By Nico Isaac

Everywhere you look, the mainstream financial experts are pinning on their “WIN 2″ buttons in a show of solidarity against what they see as the number one threat to the U.S. economy: Whip Inflation Now.

There’s just one problem: They’re primed to fight the wrong enemy. Fact is, despite ten rate cuts by the Federal Reserve Board to record low levels plus $13 trillion (and counting) in government bailout money over the past three years — the Demand For and Availability Of credit is plunging. Without a borrower or lender, the massive supply of debt LOSES value, bringing down every exposed investment like one long, toppling row of dominoes.

This is the condition known as Deflation.

And, in a special, expanded November 19, 2009 Elliott Wave Theorist, Bob Prechter uncovered more than a dozen “value depreciating” developments underway in the U.S. economy as the two main engines of credit expansion sputter: Banks and Consumers. Off the top of the Theorist’s watch list are these “Continuing and Looming Deflationary Forces”:

• A riveting chart of Treasury Holdings as a Percentage of US Chartered Bank Assets since 1952 shows how “safe” bank deposits really are. In short: today’s banks are about 95% invested in mortgages via the purchase of federal agency securities. Unlike Treasuries, IOU’s with homes as collateral have “tremendous potential” to fall in dollar value.
• Loan Availability to Small Businesses has fallen to the lowest level since the interest rate crises of 1980. In Bob Prechter’s own words: “The means of debt repayment [via business growth] are evaporating, which implies further deflationary pressure within the banking system.”
• An all-inclusive close-up of the Number Of Banks Tightening Their Lending Standards since 1997 has this message to impart: Since peaking in October 2008, lending restrictions have soared, thereby significantly reducing the overall credit supply.
• Both residential and commercial mortgages are plummeting as home/business owners walk away from their leases at an increasing rate.
• The major sources of bank revenue — consumer credit and state taxes — are plunging as more people opt to pay DOWN their debt. Also, a compelling chart of leveraged buyouts since 1995 shows a third catalyst for the credit binge — private equity — on the decline.

All that is just the beginning. The November 2009 Elliott Wave Theorist includes 13 pages of commentary, riveting charts, and unparalleled insight that make it impossible to ignore the deflationary shift underway in the financial landscape. For that reason, we have compiled the most timely insights from the entire, two-part Theorist in a special article for Club EWI members. In our opinion, this bundle of exclusive Theorist excerpts are “the most important investment report you’ll read in 2010.”

Elliott Wave International’s latest free report puts 2010 into perspective like no other. The Most Important Investment Report You’ll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Popularity: 1% [?]

By Editorial Staff

Over 100 banks are opening soon, buying junk bonds is gaining popularity and emerging markets are the trendy investment. Sound familiar? Europe appears to be returning to some bad investment habits. 

The following is an excerpt from the February issue of . For a limited time, you can visit Elliott Wave International to download the rest of the 100+ page issue free.

Just as in 2007, huge bullishness in concert with no fear is cropping up. Central and Eastern European (CEE) debt markets, for example, are clearly back on investors’ radar. UniCredit of Italy plans to open 100 banks across the region, while Erste Bank of Austria is preparing 70 more in Romania. Raiffeisen International, also of Austria, is getting ready to launch an internet-based banking system to serve the region as well.

Likewise, the European junk bond market, which effectively died after the financial crisis, has bounced back to life along with the rally. At 70%, total returns on western European junk bonds were more than double those on the FTSE All Share Index in 2009. Moreover, the trend is accelerating. The week of January 11 was the second largest week ever seen in European junk bonds, according to the Financial Times, as companies sold $11.7 billion worth of high-yield debt. Predictably, bankers are ramping up their expectations for 2010. Experts forecast about €50 billion in new issuance in the coming year, a number that nearly doubles what the market has produced in its best years. Says one portfolio manager discussing the market: A “virtuous-circle effect” will take place in 2010. “There was a time when German companies, for example, would think it was a social insult to be a junk bond, but now you are seeing [them] use the market as a mainstream tool for financing.”

That’s on the corporate side. On the sovereign side, shaky debtors and giddy investors are also fully recommitted. For the first time ever, Moody’s upgraded JP Morgan’s Emerging Market Sovereign Bond Index from “junk” to “investment grade.” January’s upgrade occurred in spite of the sovereign default risk growing in countries like Greece, Spain, and Italy (see Secondary Markets), but that’s not stopping yield-starved investors from buying.

Barings Asset Management and HSBC are reportedly increasing their exposure to emerging markets. So is bond giant, Pimco, which calls emerging-market debt an “asset class on the upward path.” Its portrayal, however, merely describes the last 10 months of market action. The index shown on the previous page tracks emerging-market bond yields in their local currency. Just like trader sentiment numbers, yields are firmly back to pre-crisis levels. But extrapolating the last 10 months forward may be one of the most dangerous bets around. When the financial community recklessly returns to play with the loaded firearms from the prior mania, it’s a tell that a bear-market rally is ending. Most will again shoot themselves in the foot.

Read the rest of this issue now free! You’ll get 100+ pages of insights about:

• World Stock Markets
• Global Interest Rates
• International Currency Relationships
• Metals and Energy
• Social Trends and Observations
• More

Visit Elliott Wave International to download your free 100+ page issue.

Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

Popularity: 1% [?]