I could not go without writing
a serious parody of the above original comedy series, so be prepared to enter
this guide, which will hopefully offer a fraction of information in "the
standard repository for all knowledge and wisdom".
This planet has a problem -
and has had this problem repeated throughout history - a problem that made
most people living through it unhappy for pretty much all of the time...and
this involved periods of inflation and deflation.
The objective of this article
is to provide what I think is an accurate version of inflation/deflation and
what to expect over the course of the next 8 years, based upon the
Contracting Fibonacci Cycle. Time points will be identified, followed by
charts illustrating Elliott Wave Analysis indicating why we are on the cusp
of a major breakout in the broad stock market indices and commodities. This
analysis runs counter to many deflationist views, which ties into the
proposed definition that will be described. This guide will be subdivided
into sections that are based upon names present within the 6 novels of the
Hitch-Hiker's Guide series.
As Per the Above Title
There are some deflationists
who think we are in a period of deflation...one noted definition of inflation
is "a net expansion of money supply and credit, with credit marked to
market" and the opposite for deflation.
A problem with the above
definitions is that they provide very broad definitions and often, these
outcomes do not occur until a "Tipping Point" has been reached.
Malcolm GladWell wrote a book titled "The Tipping Point" which I
would strongly recommend everyone read. In a nutshell, different systems,
problems etc. do not follow linear relationships, but rather, a "tipping
point" unique to a given system under study occurs. This unique
"tipping point" changes the balance of things, causing an
accelerated shifted shift to the upside or downside of a trend, based upon
the unit of measure under study.
Applying this thought to
deflation, many things happening in the news such as job layoffs,
bankruptcies etc can overwhelm senses to provide an empirical conclusion that
deflation is just around the corner.
The definition of inflation or
deflation I propose is a scalar model that comprises the integral of all
components (summation of the slope all components chosen to include in broad
economic sectors and measures) based upon the derivative of their
measurements (rate of change, as an example car speed (km/h, m/s) or money
velocity). The derivative components of each part of the equation represent
the rate of change for each chosen item by graphical representation to form a
slope ($/month positive or negative) that has an assigned probability (R2).
Each item added up can provide the integral, or summation as to whether or
not inflation or deflation is evident as a whole across the economy.
Examination of individual components offers visualized trending to determine
whether or not a given sector or defined measure is entering deflation or
inflation.
A few different obvious
components to be put under study are money supply, credit, housing prices,
food prices (which can be broken out into sub-sectors), energy prices,
precious metal prices, durable goods, retail sales (which can be broken out
into clothing, electronics), dining, purchases and yes...government
associated taxation. With this model, rising taxes are inflationary for
government, as individual expenses rise and without any recourse, so lack of
available money creates deflation in other areas, since there is less money
chasing those goods.
Assigning different items for
examining inflationary or deflationary trends involves taking the total
summation and putting them into a final integrated answer. I do not have the
computer savvy to model this so I am putting this thought out there for
others to maybe try and tinker with. Whichever unit is chosen for the
equation, all components thrown into the mix must be identical. All crunched
numbers should reveal a shift in money, which when tilting negative or
positive, would provide the short-term trend...inflation or deflation.
Because fiat currency can be expanded into infinity, credit marked to market
can be diluted by issuance of further credit to back it. Based upon the
model, consecutive months of a negative number would suggest banking
problems, which in turn would trigger deflation...the rate at which
governments create new money and prevent banks from failing would be key in
determining how long this period of time lasted.
This proposed definition and
model allows for inflation and deflation to be occurring simultaneously in
different sectors, while overall trends of inflation or deflation are noted
(periods of deflation since 1932 are very very rare and have not lasted for
long periods of time). What must be defined is a "Tipping Point",
where the cumulative summation of all defined items will "Tip" into
either inflation or deflation. The following Table below illustrates the
sequence of dates of the Contracting Fibonacci Spiral for the S&P 500
Index. Whatever defined model that takes into account all of the individual
trends can be examined with their slopes and how the cumulative values were
present at each one of the time points before economies turned south. The CFS
cycle has these dates marked out already, so identifying what value creates a
tipping point with certain sectors defining start an inflationary or
deflationary trend.
Fiat currencies are all about
currency expansion, whether it is through issuance of currency or credit.
Issuance of credit creates booms and busts, which then sees those
institutions that provided funds coming up short. Money that was released
into the economy is there, while the huge shortage of money at institutions
create losses that if not filled, can collapse everything. As per the CFS, we
are following a naturally progressive cycle that does have an ending and
every time post that is marked has top within 5% of the specified time.
Further defining the above model for inflation/deflation would provide a more
quantitative model for aiding governments to better define and prepare for
recurrences of such future events.
Table 1. Time Posts Within The
Contracting Fibonacci Spiral
Notice how tight the
Contracting Fibonacci Spiral dates are to 61.8% of the prior time
block...this is what makes it seem inevitable that "things' just seem to
happen as per the defined time posts.
There is no "Free Lunch" In the Restaurant at the End of the
Universe
The Romans tried it, Germans
tried it after WW1 and most recently, Zimbabwe also tried it...and that was
to create prosperity out of printing money. Rome expanded to rapidly and in
order to pay its soldiers and costs for maintaining an empire, gold, silver
and copper could not be extracted at a rate to match those of economic
requirements. As a result, new coins were minted with lesser of these metals,
which in turn allowed a greater amount of currency to be issued. This in a
sense was hyperinflation because a greater amount of money was chasing the
same number of goods. Hyperinflation results in a loss of faith in a country
to be able to pay its bills and therefore have no issuance of money from
creditors.
Work by Glenn Neely has the
DOW reaching over 200,00 by 2065. Someone in 1930 who ever thought seeing a
DOW at 12,000 would be hyperinflation...dilute this value with time and it
does not seem like hyperinflation. Hyperinflation results in a parabolic rise
in prices over a shorter and shorter period of time until collapse...seeing
the DOW rise by nearly 20 fold over the next 50-55 years is not
hyperinflation, but more of just strong inflation.
Economic growth going forward
is going to be dictated by the past, which is leading us into the future. I
have thoroughly explained the CFS, so anyone wishing further information,
simply Google it on the Internet. Demographics really play an important role
in defining what individual will be inflationary or deflationary as the
"Pig Passes through the Python"..it distorts the portion of the
snake from which it passes. In the 70's is was youthful purchases...now it is
medical and age related issues. Commodity prices are more of a global population
issue than one based upon demographics...as seen, there are many different
items that can get added to many buckets that go into comprising a total
model for when inflation or deflation occur...based upon a tipping point that
has yet to be defined. Examination of prior data around prior CFS turning
points hopefully can be used by some astute computer programmer to determine
this and share as public information, much like this article was intended.
So, there is no free lunch and
we know that governments are going to print money in order to sustain
economic momentum and prevent a collapse, which would result in global riots.
It would be very difficult for any nation to declare war, when war would be
from within. This creates many issues, such as new governments being assimilated
and cause a change in power due to force, rather than democracy. For the
greater good, governments will choose to keep things in motion, which ties in
with the CFS that is a basic law of nature...something will continue its
course until it is complete.
Life, The Universe and All the Charts
There are many different
charts I could present, but will focus on short-term charts for the S&P
500 Index, Gold, US Dollar Index and the AMEX Gold BUGS Index.
The short-term Elliott Wave
count of the HUI is shown below, with wave [d] of a contracting triangle
making up the last portion of a double combination to end wave [C]. I chose
to label corrective wave [C] with letters rather than numerals to indicate
the corrective terminal impulse to avoid confusion with implying it is an
impulsive decline. Based upon this count, the HUI is likely to continue
rising in wave [c] for another 8-12 trading days before topping out and
declining for anywhere from 3-4 weeks (mid-September) before terminating with
a higher low. Subsequently, a sharp move up into between April and June 2013
is expected before a partial retracement into late 2014 occurs. The move from
late 2014 into Aprilish 2016 should see a very sharp move to well above 1000
(probably 1500-1600). We are passing through time which is already is
following a predefined path...the hard part is determining how things will
move through that defined period of time once we arrive there.
Figure 1
Larger Image
The short-term Elliott Wave
count of the S&P 500 Index is shown below, with the thought pattern
forming denoted in green. Wave (c) is thought to be forming at present, which
could be forming a bullish flat pattern or triangle. So far, the wave
structure has followed reasonably well to what was hypothesized nearly 2 1/2
months ago. Once we hit mid-September, expect to see a very sharp breakout to
the upside, carrying the S&P to somewhere between 1600-1700 (looking for
1650-1700) sometime between December 5th 2012 and March 6th, 2013. Subsequently,
commodity prices should continue to soar, along with precious metal and
energy shares. Commodity stocks should top out 3-4 months after the broad
stock market indices while energy and precious metals appear to be in a
runaway bull market. Many will assume hyperinflation, with more and more
people piling into precious metal stocks assuming it is a consolidation
before screaming even higher...it will be much like 2008 where stocks topped
out while the precious metals and oil screamed higher. Inflation is the new
tool of the FED and the commodity inflation will stop the global economy dead
in its tracks. There will be many many brokerage firms that go under and
leave many who made a lot of money during this coming run up in prices with
nothing. We will all have to ensure that money is pulled early enough and in
secure places that are not likely to be lost from firms on the wrong side of
the trade. Then when the late 2014 bottom arrives...we jump back in. The
S&P is likely to decline to 800-850 if we hit 1650-1700 by late 2014, so
being in cash around April 2013 could essentially be viewed doubling one's
money as prices of the stock market plunge into late 2014. This is the road
map and we can not see what the weather will be like, but I am forecasting gloomy.
Figure 2
Larger Image
The short-term Elliott Wave
count of gold is shown below, with the thought count forming denoted in
green. The current pattern forming since mid-March appears to be that of a
diametric triangle. Generally with diametrics, one leg will be longer than
the other 7, with one or 2 legs being shorter to compensate for the time.
Time and complexity are nearly equivalent, but price can vary dramatically
between each segment. The time and complexity components of each leg have
been very consistent (can not have 4x the amount of time compared to the
shortest leg). So...based upon this chart, we have another 7-10 trading days
of sideways to upward price action before experiencing weakness into
mid-September. After this completes, we should see a very strong move up to $1900/ounce,
followed by 4-6 weeks of back and fill before breaking to new highs towards
the end of this year. The amount of compression cause by Central Planners
trying to control interest rates and tweak things can be viewed as trying to
hold a dyke in place that has rising waters...When the pressure is too great,
the dyke collapses and total control is lost to the ravages of nature...this
will happen and we will likely see gold hit between $2500-3074/ounce by early
September 2013.
Figure 3
Larger Image
The short-term Elliott Wave
count of the US Dollar Index is shown below, with the thought pattern forming
denoted in green. Originally back in mid June, I thought that early August
was a likely topping point. Developments in gold, other currencies and the S&P
500 Index indirectly suggested that upside is looming in the Dollar for at
least the first half of September. As such, once a bottom is put in place for
the dollar within 2 weeks (target of 81.5), expect a final move to last until
mid to late September. Wave A took one bar, or one month precisely and wave B
will have taken 2.5 bars. Wave C is likely to be (A+B)/2, or 1.25 bars (1.25
months, or 5 weeks). If this holds true, then a top is due anywhere between
mid to late September. Everything I have been looking at since last July for
targets still hold true...tinkering just will cause compression of price
moves that will likely overshoot and make things that much worse for the
deflationary episode expected from Septemberish 2013 until late 2014 (i.e. The
US Dollar Index bottoms around September 2013 and rises into late 2014).
Figure 4
Larger Image
So Long and Thanks for All the Charts (Not Fish)
The primary purpose of this
article was to provide a more thorough and appropriate definition of
inflation that can hopefully aid and predict turning points with precision
for financial planners to cope and deal with the current economic situation
upon us to lessen the damage. Further details of the CFS were provided in
order to show the basis for how it was elucidated and what will base future
predictions. Finally, Elliott Wave charts were provided to illustrate what
patterns are forming and what they suggest. In a nutshell, we are likely to
experience oil somewhere between $150-180/barrel, gold at $2500-3074/ounce
and silver at $65-80/ounce before September 2013. The broad stock markets are
set to top out between December 5th and March 5th, 2013, with the HUI topping
out 3-4 months after. As per 2008, high commodity prices will be the tool
that causes a tipping point and throws the global economy into deflation
lasting between Septemberish 2013 and late December 2014 (which ties in with
Cliff Droke's fantastic work at examining cycles and weaving them all
together).
That is all for this article.
For anyone looking for technical analysis that fits with the CFS cycle we
discovered last year and stock picks associated with timing for entry and
exit, feel free to check us out at www.treasurechests.info.
People may not want to hear
the above message for economic stresses we are likely to continue
experiencing until 2020, but based upon the CFS the markets are in at
present, that appears the direction we are headed.
