Jay Taylor’s Inflation/Deflation Watch (IDW)

Which way are markets headed in 2017? My IDW, which measures prices denominated in U.S. dollars for a wide choice of global stocks, U.S. Treasuries, and a wide variety of commodities, has actually been rolling over even though trillions upon trillions of new money creation has taken place since the 2008-09 financial crisis. As you can see, since the peak at 159.87 in 2011, my IDW has been rolling over, though 2016 has seen a considerable bounce back from a very significant decline below the five-year moving average. As of Thursday of this week, my IDW stood at 148.71, which compares to a three-year average of 148.45 and a five-year average of 144.58. 

Of course my IDW is misleading in terms of measuring “inflation,” for a number of reasons. First, it provides equal weight for all the items in the IDW. So for example, a 1% change in the silver price has the same impact on the IDW reading as a 1% move in much larger markets like the S&P 500 or the oil markets. And when applying the actual definition of inflation as applied by the Austrian school of economics, my IDW understates inflation by a massive degree. The Austrians quite correctly define inflation simply as the growth in the money supply. When we appropriately measure inflation by the monetary theft at the hands of the Federal Reserve Bank and as measured by the St. Louis Fed Monetary base, “inflation” has more than tripled since 2008! Our government’s propaganda has us believing that “inflation” is less than 2% per year. That measure in and of itself is bogus, as documented by economist John Williams.  But it totally ignores inflation in the global debt and equity markets, which is the food upon which America’s economic parasites in government and Wall Street have feasted. It is that reallocation of wealth from Main Street to Wall Street and Washington that has had average working-class people angry and voting for Donald Trump.

If Donald Trump follows up on his election rhetoric, it should mean a reversal of wealth from parasitic Washington and Wall Street. Perhaps it’s my senior years that leave me a bit cynical on that score. After Wall Street and Washington have raped middle income Americans increasingly since Nixon took us off the gold standard, is there anyone reading this who thinks Wall Street and Washington will allow a reversal of wealth from their pockets to average Americans?

The question is this. In what manner will the elite continue to rape and pillage the common folks? Will it be through a deflationary implosion more akin to what Daniel Oliver suggested on my radio show this past week? Or will it be through a galloping inflation more akin to the vision of Alasdair Macleod of Goldmoney?

Dan Oliver noted on my show last week that Donald Trump is entering the White House at a point in the credit cycle akin to the points at which both Herbert Hoover and Richard Nixon entered the presidency. Daniel’s point of view is that with credit reaching its peak, an inevitable unwinding of credit will cause commodity prices to decline, perhaps severely. But that’s not bad news for gold miners because, as Dan quite properly points out, gold mining firms do best when the real price of gold, measured against commodities, rises. So it’s possible we can have a decline in the nominal price of gold but also a rise in the real price of gold and thus rising margins for gold production. You can listen to Daniel’s comments on my radio show here: http://jaytaylormedia.com/media/taylor20161220-3.mp3.

Alasdair Macleod is my scheduled guest for my first radio show in 2017, that being on January 3. Alasdair has just written a report discussing his forecast for 2017. Alasdair does not disagree with Dan Oliver in terms of his prediction for stocks and bonds. He is bearish on both of those markets as well. But what Alasdair sees is a massive exodus of the huge amount of money that went into those markets, flowing into precious metals and commodities. In other words, Alasdair is not counting on the monetary implosion that Dan foresees. I will of course remind you of Alasdair’s appearance on my show next week in this letter.  Let me say that both views have merit. I do not know which of the two I come down on. I remain agnostic with respect to the Inflation/Deflation debate. I think both will eventually be right. But it is a matter of timing and as they say, “timing is everything,” when it comes to investing.