Capitalism Is Winning

Charts: The S&P 500 has traded above the key 1227 Fibonacci long term indicator for 6 days in a row, which is bullish. Volume patterns are bearish as is the advance/decline line; a mixed bag. Yield on the 10-year treasury note has also pushed up above a key Fibonacci level. This speaks to higher interest rates, if that trend continues it will destroy the US housing market, very bad.

Fundamentals: China just raised its inflation target from 3% to 4%, an admission of defeat. Actual Chinese inflation is running at 5% and has increased by one full percentage point for each of the last two months. China cannot tame inflation by raising interest rates because it will then be flooded by foreign capital despite whatever capital controls it might dream up. A flood of foreign capital would drive Chinese inflation even higher. Global equity markets are beginning to wake up to the fact that China cannot step on the brakes and are tentatively happy. China is the locomotive for world growth, so this is maybe good news, and maybe not. Imagine you are a passenger on a train and want to zoom forward to your destination. The conductor tells you that the locomotive is running at full throttle. Okay, sounds good. Then the conductor tells you that the train doesn't have any brakes. Uhh, a bit worrisome. Then the conductor tells you that there are obstacles on the track that the train may smash through (the obstacles are the Euro-Zone debt crisis and maybe the budding US sovereign debt crisis) or the train may hit these obstacles and derail.
This all sounds very scary and will probably end badly unless the world economy gets a second locomotive, i.e. the US economy needs to start growing at about 5%. There is so much idle productive capacity in the US economy that if it were to start growing, then inflation would actually slacken on the jump in global output. This brings us to Obama's big shift to the right: Extending the Bush tax cuts, freezing Federal workers pay for two years, free trade deal with South Korea, and the wonderfully harsh report from Obama's deficit cutting commission. All this represents a massive shift to the right. After shifting Obama blasted the liberals, actually hurting their feelings. He is talking to the Republicans. They speak the same language on foreign policy. He likes hanging out with them. Furious, the liberals talk of supporting a total left wing idiot like Ralph Nader in the next Presidential primary. If this were to happen it would be incredibly good because it would consign the hard left liberals into Purgatory for years.

Geopolitics: Iraq is forming a unity government. It is game over for Al-Qaeda in Iraq. This paves the way for Iraqi oil production to roar. This will go a long way to putting a cork in Chinese inflation. Also, consider that Iraq has the freest economy of any Arab state, except perhaps Yemen, which has no real central government: forcing a kind of free market economy through default. Yemen and Iraq are both growing at about 8%. We have to step back and remember that the Long War is not radical Islam vs. Christianity or radical Islam vs. democracy. No, it is radical Islam vs. capitalism. At 8% GDP growth capitalism is winning and Al-Qaeda is losing.