Wednesday, September 8, 2010

DEFLATION NEVER HAD A CHANCE

Lately we've been hearing a lot of talk about Kondratieff cycles, Elliot Wave super cycle, end of the world, deflation, deflation, deflation.

What the deflationists fail to acknowledge is that in a purely fiat monetary system deflation is a choice not an inevitability. To put it in simple terms, if a government is willing to sacrifice its currency there is absolutely no way deflation can take hold in a modern monetary system.

It doesn't matter how large the debt contraction is, 10 trillion, 100 or 1000 trillion, any government with a purely fiat currency can, with the stroke of a computer key, print enough money to wipe out the debt. Granted they will destroy the currency by doing so, but at some point we are going to be faced with the choice of print or deflate. I have little doubt Bernanke will choose to throw the dollar on the sacrificial alter.

Consumer credit isn't growing you say. Consumers are deleveraging. Not possible to have inflation unless consumers are borrowing and wages are rising. Pure nonsense!

Let me point out one indisputable fact and then I will delve deeper into the deflation/inflation argument and where investors need to put their capital to protect themselves from the coming inflationary storm. In a purely fiat monetary system a government that is willing to sacrifice its currency can, if they so desire, print enough money to mail every man, woman, and child a check for $1,000, $100,000 or a million dollars. To do so would halt any deflationary force right in its tracks. It would for most practical purposes wipe out all consumer debt. Impossible you say? Well the US has already done it twice. (It was called a tax rebate, in case you forgot.)

Here's the thing, where the inflationary forces show up is determined by who gets first use of the money. So far that has been the banking system. Through the myriad bailout programs the Fed has created money out of thin air and forced into the insolvent financial system. That has resulted in selective inflationary forces being unleashed. Instead of loaning credit to consumers or businesses who don't really want it, the financial system has plowed the money back into financial marketss. It's the reason the stock market rallied 80% despite flawed fundamentals. It's why oil rallied from $35 to over $80 despite impaired fundamentals. It's why gold is threatening to break out again to new historic highs.

If instead of forcing the liquidity into the financial system it had instead been mailed to the average consumer, we would now be seeing real estate prices rising rapidly again, food prices and gasoline would be going through the roof. Wages would be rising out of control.

Where inflation shows up is a direct result of who gets first use of the freshly minted dollars. I can assure you we don't have an impending deflation problem; we have a rapidly approaching inflation problem and currency crisis.


I've said for a long time now that eventually the market is going to make Bernanke pay a terrible price for his insane monetary policy. That price is going to be a currency crisis in the dollar and I think it's already begun.

While everyone was busy watching the Euro crack during the first part of this year what no one foresaw was that eventually the cancer that began in Europe would at some point spread into the dollar.  It began 3 months, ago although no one has noticed yet.

Next I'm going to illustrate the long term cyclical nature of the dollar as the cycles are now lining up perfectly to bring on a major currency crisis in the US dollar, much worse than what just transpired in the Euro.

First let me show you a chart of the largest cycle, the three year cycle.


I've marked the last six 3 year cycle lows. These have tended to bottom about every 3 to 3 1/2 years with most running 3 years and 3 months. The consideration here is that the next major three year cycle low is due next year sometime around the March to June time frame.

As they say, the doody is going to hit the fan when the dollar moves down into this major cycle low, and Bernanke's foolish attempt to print away the credit crisis is going to blow up in our face. By spring of next year we are going to be mired in a full-fledged dollar collapse.

The first warning is going to come when the dollar breaks back below 80. That will signal that the current intermediate cycle has failed. As soon as that happens we can close the door on the dollar. 

We should first see a test of the all time lows by late this year when the next larger yearly cycle is due to bottom. After that we should have one more leg down into late spring or early summer that I expect will send the dollar to new all time lows


The only way to abort this from happening is for Bernanke to immediately start withdrawing massive amounts of liquidity from the market. That won't stop the 3 year cycle from coming but we might have hope that the dollar could hold above the all time lows and we might avert or at least reduce the damage that will be caused by the impending currency collapse.

I can assure you he will do no such thing though. For one he has no idea the crisis is brewing. (This is the same man who assured us in '07 that the credit problems were contained in the sub-prime markets and in '06 that real estate was not in a bubble.)

And second, if he were to withdraw liquidity the country, and world, would quickly sink back into recession and then depression. No, I don't think we have to worry about Uncle Ben turning off the presses.

So what should investors do to prepare themselves for the approaching conflagration? They must be invested in real stuff, commodities. There is a reason virtually the entire commodity complex was showing relative strength as the market put in the intermediate cycle low in early July. Smart money was and still is positioning to weather the coming storm.

I would point out that the beginning phase of the crisis isn't going to feel like a crisis at all. A falling dollar will act to support all asset prices. We may even see nominal new highs in the stock market.

But eventually too much of a good thing will turn deadly and the true scope of the mess we are in will dawn on the market. At that point the collapsing dollar will no longer support stocks and we can expect the market to roll over and begin the next leg down in the ongoing secular bear market. Unlike stocks, commodities will thrive in a currency crisis with one in particular shining above all the rest.

That one of course is the only remaining secular bull market...Gold!

For those of you still on the fence I'm going to once again try to entice you onto the bull. I have unlocked last week's weekend report. Click here to go to the premium website. The August 28th weekend report has been unlocked.

For the next week I'm going to offer a buy one get three free subscription. If you buy a one year subscription ($200) I will add three free months.

This should be long enough to get investors through the current C-wave advance, avoid the D-wave that will follow it, and get you back on board in time for the next A-wave rally.

If you would like to take advantage of the offer click here and follow the Paypal link.

39 comments:

  1. Hi,
    What is the cancellation and return policy. If I join and after a month I find that the newsletter is not working for me, will you issue refund for the balance period.
    let me know please.
    B

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  2. Money has to get to the masses. It is printed or digitized but if it doesn't get to the people, it hits a brick wall and dies. If you have $1 billion and suddenly get another billion, what would you buy? Not a damn thing is the answer, you already got stuff and don't really need or want more.

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  3. B,
    Your best bet is to just go with a one month memebershipo to start with. If you like it then you can go with a more cost effective subscription.

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  4. Anon,
    Apparently you weren't around in the 70's so you don't understand how inflation works. (You apparently didn't pay any attention to what happened in 08 either)

    If the government mailed out million dollar checks to everyone, every shelf in every store in the country would immediately be swept clean. If they mailed out another check for a million you would have to be an idiot not to immediately spend every penny of it. Why? because prices would be rocketing higher by the minute. The longer you wait the more everything is going to cost you.

    It is the same behavior we saw in the summer of 08 as the price of gas was climbing and climbing.

    People would fill up their tanks even if they didn't need to any time they found a price lower than the station down the road. Why? Because they knew that if they waited till next week gas would be .10, .20 or 30 cents higher a gallon.

    Why did this happen? Because the government printed 300 billion and passed it out to the american consumers under the guise of a tax rebate. All it really accomplished was to spike the price of oil and gas and tip the economy over into the worst recession since the Great Depression.

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  5. weimar experience and Zimbabwe....scary stuff , hopefully NOT coming to a neighborhood near you! -Robert

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  6. question: This mornings email alert seems a bit contrary to the daily report posted tonight. Are you possibly expecting Gold & silver stocks to react ahead of the metals...or ...is the statement in the email alert now on hold. Thx-Robert

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  7. I'm not sure what you mean. If gold follows the path I'm looking for, namely a brief consolidation followed by a break to new highs then we should see the miners break out of the consolidation.

    If not and gold is ready to correct now then we will have to wait a little longer before miners break out of the triangle.

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  8. The problem is that the Treasury bond market would completely collapse if they issued trillions of dollars of non-debt-backed currency to "fix" the deflation problem. It would be impossible to service our national debt with the double-digit interest rates that would suddenly be demanded by investors. Also, the investors (international bankers) in the private Federal Reserve would lose their shirts. So, the Zimbabwe scenario is very unlikely.

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  9. Yep one of the problems with printing money is eventually the bond market breaks.

    Eventually as we go deeper and deeper in debt we will be faced with a decision either print to service debt or let deflation suck the world down into the next Great Depression.

    So far the powers that be have shown no ability to do what has to be done because the consequences have now become extreme. So they keep kicking the can down the road making the problem bigger and bigger.

    I expect them to continue to do the same until they break the currency and bond market. They will of course claim it wasn't their fault and then they will start looking for someone to blame which usually means a major war.

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  10. Hi, that dollar chart is interesting with the three-year cycles. But isn't it worth noting that the "cycle lows" in 1998 and 2001 were actually higher than the previous lows? So it could very well be that the next cycle low in 2011 is actually higher than in 2008. I'm not arguing that will be the case, as the dollar has all kinds of bad fundamentals working against it, but just pointing out that it's quite possible looking at that three-year cycle chart.

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  11. I always return to FOFOA...

    FOA wrote back in April of 2001,
    "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! Worthless dollars, of course, but no deflation in dollar terms!"

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  12. Here is where I am beginning to disagree with Hyperinflationistas. The theory goes: The Fed buys too many bonds, buyers begin to doubt the .govs ability to service the debt. Buyers demand higher interest rates in order to buy the debt. Interest on the debt skyrockets forcing the fed to print non stop. Dollar collapses.
    Problem with this theory. The .gov does not care who owns the debt. The Fed is ready to purchase whatever doesn't sell in the open market therefore it sets the interest rates. If no one buys the debt, fed will buy all of it, ergo no interest rate increases on the debt. The Fed could purchase 100% of all US debt and still maintain the interest rates at ridiculous lows. No, the bond markets are not the black swan here. What does worry me is reserve currency/ international currency issues. If China and OPEC were to decide they no longer accept dollars for their exports and demand renminbi or gold (not euros, no one trusts them), that would explode US energy and imported goods prices (in dollars) causing rapid inflation. People would buy "stuff" as soon as they get paid in order to get it before the price goes up (gas hoarding example was presented earlier)starting a hyperinflation spiral. When will this happen? Whenever China, Russia and OPEC decide. Watch for China completing its divestment of dollars and treasuries and then pulling the trigger.

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  13. The problem with that theory is that in order to buy an endless supply of debt the Fed would have to print an endless supply of dollars. That would cause the dollar to collapse.

    It really isn't possible to get something for nothing in this world. Whenever governments try something bad happens.

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  14. Toby, collapse against what? The average J6P or Mike Latte doesn't care how many dollars the Fed prints. They only care how many they receive (in the form of compensation or .gov payments) and what stuff it will get them. If we are talking US produced goods and services in general, whether you are trading with bits of colored paper or sea shells no one cares what the intrinsic value is, just what it will get you. How can bits of paper collapse as long as you can trade them for the stuff you want? Only in a massive direct injection (everyone receives a million dollars, vendors raise the prices exponentially based on new currency glut and velocity increase) (Lots of FEMA funded LV bags out there)will you see prices skyrocket (proven so far by the trillions sitting in bank's balance sheets having zero effect). My concern is others outside of the US (mainly OPEC)ceasing acceptance of dollars as a medium of exchange. That would collapse the dollar.

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  15. The value of dollars will collapse against real stuff. And trust me the average Joe will care quite alot if the value of the dolalr collapses because the price of everything will be going through the roof.

    Input costs will be going through the roof squeezing profit margins making it very tough for companies to raise wages enough to keep up with inflation.

    We saw this very thing unfold in the summer of 08 as the price of energy spiked destroying consumer discretionary spending and sendign the world into the worst recession since the Great Depression.

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  16. I would also point out that while some of the reserves have ended u just sitting in the federal reserve quite a bit has leaked into asset markets represented by the large gains in virtually all assets since March 09.

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  17. It is the Fed printing that causes the problems. This eventually will break the bond market. Not the oter way around.

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  18. That is also why it is ridiculous to think you can rid the world of poverty. If everyone had money, then a loaf of bread would cost $50. Unfortunately there will always be rich and poor, that is life, and social engineering is worthless. Anyway, do you see a triple top in Gold here, at least for a small pullback anyway.

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  19. What happens if ben drops money in peoples' yards and they pay down debt with some of it then hide the rest because they fear further declines in real estate and other assets? Tell us why Japan's printing of trillions of yen resulted in 20 years of deflation. Keyenes was wrong and Von Mises was right. Social mood is the deciding factor. I predict Ben's PhD will be revoked as his thesis ignores human nature; society is so indebted already that it will not borrow (take) and spend, but rather it will take and save which is deflationary. Bad decisions cannot be made good through hyperinflation until the bad actors are bankrupted. Tell us Toby.

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  20. If a million dollars was dropped in your yard and you didn't spend it, you neighbor sure would. As you see your neighbor spend every penny, you will watch a surge in prices. The only people that will be holding a million dollars will be the same people holding bonds at 3.5% while they go into double digits.

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  21. triple top in Gold or GDX would leave us rangebound...failure to break the top would mean back to the bottom of the range, right? vOLUME DOWN TODAY WAS PRETTY BIG=HEAVY SELL OFF TOP

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  22. No such thing as triple tops. Gold is just moving into a daily cycle low. Don't get side tracked by the daily wiggles.

    Pull up a 10 year chart of gold and it will be obvious what to do. Hint: buy dips :)

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  23. The bit that gets overlooked here is that a sustained and substantial fall in the USD will bring about a recovery in the US....big increases in exports, big reductions in imports. The sooner this happens the better. How can you get inflation with unemployment at 15 or 20%?

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  24. Inflation is an expansion in the money supply. Where that inflation occurs is a direct result of who gets first use of the money.

    If the money is beig forced into the financial sector then it will show up in asset markets usually in commodities as savvy investors buy real stuff to protect themselves from currncy debasement by the Fed. This is what has been happening since 09.

    Now if the money was just being printed and mailed directly to the consumer then we would see inflation show up more uniformly everywhere. Certainly food and gas prices would soar but so to would real estate, consumer electronics, clothes etc.

    Does anyone find it odd that gasoline prices are still almost $3.00 a gallon despite almost 15% unemployment. Some of the money is already finding it's way to the consumer in the form of extended unemployment benefits.

    People forget that serious inflation doesn't happen during times of full employment. The stagflation of the 70's came during periods of recession and high unemployment.

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  25. I would also point out that we will never get a true recovery by just debasing the currency. Eventually that leads to spiking energy prices and the collaspe of the economy.

    That is the reason we can't just print our way to prosperity. The last attempt to do so just lead to a housing and credit bubble and ultimately the worst recession since the Great Ddepression.

    There really is no free lunch in this world.

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  26. Its not about a free lunch, its about devaluing US lobor, getting people back to work and winning back markets that have been lost to the developing world....The US could become the next China.

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  27. its about devaluing US lobor, getting people back to work and winning back markets that have been lost to the developing world....The US could become the next China.<<<

    Not when you are the reserve currency. See the British pound in the 1930's (below link)


    http://messages.finance.yahoo.com/Business_%26_Finance/Investments/ETFs_%28A_to_Z%29/ETFs_U/threadview?bn=100489&tid=87&mid=87

    Look for the dollar to strengthen dramatically in the next 18-24 months.

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  28. I'd be willing to make you a bet we see 74 before we see 90.

    The dollar will drop into a yearly cycle low and then a 3 year cycle low just like its done now for the last 30 years.

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  29. deflation is very real and is happening and shall be happening.

    The question is in what money (or currency) is deflation happening?

    Is it is US Dollars as main stream deflationists believe? Is it in any other fiat? or is it happening in true money, real money?

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  30. Name me something that is deflating in price other than housing which is suffering a severe oversupply problem.

    Is gasoline dropping precipitously? Oil? Food? Copper, health insurance, education, wages, heck in Vegas even housing prices are starting to rise very modestly.

    Deflation is a contraction in the money supply when that happens prices drop and not just housing prices, everything drops in price drastically.

    If you can show me where prices are dropping radically then I might buy the whole deflation nonsense but you can't so I don't :)

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  31. no need to get agitated,

    I am not saying that I buy deflation argument at all, there is no deflation in dollars, or pounds, or whatever fiat

    but in gold


    prices of things have come down and shall come down in gold

    now, you say deflation is a contraction in money supply, I don't want to get into arguments over semantics of M1, M2, Mn

    I just have one question

    what is money?

    I think only gold is money, and everything else is -- well, define them however you want, they ain't money

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  32. I'm a first time visitor to the blog - Your scenario makes total sense. Deflation does not seem like a realistic possibility at all. As for the gold recommendation and other commodities...that makes sense too...but what about silver? And should real estate prices rebound since they are a hard asset also. This is feeling a lot like the early 1970's - only worse.

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  33. Real estate was one of the largest bubbles in history that's not ever coming back in our lifetime so I wouldn't waste money on real estate but silver is far and away a better investment than even gold.

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  35. I hate to bring the bad news...the dollar is acting like it wants to move higher...It keeps pushing 86 with more volume over last few months...if it breaks 86 with volume forget about it....we could be heading back over 100...how about that? haven't seen that for almost a decade...thus a squeeze on commodities may be coming..deflation may be an overstatement but disinflation for sure.

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  36. Pretty unlikely. Those 3 year cycle lows come like clockwork and have for the last 30+ years.

    In a purely fiat moneytary system deflaiton is a choice and the Fed has shown no sign they are willing to accept that for the last 110 years. I don't know why they would start now.

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  37. We will have to see. I think BOJ is getting ready to through the yen under the bus...thus dollar is beginning to gain some upward pressure. It will be definately interesting in the next few months one way or the other.

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  38. "throw under the bus" not "through"

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