National ISM Hits Highest Level Since May

EconomicPolicy Journal posts the chart showing that the National ISM Hits Highest Level Since May.

ISM is showing strong results as moneyness has come to US manufacturing through a rising 30 10 sovereign debt yield curve, $TYX:$TNX, up until October 2010, on anticipation of Quantative Easing 2, that is QE 2 and yen carry trade and dollar carry trade stimulating investment in US based global stocks, that is the Morgan Stanley Cyclicals Index, $CYC.  Moneyness also came through a flight to supposed safety US companies on concerns of European Sovereign Debt Crisis and Banking Crisis. And moneyness came through a rising 30 Year US Government Bond, EDV, up until Ben Bernanke announced QE 2 in August 2010, which can be seen in the Morgan Stanley Cyclicals Index relative to the 30 Year US Government bond, $CYC:EDV, rising: the chart of $CYC:EDV has the same wave structure as the EconomicPolicy Journal’s ISM activity. 

I expect the currency traders to reinstitute the global currency war that they started November 4, 2010 against the world bankers for control of the worlds people and resources: 2011 will be the year of competitive currency deflation, that is competitive currency devaluation, at the hands of the FX traders as bond vigilantes call interest rates high on the European Sovereign Debt Crisis and Bank Debt Crisis as well as on the fact that Ben Bernanke’s Quantative Easing, QE 2, and US Deficit Spending, constitutes monetization of debt. I envision that all currencies, probably led by the Swiss Franc, FXF, will be falling lower in early January with the US Dollar, $USD, rising for a brief period. All currencies will be heading lower at differing rates: FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, CYB, BZF, XRU, FXY, BNZ, DBV, CEW.  In Terminator Fashion, It’s hasta la vista baby to the neoliberal Milton Friedman Free To Choose currency regime.

Debt deflation will be active in 2011.

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

As most are painfully aware banks will need to revive, that is renew their balance sheets soon with new debt issue. No one, nada, absolutely no one, is going to buy bank debt. Investors are short selling European bank debt and buying credit default swaps on the banks.

I see a strong down draft in world stocks, ACWI, and VT, and in European Financial Institutions, EUFN, in particular; as well as increasing sovereign debt interest rates such as the Interest Rate on the 30 Year US Government Bond, $TYX, and the Interest Rate on the 10 Year Us Government Note, $TNX, and thus a decrease in Treasury Bonds, such as EDV and BWX.

The 30 Year US Treasuries, EDV, entered an Elliott Wave 3 Down on September 28, 2010.

Debt deflation will be turning ISM down.

I expect to see a crack up boom in certain commodities. 

Anticipation of QE 2 inflated Commodities such as Food, FUD, Gasoline, UGA, Heating And Other Oils, DBC, Small Cap Pure Value Stocks, RZV, And Russell 2000 Growth Stocks, IWO, as seen in the chart of EDV, compared with UGA, RZV, and IWO. When the European Stocks, VGK, are added to the chart, it shows that European Shares lost value, after the European Leaders met in Summit on December 15, and failed to come to a comprehensive solution to the European Sovereign Debt and Bank Debt Crisis; this is what analyst John Mauldin referred to as kicking the can down the road. Inflation has not shown up in CPI data (as it strips out food and energy). Housing prices have deflated on both a higher interest rate, and expiration of federal government buying incentives, that is subsidies.

Eileen E. Jacobs writes: “Money flowing into hard assets, especially precious metals, JJP,  is another unintended consequence of QE2. As faith in paper currencies drop, investors look for ways to reduce exposure to them. Precious metals have had an outstanding 2010. Although it’s hard to determine what the fair value is for precious metals, particularly gold, GLD, the logic is that they’re inflation proof and it will always be worth something.”

She continues:  “Oil prices, food prices, and assets in emerging markets have all been going higher. Investors are sending their capital to foreign countries to find better opportunities. Brazil, India, and China are benefiting from this. An investor has more opportunity from investing in a country with a fast growing economy. Receiving income in a currency that is strengthening against the dollar is an added bonus. The more money the Fed prints, the more money that gets invested elsewhere.”

Australia, EWA, and South Africa, EZA, have been hot money flow destinations with yen carry trade investments levering up their share values. The Australian Dollar – Yen carry trade, seen in FXA:FXY, and the South African Rand – Yen carry trade, SZR:FXY, have maintained strength. Investment value has been sustained in the whole spectrum of Australian shares: Australian Small Caps, KROO, and Australian Banking, WestPac Banking, WBK.   

The ETF, FUE, tracks not only alternative fuels, but cooking oils, as well; it has seen strong  growth. These oils along with agricultural commodities, RJA, and food commodities, FUD, are likely to continue to see investment support and moneyness coming from fears of sovereign default. I believe that China money tightening, that is higher interest rates, will turn down base metal prices, DBB. Given eventual debasement of the US Dollar, $USD, by central bank activities, investors are likely to pour  money into heating and specialty oils, DBC, as well as West Texas Intermediate Crude, $WTIC, traded by the oil ETF, USO. I believe falling aluminum prices, JJA, and falling copper prices, JJC, will turn down Alcoa Aluminum, AA, Southern Peru Copper, SCCO, and Freeport McMoRan Copper and Gold, FCX. And fertilizer manufacturer Potash Corp, POT, having double topped out, will be turning down.

It’s my belief that as more and more experience unemployment, Gasoline Prices, UGA, will effectively be inflationary, as they consume a greater proportion of ones limited income.

I believe that timber prices, CUT, have double topped and that investment asset prices of wood and lumber manufactures such as Koppers Holdings, KOP, will fall.

Javier Blas of Financial Times reports on December 22, 2010:  “Mexico has taken the unusual step of insuring itself against the effect of rising corn prices on tortilla, a food staple for millions in the country, in the latest sign of growing concern about food inflation in emerging countries. Rising food inflation has become a big headache in countries from Mexico to China and India as bad weather has ruined crops, forcing prices up.  Food accounts for up to half of all household spending in emerging countries, compared to just 10 to 15% in Europe and the US.”

Tushar Dhara and Pratik Parija of Bloomberg report on December 23, 2010:  “India’s food inflation accelerated to a six-week high, adding pressure on authorities to curb a jump in onion prices that has forced the nation to halt exports of the staple this week and toppled governments in the past.  An index measuring wholesale prices of agricultural products including lentils, rice and vegetables compiled by the commerce ministry rose 12.13%. .. from a year earlier.”

Barry Gray of WSWS.org writes   “Natural disasters are also playing a role. Drought in the Black Sea region cut Russia’s wheat harvest by a third this year. Unusually hot and dry weather in Argentina and other Latin American crop exporting nations is threatening to further reduce the volume of corn, wheat and soybeans on world markets.”

“Such natural factors, however, are exacerbated by the impact of national divisions on the global economy. Russia responded to the failure of its crop by imposing an export ban on wheat. Similarly, India has imposed an export ban on onions. The effect of such measures is to increase the upward pressure on prices worldwide.”

“A major factor in the rise in corn prices is the diversion of a third of US corn production to the more profitable production of ethanol in 2010. On the global commodity markets, wheat and corn have increased almost 50 percent over last year. Wheat prices soared to their highest level in over two years this week.”

“Overall, world commodity prices, DJP, have risen by 25 percent over the past six months. The European debt crisis and the Federal Reserve’s cheap-dollar policy have, according to the Journal (December 27), “driven investors to hard assets.”

“Oil, $WTIC,  is now at $90 a barrel, nearing a 26-month high. The sharp increase in oil prices drives up transport costs for food and other commodities.”

Michael Pinto relates Rising Rates Reveal Debt Reality:  “As the issuer of the world’s reserve currency, the US government has enjoyed the benefits of low-interest rates despite its inflationary practices. When we run a trade deficit with a country like China, they have a strong incentive to ‘recycle’ the deficit back into our dollars and Treasuries. This practice has hidden what would otherwise be much higher borrowing costs and much lower purchasing power for the dollar. This artificial price signal allows people like Paul Krugman to claim that the Obama Administration’s stimulus programs should be much larger. Because our yawning fiscal deficits have not driven bond yields significantly higher, he sees no reason to curtail spending. Krugman wants to spend like its World War III, and then has the nerve to call those worried about the budget mindless zombies!”

“Krugman is just one partisan Democrat shouting at mirrors, but the misunderstanding has struck the right-wing as well. Last week, in a debate with me on CNBC’s The Kudlow Report, Brian Wesbury, Chief Economist of First Trust Advisors and writer for The American Spectator, claimed that our $9.3 trillion national debt is of little consequence because our GDP is a far greater. However, he failed to note that our $14.7 trillion of GDP only yields about $2.2 trillion in revenue for the Treasury. To fully access that entire GDP, the government would have to raise all tax brackets to 100% without producing any reduction in output or decrease in revenue. This is, of course, preposterous. As was demonstrated in the 1970s, even small increases in marginal tax rates have a substantial negative impact on output. A healthier appraisal would center on the fact that our publicly traded debt is now 422% of our annual tax revenue.”

“Wesbury did mention that if the government could not raise revenue to pay off the bonds, it could simply monetize the debt with few significant consequences. Apparently, paying back one’s creditors in worthless paper is not technically “default” to an economist.”

“So neither Krugman nor Wesbury, both intelligent, highly educated economists, see our current course leading to imminent crisis. Unfortunately, both have been led astray by the low debt service ratio which has masked our economy’s underlying insolvency. To see through the haze, you have to look at the numbers behind this so-called “deleveraging consumer” and then look at the debt of the nation.”

“Meanwhile, the average maturity on our debt has declined to 5.5 years. Compare that with the UK’s gilts, which average about 14 years, or even to Greece’s bonds, which average about 8 years. Falling interest rates and reduced durations have merely given the illusion of solvency to the US as compared to these other ailing sovereigns.”

“Right now, the US national debt is the biggest subprime ARM of all time. Much like homeowners who thought they could afford a mortgage that was 10 times their annual incomes, Messrs. Krugman and Wesbury are blinded by deceptively low current rates of interest. These ostriches won’t poke their heads up to see the writing on the wall: low rates and quantitative easing cannot coexist for long. As rates continue to rise, the reality of US insolvency will be revealed.”

The so called flight to safety out of Europe and away from the European sovereign debt and European banking debt imbroglio has been so strong, that the US based growth companies, that is the Russell 2000 Growth Stocks, IWO, have soared to an all time monthly high as seen in Yahoo Finance historical data record and Finviz chart; and investors have embraced the Small Cap Pure Value, RZV, shares to almost the all time high seen in April 2007 when the Financials, XLF, turned down with the onset of sub prime crisis. Small cap growth stocks rising included the small cap energy shares XLES. 

The ratio of the Small Cap Pure Value Relative to the Small Cap Pure Growth Weekly, RZV:RZG Weekly, shows moneyness coming to these shares on risk avoidance of the European sovereign crisis since December 1, 2010; as well as on sympathy for the year-end bonus rise in the investment banking shares, KCE, such as Goldman Sachs, GS, and American Capital, ACAS,  Small Cap Pure Value Shares that were monetized by Ben Bernanke’s QE 2 include Dollar Financial, DLLR, EZ Corp, EZPW, Morningstar, MORN, New Star Financial, NEWS, Nicholas Financial, NICK.    

Anticipation of QE 2 and a rising Euro, FXE, coming from anticipation of good bank stress test results, gave moneyness to the Moran Stanley Cyclicals Index, $CYC, that is stimulated investment in the economic growth and expansion stocks, such as Deere, DE, Freeport-McMoRan Copper & Gold, FCX, Temple Inland, TIN,

Utilities are both interest rate sensitive and Euro, FXE, sensitive. Utilities, XLU, entered an Elliott Wave 3 of 3 Down on December 28, 2010.

The year ending with in an upswing in world government bonds, BWX, and international corporate bonds, PICB, putting in a likely Elliott Wave 2 up and ready to enter an Elliott Wave 3 Down.

Falling global interest rates this week stimulated major currencies, DBV, and emerging market currencies, CEW, to rise which took the small caps excluding the US, VSS, higher and emerging Market Shares, EEM higher. Brazil small caps, BRF, South Korea small caps, SKOR,  India small caps, SCIF, Canada small caps, CNDA, Taiwan Small Caps, TWON, Australia small caps, KROO, and Japan Small Caps, JSC rose higher. India, INP, Brazil, EWZ, Turkey, TUR, Indonesia, IDX, Chile, ECH, all rose. Japan, EWJ, Mexico, EWW, Russia, RSX, Austria, EWO, Switzerland, EWL, Sweden, EWD, Asia High Yielding Securities, DNH, Europe Small Cap Dividends, DFE, Israel, EIS, and South Africa, EZA, Taiwan, EWT, rose to new rally highs.

The Shanghai shares, traded by Morgan Stanley A Share Fund, CAF, entered into an Elliott Wave 3 Down on December 14, 2010 as they fell from a December 13, 2010 price of 28.55; this in response to China Interest tightening. What a difference between shares depreciating in value because of central bank policy and the Small US Energy Producers, XLES, shares inflating in price because of a flight to safety from central bank policy.  

In conclusion, I expect the US Dollar, $USD, to go up as world currencies, DBV, fail and the emerging market currencies, CEW fail. I expect the S&P, SPY, to turn down on falling global currencies as interest rates go higher. I expect most commodities, with the exception of Aluminum, JJA, copper, JJC, Tin, JJT, Nickle, JJN, and Lead, LD, to go higher as investors see Bernanke’s QE2 and Obama’s  Deficit spending as monetization of debt. Yes, currencies, with the exception of the US Dollar, $USD, stocks, VT, Bonds, BND, such as world government bonds, BWX, international corporate bonds, PICB, US Treasuries, EDV, and TLT, are going lower. There is coming a crack up boom in commodities. As you probably know, I do not have a brokerage account  as I believe that an investment flameout is coming soon, where one may not have immediate access to one’s brokerage account; therefore I have decided to invest in gold bullion as a provision for an easily traded investment

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