The Age Of Deleveraging Will See A Fast Fall In The Morgan Stanley Cyclicals Index As Well As A Fast Fall Small Cap Shares

I … CLN in Uttercorrelated writes on the soon coming Age of Deleverage and Redemptions.

In the video clip of Charlie Rose interview from 1994, with Sir James Goldsmith and Laura Tyson, Chair of the US President’s Council of Economic Advisers during the Clinton Administration, CLN remarks: “The interview is not only prophetic, but presents the voice of reason and truth (Sir James Goldsmith) dismantling the unnatural globalization illusion, perpetrated with the sole obsession of increasing corporate profits by any means (Laura Tyson). At about 38:10 , Sir James Goldsmith says something very important:

“[…]we are destroying the stability of our societies because we are worshiping the wrong god: Economic Index.[…] The economy, like everything else, is a tool which should be submitted to the fundamental requirements of the society.

What amazes me is that almost nobody goes to the core of the problem, identifying what the “globalization” we have had and known for the past 20 years really is: an unsustainable productivity/profitabity fraud.

In a comment, here on this blog, Quadi said: “As a matter of fact, one can directly map the repeal of Glass Steagal with the decline of net interest margins: banks weren’t making enough money doing the usual C&I lending and vanilla underwriting: commercial paper had taken a chunk out of their wallets! Since G-S was repealed, earnings soared (until recently).”

The securitization has been nothing else than a profit reporting scam, cloaked in deregulation, veiled in irresponsible leverage and hidden in risk representation fraud.

The same is with the whole corporate vision of globalization:

  • There was no global increase in farming productivity. The poor farmers in less developed countries are not obtaining higher yields. They are just unable to compete anymore with cheap food imports from developed countries. The globalization in agriculture has resulted in Africa in a class/cast of destitute people completely dependent on international food aid, in slums and favellas growing at the outskirts of developing-world cities or even in peasant uprisings (as in Chiapas). Moreover, farmers in developed countries have no real benefits, being more and more swamped in debt, while the big agro industrial business, which was supposed to be the main beneficiary of the “globalization” in agriculture …. now, after the commodes bubble, is in free fall.
  • There was no real global increase in manufacturing productivity. Most of the manufacturing outsourced to developing countries has not become more productive after relocation. By the contrary, but the productivity decrease has been artificially compensated by lower wages and local government subsidies, obtained usually through currency manipulation schemes of various Ponzi flavors.
  • There was no real global increase in trade profitability. For that I have just three words: Dry Baltic Index. If I pretend I have money to spend and you pretend you can make the products cheaper, that doesn’t bring a real benefit from commerce. That is just an Enron-style trade fantasy.
  • There was no significant or real increase in the profitability of services in the developed world: Indian call centers and landscaping by illegal immigrants.
  • There was no real increase in the profitability of the financial sector on the global level and not even in the developed world (please, just don’t get me started here).

What we were sold as “globalization” has been nothing else than a Dark Age for Productivity and Profitability, in which corporate profits have been extracted in an unsustainable and wasteful drive. This will end now, one way or the other. The current model is not even good for corporations anymore.

II … Yes, the current economic model is not good. It is about to go from bad to worse.

A … The Morgan Stanley Cyclicals Index shows peak risk and peak growth has been achieved.
The ratio of the Morgan Stanley Cyclicals Index, $CYC, to the DOW Industrials, $INDU, $CYC:$INDU, is at an all time high suggesting that peak value has been achieved in the stocks which reflect investment in growth opportunities. Said another way, peak wealth and peak expansion of growth stocks, specifically risk stocks like Freeport McMoRan Copper and Gold, FCX, has been achieved. The world is at the point of peak risk and full investment expansion. Might there come a prick in the global investment bubble even very soon?

The euro yen carry trade, that is the EUR/JPY, seen in the chart of FXE:FXY, has been the defacto driver for the Morgan Stanley Cyclicals Index, $CYC, of 30 leading economic growth companies.

A fall in the Euro, FXE, coming from the European Sovereign Debt and Bank Debt Crisis will send Global Stocks, VT, lower; these completed an Elliott Wave 5 up at 47.45 on December 22, 2010.

Other carry trades which will be unwinding, causing a deleveraging of stocks are:

The British Pound Sterling Yen Carry Trade — FXB:FXY

The Canadian Dollar Yen Carry Trade — FXC:FXY

The Indian Rupe Yen Carry Trade — ICN:FXY

The New Zealand Yen Carry Trade — BNZ:FXY

The South Africa Rand Yen Carry Trade — SZR:FXY

The Swedish Krona Carry Trade — FXS:FXY

The Mexico Peso Yen Carry Trade — FXM:FXY

The Brazilian Real Yen Carry Trade — BZF:FXY

The Emerging Market Currencies Carry Trade … CEW:FXY

The Australian Dollar Yen Carry Trade — FXA:FXY is overvalued; I believe a rapid fall is coming to BHP Billiton, BHP, Australia, EWA, Australia Small Caps, KROO,  and Westpac Banking, WBK,

And even more dramatically overvalued is The Oil Yen Carry Trade — USO:FXY; oil will be rapidly falling lower in value.

The Metal Commodity Aluminum — JJA is overvalued; look for a fall in Alcoa Aluminum, AA; its chart shows a parabolic rise in value. 

The Metal Commodity Copper — JJC is overvalued; look for a fall in copper miners, COPX.

The Commodities — DBC, shows a parabolic rise; this cannot and will not be sustained.

The Base Metals — DBB  likely entered an Elliott Wave 3 own at 23.81 on December 22, 2010; look for a fast fall in Global Industrial Metal Producers, CRBI.

Metal Manufacturing companies, XME, such as Chicago Bridge & Iron Co — CBI, will be falling quickly in price.

B. The ratio of the Small Cap Value Shares Relative To Small Cap Growth Shares Daily, RZV:RZG , shows topped out, suggesting that the rise in small cap value shares is done and over.

I cover the topping out of small cap stocks at great length in my article Stocks And Commodities Manifest Three White Soldiers As The Euro Falls Lower.

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