the beginning of this crisis, where is the capital going to come from? The need for US government’s action has already demonstrated that the private sector isn’t willing to cough up fresh capital.
This means more bank failures, more mergers, and a giant contraction of credit everywhere in the world, not just the US.
We are having a hard time understanding how $200 billion of bad mortgages could have created such a falling-pyramid effect. It’s true that banks and brokers tried to make a silk purse out of a sow’s ear, with the aid of the ratings agencies, believing modern portfolio theory was the alchemist’s stone, but still, how did something so small become so big?
The answer is that it didn’t.
The $200 billion in liar’s loan mortgages were not magically, virally multiplied to infect every CDO and other alphabet-soup asset class to the extent of $700 billion or $1.5 trillion or any other number.
In fact, because of various accounting and mark-to-model rules, the ultimate owners of a lot of this paper are going to make a tidy profit of it. It’s not bad, just not trusted. (That doesn‘t mean the US taxpayer will get the profit. The agencies tasked with buying and then selling the paper will manage to siphon off the gains to the insiders and interested parties).
The key is “not trusted.” Trust is everything. It’s everything in romance, commerce and finance. In a nutshell, the banks don’t trust one another today, perhaps projecting their own bad actions on others, and the old banker’s principle of “know your customer” is out the window.
You can’t legislate trust.
Critics are moaning about how the fat cats will only get fatter from the bailout while the little guy gets hosed, but anyone with a 401k plan is not complaining too loudly and in any case, the immediate losses or escape from losses is not the main event.
The main event is the loss of trust in society at large, not just the financial sector. The social contract was broken, and it was broken in Washington. Raw naked capitalism may be good at setting optimal prices, but that’s about it. To say total lack of regulation is a necessary corollary of capitalism is to have read no economic history and to misread human nature.
And gosh, isn’t Washington where the rescue is coming from? If a poll were taken today asking the public whether it trusts Wall Street or Washington to “do the right thing,” the answer would be an overwhelming “no.” This is not a political statement (please don’t write) but rather an economic observation.
Trust is essential to economic activity. You need trust to get new companies funded and trade conducted (think of letters of credit, not to mention open account trade). You need trust to let the gas tank in your car go down to one-quarter and not be filling it up every day just to be sure you can get it. You need trust to have a successful economy.
Observers in less developed countries note that the key reason they do not get growth is that they have no banking sector or capital markets.
Well, why not?
In large part because Tribe A doesn’t trust Tribe B.
We can see nothing that Washington or Wall Street can do this week to reverse the situation. In fact, more bad news is surely on the plate. The only thing that can save the US Dollar Outlook now is a Shock from elsewhere, like Germany. (Japan seems safe for the moment.) Aside from the mysterious yen, the US dollar is toast.
The EUR/JPY Unwound Causing Massive Disinvestment From Not Only Stocks But Currencies As Well
The EURJPY is called the Armageddon Trade, and for good reason: as when it unwinds, then it causes terrific disinvestment from the emerging markets, especially so now that the markets are liquidity deprived.
ActionForex EUR/JPY Daily Outlook shows the unwinding to 152.42; it is also seen in these Stockcharts.com charts FXE:FXY Daily ... FXE:FXY Weekly
BNZ New Zealand Dollar, -1.6%
BZF Brazilian Real, -7.0%
FXB British Pound, -1.8%
FXE Euro, -1.3%
FXC Cansdian Dollar, -1.0%
FXA Australian Dollar -3.9%
ICN Indian Rupe -1.8%
CYB Chinese Yuan -0.3%
FXS Swiss Krona -1.9%
The ongoing MSN chart of the Euro, FXE, compared to the Brazilian Real, the New Zealand Dollar, the Australian Dollar and the Indian Rupe shows toay's liquidity meltdown
The Ted Spread Reflects Not Only Liquidity Meltdown But A Total Drought And Absence Of Liquidity
The Ted Spread is a metric of liquidity. It opened at 3.25 today and remained there until close. This high value relates that money and cash is completely out of the financial system. The TED Spread has only been above 3.0% three in its history: immediately prior to the 1987 stock market crash; last week, and two weeks ago when the stock sold off and redemptions from money market accounts forced closure of several big name funds.
These other metrics of liquidity show there was not only a complete liquidity breakdown, but a complete liquidity exhaustion today.
PGF -17% ... Financial preferred
HGI -13% ... International yield hog
JNK - 4% ... Junk bonds
CVY -11% ... Claymore yield hog
CSD - 8% ... Claymore spin off
LQD - 9% ... U.S. investment-grade corporate bonds
HYG - 8%.... High yield bonds
The MSN chart of the preferred shares ETF, PGF, for the period September 11, 2008 through September 29, 2008, reflects how the credit drought tumbled the preferred stocks.
The MSN chart of PGF, HYG, HGI, JNK, CVY, CSD, LQY, and HYG, for the period September 11, 2008 through September 29, 2008, shows the death of liquidity. Liquidity is being drained from the financial system faster than it is being added by liquidity infections from the central banks.
The President Bush's Short Selling Ban Effectively Shut Down The Convertible Bond Market
Tom Lauricella in September 26, 2008 Wall Street Journal article reports: "The Securities and Exchange Commission's ban on short selling of financial stocks has effectively shut down much of the convertible-bond market, a crucial area of financing for struggling companies."
Richard of the Resource Bear News Service reports that the MSN Finance chart of the convertible bond ETFs, CVF, NCZ, NIE, and CHI for the period of September 11, 2008 to September 29, 2008, documents there was significant loss to those invested in convertible bonds: between five and twenty percent; these were off sharply again today
And The President's Ban Terminated Hedge Funds And Long/Short Funds For All Practical Purposes
Rob Curran, Geoffrey Rogow and Joseph Checkler in September 25 Dow Jones article report: "The short-selling ban is taking the 'hedge' out of hedge funds. The Securities and Exchange Commission has banned short sales of roughly 950 financial-related stocks until Oct. 2 ... With their hands tied on those stocks and the algorithms that do much of their trading running into technical hitches, many quantitative and other 'market neutral' hedge funds are drastically reducing trading activity ... Once major buyers and sellers on the stock market, these funds may have to reinvent their models in the event of an extension of the rule beyond Oct. 2. 'There are very, very few short-only funds on Wall Street, so the ban mainly removed long/short funds from the market,' said Dan Mathisson, head of the algorithmic trading unit at Credit Suisse ... 'If they can't put on their short positions, they can't put on their long positions, either. It's just breaking down a lot of their models, and the end result is they're walking away. A lot of funds are reducing the size of their books.'"
Today, the above statements proved true as long short funds were decimated. The best example of a 130/30 ETF is JFT; it fell 12% as is seen in the ongoing three month Yahoo Finance Chart of JFT ... JFT
The Federal Reserve Responded To Today's Liquidity Meltdown By Pumping An Additional $630 Billion Into The System
Scott Lanman and Craig Torres of Bloomberg report that: "The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode".
My comment is that it did little to restore liquidity and nothing to restore trust.
Are All The Reserves Of The US Central Bank Now Gone?
Elaine Meinel Supkis believes that today's $630 Billion was the Fed's Last Bullet: "All the reserves of the Federal Reserve are now gone. The ONLY way the Fed can flood the world with dollars is to beg all the other banks to give us dollars for us to give them. Got that? HAHAHA. This is how the Outer Darkness operates! Up is down and in is out. Everything is the opposite. So the Federal Reserves, which is neither federal nor has reserves, is now the conduit for flash flows of money created out of thin air....by our trade rivals.
I hammer on the issue of trade because money is just another way of saying, 'Trade'. This is why these money games the Fed has been frantically playing are called 'Swaps'. This is basically a 'bait and switch' deal which will turn into a 'switch and steal' operation. The crazy, out of balance world trade system is being kicked back into action via these fraudulent deals between the rival central banks and our foolish Federal Reserve bankers. The game here is to not let the US people know that the jig is up. That we can't run trillion dollar trade or budget deficits!
Indeed, it is not mere irony that this sum we just got via a 'swap' in London is pretty much exactly the size of our trade deficit. This is not coincidence. Or rather, in the Outer Darkness, coincidence is magic and magic is all about having things merge and then in a loud bang, flip into a new system, a new shape, a new reality.
The Derivatives Beast is the darling son of the goddess, Depression who was suckled by her sister goddess, Inflation. He is eating up all our money. The actual dollars. Not merely content with devouring equity values, he is now literally eating dollars. This is why the dollars have to now pour out of our entire system only to disappear. This money is needed to sustain global unbalanced trade. But it vanishes before it can be passed around the planet.
Lord only knows what the Dragon of China is doing with its vast, huge dollar reserves! This $630 billion infusion is one third the size of China's FOREX dollar reserves. Recently, I sat down and calculated Europe's dollar reserves and it was over $600 billion by about $50 billion. So I am also assuming this injection was actually Europe letting the Federal Reserve 'borrow' their dollar reserves!
This is ASTONISHING if it is true. It is another sign that the whole concept of a floating currency with the US as the reserve currency has now officially collapsed! Now we will see a free-for-all as our trade rivals spar to see who replaces the US as a reserve currency".
Meanwhile, the Derivatives Beast burps".
Global Problems Require Global Solutions
A Global Monetary Authority, like that called for Jeffrey Garten in a recent FT.com article, and a chief world banker, will arise to address the challenges to financial stability and liquidity.
Garten’s call for a GMA echoes a piece published in the FT back in June by Timothy Geithner, president of the Federal Reserve Bank of New York, who wrote an article in the Financial Times calling for unified regulation of global banking.
Elaine Meinel Supkis writes: "The creditor nations will join with each other AGAINST the debtor nations. This is natural. Just like when the world went bankrupt and the US was solvent after WWI and then WWII. The US was the top voting entity in global trade and banking organizations.
The new MAO authority will be imposed on us when we finally go bankrupt.
This Brit also wants a global tax. Not on ourselves, we will be the debtor/consumers! No, the sovereign wealth funds, the successful manufacturers and traders will be taxed...so we can consume. This is so stupid, I am not speechless. Heh. Try selling this idea to China!
They will want MAO only if they have veto power".
Central Bankers Effect Political Coup By Nationalizing Banking
Matthew Saltmarsh and Landon Thomas Jr. in New York Times article European Regulators Move Swiftly to Rescue Lenders report: "Just days after Washington brokered the sale of Washington Mutual, the largest American savings and loan, regulators in Britain and Belgium swooped in to engineer rescues of two leading banks with heavy exposure to soured mortgages.
In the latest sign of trouble to hit Europe from the global credit crisis, the Belgian, Dutch and Luxembourg governments announced Sunday a partial nationalization of the Belgian-Dutch financial conglomerate Fortis, involving a combined injection of 11.2 billion euros, or $16.1 billion, from the three governments, which took a 49 percent stake.
Prime Minister Yves Leterme of Belgium, who was joined Sunday by the European Central Bank president, Jean-Claude Trichet, in an unprecedented appearance, announced the accord after a weekend of emergency talks in which the governments had tried to broker a whole or partial sale of the bank to private bidders".
Again Elaine Meinel Supkis writes: "All the G7 nations but Japan are nationalizing all their banking systems. This wave of nationalization sweeping the top financial banking systems is a sign that all are overexposed and all lent far beyond their means. And the era of cheap interest lending was FAKE. I remember how everyone was marveling at the miracle of no inflation. Even as oil prices began their historic, relentless climb and gold shot upwards, everyone at the helm of the G7 nations were smug about cheap lending. Indeed, the US rashly dropped rates to 1% when oil and gold were rapidly climbing!
Instead of being arrested for fraud, reckless endangerment and theft, these same banking gnomes that flooded the world with easy credit right when inflation was certainly taking off are now taking over our governments. For these nationalizations are basically all political coups."
I say these political coups fulfill the bible prophecy of the First Horseman of the Apocalypse. The horse is white signifying conquest over mankind, and the fact the rider has a bow with no arrows, foretells a bloodless political coup.
The Scripture reference is Revelation 6:1-2 where the NIV relates: "I watched as the Lamb opened the first of the seven seals. Then I heard one of the four living creatures say in a voice like thunder, "Come!" I looked, and there before me was a white horse! Its rider held a bow, and he was given a crown, and he rode out as a conqueror bent on conquest".
Here is one artist's rendition of the four horsemen of the apocalypse and here is another artist's rendition.
Arlen L Chitwood relate the Greek word "crown" here is "stephanos" or "conqueror's crown".
Economic and political conquerors will arise to establish ten regional oligarchies of state corporate rule; as well as four rival world powers, consisting of the North being Russia, the East being China and Japan, the South being South America and Africa, and the West being the United States, Great Britain, and Europe.
The leaders will announce Security and Prosperity Framework Agreements, such as the Federal Reserve's TAF, TSLF, and PDCF, and also the SPP, which replace traditional and constitutional law.
Stakeholders, such as the North American Competitiveness Council, that is the NACC, will oversee natural resources, the factors of production and manage the economic institutions of finance, commerce, trade and investment. Societies will be pyramidal in shape. Eventually, a global king, the Antichrist, will rise to rule over mankind.
Again Arlen L Chitwood notes the difference between the Greek words "stephanos" and "diadema", relative to the Antichrist and his kingdom. Stephanos is used of the type crown worn by the Antichrist, when he is first introduced in the book of Revelation (6:2), but later diadema, is used relative to his exercise of delegated power and authority, (12:3; 13:1, 2).
Bank Mergers Escalate As A Means To Prevent Derivative Settlement Events That Arise From Counterparty Exposure
The New York Times reports that Citigroup To Buy Wachovia’s Bank Assets For $1 A Share.
Again Elaine Meinel Supkis remarks : "The derivatives exposure is in the hundreds of trillions of dollars. This is why these rescues are happening simultaneous with frantic law making. The screams we hear are the bankers opening their safes to find the Derivatives Beast inside, munching up all their wealth."
The US Dollar Rose Slightly
The US Dollar, $USD, rose 0.75% to close at 77.57 as most all the world's currencies tumbled ... $USD.
ActionForex reports the USD/JPY lower today at 106.15.
Investment Application
Gold, $GOLD, closed at $894.90 ... $GOLD
Gold, GLD rose 3% today, while oil, USO fell 11%, commodities, RJI fell 8%, world stocks, EFA fell 11%, US Stocks, VTI fell 7%, and the Euro, FXE fell 1% ... GLD
A special note to all those of the Austrian economist persuasion who are preaching, and have been preaching deflation, take note: gold did not deflate today, it inflated.
The facts are in and they establish that gold is the measure and means of preserving wealth in a world of falling oil, commodity, stock and currency wealth.
I am concerned that brokerage accounts are not a safe place to hold money or investments. I know brokerage accounts are insured, but the concern comes from todays massive liquidity meltdown, if brokerages have a liquidity run, that is a liquidity drain, then the insurance would be overwhelmed.
Herb Greenburg in MarketWatch article How To Keep Your Investments Safe recommends a trust account for investments.
I recommend gold and gold alone, as an investment, and that one retain as much personal control over that as possible.
Despite the downside risk of a lower price of gold from its current $894 to $850, $820, with a falling Euro, I believe that gold relative to the Euro, GLD:FXE, gold relative to world stocks, GLD:EFA, and gold relative to US Stocks, GLD:VTI, will maintain value and soon rise considerably more than it has recently ... GLD:FXE ... GLD:EFA ... GLD:VTI
I suggest that to protect against the risk of loss of investment principal, both from market downturn and from brokerage shutdown, that one be invested in "physical gold" in four locations: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.
Keywords
liquidity crisis, liquidity evaporation, liquidity vacuum, evaporation of liquidity, financial system meltdown, financial system breakdown, liquiditymeltdown, liquidity meltdown, liquidity evacuatio
An unwinding yen carry trade, EUR/JPY, FXE:FXY, sent the Euro, FXE, lower which induced a sell off in Asia shares, before the US stock markets opened, as is seen in the ongoing Yahoo Finance Chart of AIA relative to EWJ, JSC, and FXI ... FXE:FXY Daily ... FXE:FXY Weekly ... AIA relative to EWJ, JSC and FXI
Stocks gapped lower upon opening, and immediately went into freefall, ahead of the vote on the President's bailout plan, the Emergency Economic Stabilization Act of 2008, EESA, providing TARP, as can be seen in the five day Yahoo Finance chart of the Nasdaq, QQQQ ... QQQQ
Foreign shares fell on a lower Euro, FXE, as can be seen in the on going six month Yahoo Finance chart of the Proshares 200% inverse ETFs, EFU, EEV, and FXP ... EFU, EEV and FXP
The natural resource shares also fell on a lower Euro, FXE, as can be seen in the ongoing six month Yahoo Finance chart of SLX, XLE, KOL, OIH, GDX and XME ... SLX, XLE, KOL, OIH, GDX, and XME
The MSN Chart of URR, compared to EEM and EEB documents how an unwinding yen carry trade beginning in June 2008, caused terrific destruction to stock market value in the emerging markets, EEM, and in the BRICS, EEB, as carry traders went about to buy yen and repay their 0.5% Bank of Japan loans ... URR as a proxy for the Euro, and EEM, and EEB
The BRICS, EEB, fell as can be seen in the ongoing six month Yahoo Finance chart of RSX, EWZ, FXI and INP ... RSX, EWZ, FXI and INP
Alternative energy fell as can be seen in the ongoing six month Yahoo Finance Chart of ICLN, TAN and FAN.
World real estate shares fell as can be seen in the ongoing six month Yahoo Finance Chart of WPS, TAO, IYR, and EEM ... WPS, TAO, IYR, EEM
Mortgage REITS, REM, fell 9% on risk aversion to mortgage backed securities.
Semiconductors, SMH, fell 9% lower, leading the Nasdaq, QQQQQ, down as the yen carry traders had massive amounts of monies in stocks such as Cypress Semiconductors, CY, and sold today at any price they could get ... CY
On July 14, 2008, the carry traders, sold commodities, RJI, gold, GLD, and oil, USO, to take profit and go long the financial sector, causing a dollar rally, and a US stock rally, but today the carry traders were forced out of their financial sector positions by the unwinding of EURJPY.
Financial shares, IYF, fell 9%; and thus value shares fell more than growth shares. Rydex S&P 500 Pure Value, RPV, fell 11% and Russell 2000 Value, IWN, 8%.
Regional Banks, IAT, fell 11%. Among losers, Fifth Third Bancorp, FITB, dropped 44 percent, FirstFed Financial Corp, FED, gave up 25 percent, and KeyCorp, KEY, slumped 33 percent, Regions Financial, RF, 41%, Ohio based National City 63%.
Money Center Banks, KBE, fell 15%. Citigroup, C, fell 12%, and Bank of America, BAC, 18%.
Shares of investment bankers tumbled: Goldman Sachs Group Inc, GS, fell 13% and Morgan Stanley, MS, fell 16%; they had dropped by as much as 24 percent and 19 percent.
The Dollar Rally stocks fell: Retail, XRT 6%, Homebuilding, ITB 11%, Consumer Discretionary, XLY 7%.
Trader Tim Knight in article The Best Is Yet To Come relates: The risk/reward on my index puts got so extreme that I sold all of them a few minutes before the close ... Today was the best trading day of my entire life, and, again, the terrific community here is a major part of that. I hope that, in turn, millions of dollars in profits were made amongst the audience here. Thanks, everyone, and I'll write more later today!
Peak US Treasuries Was Likely Achieved Today
Charts of US Government Debt and Interest are as follows:
TLT closed at 97.25
BTTRX closed at 60.08
SHY closed at 83.89
$TYX closed at 41.61
DXKSX, which is 250% inverse of $TNX, closed at 13.22
The 3 month ongoing Yahoo Finance chart of TLT compared to WIP and TIP ... TLT, WIP and TIP
Trust Has Left The Financial System
The Foreign Exchange Currency Outlook article How $200 Billion Of Bad Mortgages Could Have Created Such A Falling Pyramid Effect relates: It’s conceivable that if oil were still falling and if gold were not rallying so strongly that the US dollar could survive this latest “fix” for the financial sector mess.
But oil is rising and gold is rallying, and the perception is spreading that we are probably only half-way through the plans that will be needed, and haven’t even started the economic consequences of the failure. Many other shoes are out there to be dropped, especially now that the Feds have their wallet open for the picking.
We wrote last week that we are happy to see a vigorous initiative from the US government and a comprehensive one instead of the case-by-case situation we have had since Bear Stearns. But don’t be misled—nobody in his right mind can be “happy” about this outcome.
It’s awful in just about every way imaginable.
It favors the institutions that created this mess in the first place (those still standing, that is) and nowhere is there a single provision for the ordinary Joe, whether as mortagee or investor. It may just manage to resolve the liquidity crisis, but it doesn’t solve the problem of under-capitalization of the banks, which still need to raise more funds. With the Middle East and Asian investors already licking their wounds from having jumped in with both feet at the beginning of this crisis, where is the capital going to come from? The need for US government’s action has already demonstrated that the private sector isn’t willing to cough up fresh capital.
This means more bank failures, more mergers, and a giant contraction of credit everywhere in the world, not just the US.
We are having a hard time understanding how $200 billion of bad mortgages could have created such a falling-pyramid effect. It’s true that banks and brokers tried to make a silk purse out of a sow’s ear, with the aid of the ratings agencies, believing modern portfolio theory was the alchemist’s stone, but still, how did something so small become so big?
The answer is that it didn’t.
The $200 billion in liar’s loan mortgages were not magically, virally multiplied to infect every CDO and other alphabet-soup asset class to the extent of $700 billion or $1.5 trillion or any other number.
In fact, because of various accounting and mark-to-model rules, the ultimate owners of a lot of this paper are going to make a tidy profit of it. It’s not bad, just not trusted. (That doesn‘t mean the US taxpayer will get the profit. The agencies tasked with buying and then selling the paper will manage to siphon off the gains to the insiders and interested parties).
The key is “not trusted.” Trust is everything. It’s everything in romance, commerce and finance. In a nutshell, the banks don’t trust one another today, perhaps projecting their own bad actions on others, and the old banker’s principle of “know your customer” is out the window.
You can’t legislate trust.
Critics are moaning about how the fat cats will only get fatter from the bailout while the little guy gets hosed, but anyone with a 401k plan is not complaining too loudly and in any case, the immediate losses or escape from losses is not the main event.
The main event is the loss of trust in society at large, not just the financial sector. The social contract was broken, and it was broken in Washington. Raw naked capitalism may be good at setting optimal prices, but that’s about it. To say total lack of regulation is a necessary corollary of capitalism is to have read no economic history and to misread human nature.
And gosh, isn’t Washington where the rescue is coming from? If a poll were taken today asking the public whether it trusts Wall Street or Washington to “do the right thing,” the answer would be an overwhelming “no.” This is not a political statement (please don’t write) but rather an economic observation.
Trust is essential to economic activity. You need trust to get new companies funded and trade conducted (think of letters of credit, not to mention open account trade). You need trust to let the gas tank in your car go down to one-quarter and not be filling it up every day just to be sure you can get it. You need trust to have a successful economy.
Observers in less developed countries note that the key reason they do not get growth is that they have no banking sector or capital markets.
Well, why not?
In large part because Tribe A doesn’t trust Tribe B.
We can see nothing that Washington or Wall Street can do this week to reverse the situation. In fact, more bad news is surely on the plate. The only thing that can save the US Dollar Outlook now is a Shock from elsewhere, like Germany. (Japan seems safe for the moment.) Aside from the mysterious yen, the US dollar is toast.
The EUR/JPY Unwound Causing Massive Disinvestment From Not Only Stocks But Currencies As Well
The EURJPY is called the Armageddon Trade, and for good reason: as when it unwinds, then it causes terrific disinvestment from the emerging markets, especially so now that the markets are liquidity deprived.
ActionForex EUR/JPY Daily Outlook shows the unwinding to 152.42; it is also seen in these Stockcharts.com charts FXE:FXY Daily ... FXE:FXY Weekly
BNZ New Zealand Dollar, -1.6%
BZF Brazilian Real, -7.0%
FXB British Pound, -1.8%
FXE Euro, -1.3%
FXC Cansdian Dollar, -1.0%
FXA Australian Dollar -3.9%
ICN Indian Rupe -1.8%
CYB Chinese Yuan -0.3%
FXS Swiss Krona -1.9%
The ongoing MSN chart of the Euro, FXE, compared to the Brazilian Real, the New Zealand Dollar, the Australian Dollar and the Indian Rupe shows toay's liquidity meltdown
The Ted Spread Reflects Not Only Liquidity Meltdown But A Total Drought And Absence Of Liquidity
The Ted Spread is a metric of liquidity. It opened at 3.25 today and remained there until close. This high value relates that money and cash is completely out of the financial system. The TED Spread has only been above 3.0% three in its history: immediately prior to the 1987 stock market crash; last week, and two weeks ago when the stock sold off and redemptions from money market accounts forced closure of several big name funds.
These other metrics of liquidity show there was not only a complete liquidity breakdown, but a complete liquidity exhaustion today.
PGF -17% ... Financial preferred
HGI -13% ... International yield hog
JNK - 4% ... Junk bonds
CVY -11% ... Claymore yield hog
CSD - 8% ... Claymore spin off
LQD - 9% ... U.S. investment-grade corporate bonds
HYG - 8%.... High yield bonds
The MSN chart of the preferred shares ETF, PGF, for the period September 11, 2008 through September 29, 2008, reflects how the credit drought tumbled the preferred stocks.
The MSN chart of PGF, HYG, HGI, JNK, CVY, CSD, LQY, and HYG, for the period September 11, 2008 through September 29, 2008, shows the death of liquidity. Liquidity is being drained from the financial system faster than it is being added by liquidity infections from the central banks.
The President Bush's Short Selling Ban Effectively Shut Down The Convertible Bond Market
Tom Lauricella in September 26, 2008 Wall Street Journal article reports: "The Securities and Exchange Commission's ban on short selling of financial stocks has effectively shut down much of the convertible-bond market, a crucial area of financing for struggling companies."
Richard of the Resource Bear News Service reports that the MSN Finance chart of the convertible bond ETFs, CVF, NCZ, NIE, and CHI for the period of September 11, 2008 to September 29, 2008, documents there was significant loss to those invested in convertible bonds: between five and twenty percent; these were off sharply again today
And The President's Ban Terminated Hedge Funds And Long/Short Funds For All Practical Purposes
Rob Curran, Geoffrey Rogow and Joseph Checkler in September 25 Dow Jones article report: "The short-selling ban is taking the 'hedge' out of hedge funds. The Securities and Exchange Commission has banned short sales of roughly 950 financial-related stocks until Oct. 2 ... With their hands tied on those stocks and the algorithms that do much of their trading running into technical hitches, many quantitative and other 'market neutral' hedge funds are drastically reducing trading activity ... Once major buyers and sellers on the stock market, these funds may have to reinvent their models in the event of an extension of the rule beyond Oct. 2. 'There are very, very few short-only funds on Wall Street, so the ban mainly removed long/short funds from the market,' said Dan Mathisson, head of the algorithmic trading unit at Credit Suisse ... 'If they can't put on their short positions, they can't put on their long positions, either. It's just breaking down a lot of their models, and the end result is they're walking away. A lot of funds are reducing the size of their books.'"
Today, the above statements proved true as long short funds were decimated. The best example of a 130/30 ETF is JFT; it fell 12% as is seen in the ongoing three month Yahoo Finance Chart of JFT ... JFT
The Federal Reserve Responded To Today's Liquidity Meltdown By Pumping An Additional $630 Billion Into The System
Scott Lanman and Craig Torres of Bloomberg report that: "The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode".
My comment is that it did little to restore liquidity and nothing to restore trust.
Are All The Reserves Of The US Central Bank Now Gone?
Elaine Meinel Supkis believes that today's $630 Billion was the Fed's Last Bullet: "All the reserves of the Federal Reserve are now gone. The ONLY way the Fed can flood the world with dollars is to beg all the other banks to give us dollars for us to give them. Got that? HAHAHA. This is how the Outer Darkness operates! Up is down and in is out. Everything is the opposite. So the Federal Reserves, which is neither federal nor has reserves, is now the conduit for flash flows of money created out of thin air....by our trade rivals.
I hammer on the issue of trade because money is just another way of saying, 'Trade'. This is why these money games the Fed has been frantically playing are called 'Swaps'. This is basically a 'bait and switch' deal which will turn into a 'switch and steal' operation. The crazy, out of balance world trade system is being kicked back into action via these fraudulent deals between the rival central banks and our foolish Federal Reserve bankers. The game here is to not let the US people know that the jig is up. That we can't run trillion dollar trade or budget deficits!
Indeed, it is not mere irony that this sum we just got via a 'swap' in London is pretty much exactly the size of our trade deficit. This is not coincidence. Or rather, in the Outer Darkness, coincidence is magic and magic is all about having things merge and then in a loud bang, flip into a new system, a new shape, a new reality.
The Derivatives Beast is the darling son of the goddess, Depression who was suckled by her sister goddess, Inflation. He is eating up all our money. The actual dollars. Not merely content with devouring equity values, he is now literally eating dollars. This is why the dollars have to now pour out of our entire system only to disappear. This money is needed to sustain global unbalanced trade. But it vanishes before it can be passed around the planet.
Lord only knows what the Dragon of China is doing with its vast, huge dollar reserves! This $630 billion infusion is one third the size of China's FOREX dollar reserves. Recently, I sat down and calculated Europe's dollar reserves and it was over $600 billion by about $50 billion. So I am also assuming this injection was actually Europe letting the Federal Reserve 'borrow' their dollar reserves!
This is ASTONISHING if it is true. It is another sign that the whole concept of a floating currency with the US as the reserve currency has now officially collapsed! Now we will see a free-for-all as our trade rivals spar to see who replaces the US as a reserve currency".
Meanwhile, the Derivatives Beast burps".
Global Problems Require Global Solutions
A Global Monetary Authority, like that called for Jeffrey Garten in a recent FT.com article, and a chief world banker, will arise to address the challenges to financial stability and liquidity.
Garten’s call for a GMA echoes a piece published in the FT back in June by Timothy Geithner, president of the Federal Reserve Bank of New York, who wrote an article in the Financial Times calling for unified regulation of global banking.
Elaine Meinel Supkis writes: "The creditor nations will join with each other AGAINST the debtor nations. This is natural. Just like when the world went bankrupt and the US was solvent after WWI and then WWII. The US was the top voting entity in global trade and banking organizations.
The new MAO authority will be imposed on us when we finally go bankrupt.
This Brit also wants a global tax. Not on ourselves, we will be the debtor/consumers! No, the sovereign wealth funds, the successful manufacturers and traders will be taxed...so we can consume. This is so stupid, I am not speechless. Heh. Try selling this idea to China!
They will want MAO only if they have veto power".
Central Bankers Effect Political Coup By Nationalizing Banking
Matthew Saltmarsh and Landon Thomas Jr. in New York Times article European Regulators Move Swiftly to Rescue Lenders report: "Just days after Washington brokered the sale of Washington Mutual, the largest American savings and loan, regulators in Britain and Belgium swooped in to engineer rescues of two leading banks with heavy exposure to soured mortgages.
In the latest sign of trouble to hit Europe from the global credit crisis, the Belgian, Dutch and Luxembourg governments announced Sunday a partial nationalization of the Belgian-Dutch financial conglomerate Fortis, involving a combined injection of 11.2 billion euros, or $16.1 billion, from the three governments, which took a 49 percent stake.
Prime Minister Yves Leterme of Belgium, who was joined Sunday by the European Central Bank president, Jean-Claude Trichet, in an unprecedented appearance, announced the accord after a weekend of emergency talks in which the governments had tried to broker a whole or partial sale of the bank to private bidders".
Again Elaine Meinel Supkis writes: "All the G7 nations but Japan are nationalizing all their banking systems. This wave of nationalization sweeping the top financial banking systems is a sign that all are overexposed and all lent far beyond their means. And the era of cheap interest lending was FAKE. I remember how everyone was marveling at the miracle of no inflation. Even as oil prices began their historic, relentless climb and gold shot upwards, everyone at the helm of the G7 nations were smug about cheap lending. Indeed, the US rashly dropped rates to 1% when oil and gold were rapidly climbing!
Instead of being arrested for fraud, reckless endangerment and theft, these same banking gnomes that flooded the world with easy credit right when inflation was certainly taking off are now taking over our governments. For these nationalizations are basically all political coups."
I say these political coups fulfill the bible prophecy of the First Horseman of the Apocalypse. The horse is white signifying conquest over mankind, and the fact the rider has a bow with no arrows, foretells a bloodless political coup.
The Scripture reference is Revelation 6:1-2 where the NIV relates: "I watched as the Lamb opened the first of the seven seals. Then I heard one of the four living creatures say in a voice like thunder, "Come!" I looked, and there before me was a white horse! Its rider held a bow, and he was given a crown, and he rode out as a conqueror bent on conquest".
Here is one artist's rendition of the four horsemen of the apocalypse and here is another artist's rendition.
Arlen L Chitwood relate the Greek word "crown" here is "stephanos" or "conqueror's crown".
Economic and political conquerors will arise to establish ten regional oligarchies of state corporate rule; as well as four rival world powers, consisting of the North being Russia, the East being China and Japan, the South being South America and Africa, and the West being the United States, Great Britain, and Europe.
The leaders will announce Security and Prosperity Framework Agreements, such as the Federal Reserve's TAF, TSLF, and PDCF, and also the SPP, which replace traditional and constitutional law.
Stakeholders, such as the North American Competitiveness Council, that is the NACC, will oversee natural resources, the factors of production and manage the economic institutions of finance, commerce, trade and investment. Societies will be pyramidal in shape. Eventually, a global king, the Antichrist, will rise to rule over mankind.
Again Arlen L Chitwood notes the difference between the Greek words "stephanos" and "diadema", relative to the Antichrist and his kingdom. Stephanos is used of the type crown worn by the Antichrist, when he is first introduced in the book of Revelation (6:2), but later diadema, is used relative to his exercise of delegated power and authority, (12:3; 13:1, 2).
Bank Mergers Escalate As A Means To Prevent Derivative Settlement Events That Arise From Counterparty Exposure
The New York Times reports that Citigroup To Buy Wachovia’s Bank Assets For $1 A Share.
Again Elaine Meinel Supkis remarks : "The derivatives exposure is in the hundreds of trillions of dollars. This is why these rescues are happening simultaneous with frantic law making. The screams we hear are the bankers opening their safes to find the Derivatives Beast inside, munching up all their wealth."
The US Dollar Rose Slightly
The US Dollar, $USD, rose 0.75% to close at 77.57 as most all the world's currencies tumbled ... $USD.
ActionForex reports the USD/JPY lower today at 106.15.
Investment Application
Gold, $GOLD, closed at $894.90 ... $GOLD
Gold, GLD rose 3% today, while oil, USO fell 11%, commodities, RJI fell 8%, world stocks, EFA fell 11%, US Stocks, VTI fell 7%, and the Euro, FXE fell 1% ... GLD
A special note to all those of the Austrian economist persuasion who are preaching, and have been preaching deflation, take note: gold did not deflate today, it inflated.
The facts are in and they establish that gold is the measure and means of preserving wealth in a world of falling oil, commodity, stock and currency wealth.
I am concerned that brokerage accounts are not a safe place to hold money or investments. I know brokerage accounts are insured, but the concern comes from todays massive liquidity meltdown, if brokerages have a liquidity run, that is a liquidity drain, then the insurance would be overwhelmed.
Herb Greenburg in MarketWatch article How To Keep Your Investments Safe recommends a trust account for investments.
I recommend gold and gold alone, as an investment, and that one retain as much personal control over that as possible.
Despite the downside risk of a lower price of gold from its current $894 to $850, $820, with a falling Euro, I believe that gold relative to the Euro, GLD:FXE, gold relative to world stocks, GLD:EFA, and gold relative to US Stocks, GLD:VTI, will maintain value and soon rise considerably more than it has recently ... GLD:FXE ... GLD:EFA ... GLD:VTI
I suggest that to protect against the risk of loss of investment principal, both from market downturn and from brokerage shutdown, that one be invested in "physical gold" in four locations: the gold ETF, GLD, directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins.
Keywords
liquidity crisis, liquidity evaporation, liquidity vacuum, evaporation of liquidity, financial system meltdown, financial system breakdown, liquiditymeltdown, liquidity meltdown, liquidity evacuatio
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