By Jay Taylor, Posted Tuesday, May 26, 2009

If we are looking at getting out of our inflation plays, our IDW is suggesting we wait for now. It is indicating there might be more upside left. Last week, for the first time since July 25, our Inflation/Deflation Moving Average Intensity reading flipped into a positive +1 territory. Had we paid more attention to the negative reading after July 25 last year and adjusted our Model Portfolio accordingly, we might have avoided much of the pain of last autumn.

Indeed that is consistent with Dr. McHugh's work. He is suggesting a few more days of correction before we get one more final thrust upward in the (B) wave before we face the horrendous prospects of the (C) wave down. McHugh is looking for a rise in the Dow to as high as 9700 before the equity market's last hurrah is complete. That's about a 17% rise from the Dow's current 8,277.32 level. We certainly don't want to make it sound as though we are putting all our marbles in Dr. McHugh's scenario. We are not. But based on his calls prior to last fall and on his ongoing accuracy since then, my confidence level in his work has risen dramatically. No one works harder and smarter than Robert McHugh. And he is never locked into a position, but rather provides us with a sense of probabilities that are most helpful in deciding what to do next. As they say, nothing is certain in life except death and taxes. So our decisions are always based on probabilities if you think about it. And getting it right more often requires the best information that you can get and that your brain is capable of processing.

QUESTION: Taylor, what about hyperinflation? Have you given up on that possibility?

ANSWER: No, I have not given up on the potential for hyperinflation. But I don't see it coming now unless policy is changed away from bailing out the rich corporate interests, as any good fascist policy requires, and turning it more toward a communist philosophy of reallocating wealth to the masses. And that could come with an Obama presidency. What I think is likely to happen is that the ruling elite (bankers and top corporate interests) will continue to get their bailouts with printed money. As long as the dollar retains anything close to the existing purchasing power, this will go on and on and on. Meanwhile, I suspect the recipients of big bonuses are trading their dollars in for tangible assets in various countries scattered around the world. We know a few of these people personally and the ones we know, who have been gold bugs for a long time, have been diversifying their political risks and assets risks for a long time.

Once the bailout game nears its end and the system falls in on itself, and if as we think possible, masses of Americans storm the White House, capitol buildings, and Federal Reserve Bank, the attitude may be "let them eat cake," at which time a real inflation process could get underway. In other words, when the masses become so angry the ruling elite will no longer be able to control the system, they may then write out huge checks to every man, woman, child, cat, and dog in America. Then I think a hyperinflationary process could indeed get underway. Short of that, I don't see it happening, because the normal process to inflate-through the banking system-does not seem to be possible, given the bankrupt state of the American consumer. Yes, there is some transfer of wealth to the masses via auto bailouts, etc., but it is very, very small compared to the wealth destruction suffered by the masses.

For now, notwithstanding the near-term direction of our IDW, I think deflation is likely to continue on, because debt is simply too massive to enable banks to make loans to the extent required to expand the monetary system. That said, we will continue to watch our IDW as well as other indicators for any hints at direction. We want to always keep an open mind. To do otherwise is foolish.