|
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
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
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
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
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).
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.
David Petch
Treasure
Chests.com
Treasure Chests
is a market timing service specializing in value-based position trading in
the precious metals and equity markets with an orientation geared to
identifying intermediate-term swing trading opportunities. Specific
opportunities are identified utilizing a combination of fundamental,
technical, and inter-market analysis. This style of investing has proven very
successful for wealthy and sophisticated investors, as it reduces risk and
enhances returns when the methodology is applied effectively. Those
interested in discovering more about how the strategies described above can
enhance your wealth should visit our web site at Treasure Chests
|
