Greetings,

Happy New Year to all!

The first trading day of 2010 began with a bang.  Everything was looking up – mainly inflation.  Of course, it’s only one day in a long year.  The macro-level view is still firmly in the deflationary camp.

The US Federal government did a very “respectable” job of creating massive amounts of new debt in 2009.  They were also quite successful in getting citizenry to enter into new debt through various programs such as “cash for clunkers” and the “first-time homebuyers tax credit”.  We’ve seen the home tax credit extended, and revised to allow even certain current homeowners to sell their house and enter into a fresh 30-year mortgage debt on a new property.

Federal government debt spending is the only thing standing between us and a full-fledged depression.  Should we be congratulating our Congress and President for attempting to spend their way out of a depression?  No – for a number of reasons. First, all new government debt is actually just claims on our future labor.  Every dollar that they spend adds one more pound to the yoke of servitude and slavery around our necks.  Second, trying to spend ones way out of a depression won’t work.

I have often talked about keeping at least a one-month supply of food (rotated to keep fresh) and a one-month supply of cash-on-hand.  Is this just “The Boy That Cried Wolf?”  I can only answer this way.  I have studied economics for a long time, and have created a detailed hypothesis of what is currently happening in our economy.  If this hypothesis is accurate then the one-month of supplies will work out very well.  If the hypothesis is wrong then you won’t have to go grocery shopping quite as often. J

All I encourage is this: Watch the credit markets.  This is where the story is being told.  It’s a slow-moving train wreck, but the engines are still heading towards each other.  I don’t believe that we’ll see the start of the next downturn come out of the US, it will probably be somewhere in Europe – although Asia is a distinct possibility.

Watch Japan.  They are the only ones openly admitting to deflation right now: Japan Return to ’91 GDP Gives Market Mega Risk Crisis.

We also see Singapore reporting some very deflationary numbers for the fourth quarter of 2009: Singapore's economy shrinks annualized 6.8% in Q4.

Great Britain is mired in deflation: Bank of England considering extension of quantitative easing programme.

Even the country of Qatar is seeing credit destruction: Central bank stops loans to public sector.  This is an attempt to set up a monetary union in the region.

Things are changing quite fast.  Have joy in the new year, but don’t believe the government propaganda.  This recession is far from over.

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Watch for these indexes to drop:

Chinese Shanghai Composite Index: 3,277.14 (change of 0.31% from July 20, 2009 base value of 3,266.92)
Shenzhen Stock Exchange Component Stock Index (SSE): 13,533.54 (change of 1.14% from July 20, 2009 base value of 13,381.22)
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Here are today’s numbers for the economic indicator:

1) Gold = $1,120.90
2) Dollar Index = 77.48
3) Oil = $81.51
4) S&P 500 Index = 1,132.99
5) 3-month Treasury Bill yield = 0.05
6) 3-month OIS = 0.16

HEI = 31.53

(A value of under 100 indicates deflation, while over 100 indicates inflation – as referenced to Sept. 12, 2008…the day before Lehman Brothers collapsed)



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Here are the numbers for the day:

Dollar Index adjusted indexes:
Dow = (10,583.96) x (0.7748) = 8,200.45
S&P 500 = (1,132.99) x (0. 7748) = 877.84
Nasdaq = (2,308.42) x (0.7748) = 1,788.56

3-month Treasury: 0.05

2-year Treasury: 1.06

10-year Treasury: 3.82

30-year Treasury: 4.64

2-yr vs. 10-yr Spread (Target > 273): 276 basis points – (Danger Zone)

2-yr vs. 30-yr Spread (Target > 369): 358 basis points

3-month LIBOR: 0.25

3-month EURIBOR: 0.70

3-month OIS: 0.16

TED Spread: 20 basis points

LIBOR/OIS Spread: 9 basis points

Dollar Index: 77.48

Volatility Index: 20.04

JPY-EUR Exchange Rate (Target < 115): 133.1956

JPY-GBP Exchange Rate (Target < 145): 148.7224

JPY-USD Exchange Rate (Target < 90): 92.247

USD-EUR Exchange Rate (Target < 1.25): 1.4411

USD-CNY Exchange Rate (Target > 7.0): 6.8273

Warmly,

Brad

Comments or questions?  brhamill@hamill.com