This will be a quick Economic Update this evening.  Let’s analyze some of the numbers shown below.

I need to repeat my common mantra: The following information is only my personal opinion.  It should not be taken as investment advice, nor necessarily be used in investment decisions.

First, the Chinese stock market is off about 8% from last July.  My calculations show that breaking the 20% level will begin to cause a faster unraveling of the international markets.  Will it get there?  I don’t know for sure….but I fully expect it to.

The spreads between the 2-yr vs. 10-yr and 2-yr vs. 30-yr US treasuries have been in the danger zone for a little while.  However, they seem to be possibly on the verge of getting even more dangerous.  This would surprise me somewhat, since the Fed has thus far done a great job of currency manipulation in order to keep the spreads reined in a little bit.  If the spreads increase even more from current values then look for things to get bad pretty fast.

The US Dollar Index continues its climb.  It currently sits just below 80.  Notice how we no longer see all of the news articles telling us how the dollar is going to be destroyed?  This will have a negative effect on the price of commodities, such as gold and oil.  Watch for commodities to decrease in value as the US dollar strengthens.

A stronger US dollar does not show economic improvement – even though it would seem as such.  Instead, it shows just how desperate the Federal government is getting – since they want a weaker dollar in order to drive export sales to other nations.  The strong dollar is a result of major deflationary pressure.  Look for the US Dollar Index to rise into the mid 90’s.  I wouldn’t be surprised at all to see it break 100.

Watch for European currencies to continue weakening against the US dollar.  The European Union is entering a period of very high instability.  I expect that the member countries may very well splinter off as time goes on.

Right now is probably the absolute worst time to be purchasing a home – even if the purchase is made with cash.  Look for current home prices to drop another 30-50% from current levels as this all plays out.

Likewise, now is probably the absolute best time to be selling a house and renting instead – assuming that there is still a decent-sized mortgage due on the home.  Many more people will be finding themselves under water on their mortgage vs. home value.

It would be very wise to create multi-level financial plans within families.  This would include plans for “What to do if a minor recession continues for the next 12 months” to “What to do if a major depression becomes evident, and lasts for at least the next 9 years”.  Some things to think about are the usual, like jobs, living arrangements, helping out those in need – to others that may not be as clear: Is a college education the best use of resources for a teenager? What are the plans if sons and daughters are drafted into a new war?

This Update is not very “cheery”, but is meant to create conversation around many events that may happen – and quite a number that I fully expect to happen.
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Watch for these indexes to drop:

Chinese Shanghai Composite Index: 3,003.83 (change of 8.05% from July 20, 2009 base value of 3,266.92)
Shenzhen Stock Exchange Component Stock Index (SSE): 12,262.57 (change of 8.36% 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 = $1,109.30
2) Silver = $16.37
3) Dollar Index = 79.41
4) Oil = $76.97
5) S&P 500 Index = 1,097.28
6) 3-month Treasury Bill yield = 0.09
7) 3-month OIS = 0.15

HEI = 33.91

(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 = (10,270.55) x (0.7941) = 8,155.84
S&P 500 = (1,097.28) x (0. 7941) = 871.35
Nasdaq = (2,190.91) x (0. 7941) = 1,739.80

3-month Treasury: 0.09

2-year Treasury: 0.87

10-year Treasury: 3.70

30-year Treasury: 4.64

2-yr vs. 10-yr Spread (Target > 273): 283 basis points – (Danger Zone)

2-yr vs. 30-yr Spread (Target > 369): 377 basis points – (Danger Zone)

3-month LIBOR: 0.25

3-month EURIBOR: 0.66

3-month OIS: 0.15

TED Spread: 16 basis points

LIBOR/OIS Spread: 10 basis points

Dollar Index: 79.41

Volatility Index: 21.60

JPY-EUR Exchange Rate (Target < 115): 126.4508

JPY-GBP Exchange Rate (Target < 145): 144.6352 – (Danger Zone)

JPY-USD Exchange Rate (Target < 90): 90.977

USD-EUR Exchange Rate (Target < 1.25): 1.3899

USD-CNY Exchange Rate (Target > 7.0): 6.8266

Warmly,

Brad

Comments or questions?  brhamill@hamill.com

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