The Dollar and The Real Inflation Story

I can’t tell you how many talking heads I’ve watched in the media recently touting the strong dollar. Sometimes I really wonder whether Homo sapiens are an intelligent life form. Remember this is the same species that created the Tulip mania … and the tech, and real estate bubble.

Folks in the real world it just isn’t possible to have a strong dollar if you are counterfeiting 85 billion of them a month. That’s just basic common sense, which seems to be an extremely rare commodity in the world today.

Yes, markets can be irrational, because humans are driven by emotions. When something goes up or down for a long period of time our emotions invent reasons for why it’s happening. We convince ourselves that a tulip bulb really is worth more than a house. We justify skyrocketing housing prices far above average income levels by inventing a fantasy that we are running out of land. Of course no amount of fantasy means we can escape reality, just that the longer the illusion extends the bigger the bubble grows before it pops. But there is never any doubt it is going to pop.

There is one reason and one reason only why the dollar index has the illusion of being strong (let’s face it, at 82 the dollar is hardly strong. In 2000 the dollar index was at 120).

The dollar is strong lately because the yen, pound, euro and Canadian dollar have all been dropping sharply into major intermediate and yearly cycle lows.

If the last daily cycle pivot is broken (lower low) it will almost certainly confirm that the dollar has begun an intermediate decline.

Because the Fed targets asset prices, it tends to start in those areas that we don’t normally associate as inflationary. Let’s face it, no one is really going to freak out about a rising stock market, but that is the first sign of inflation. The Fed’s liquidity has to land on something, and it usually starts in the stock market first. Unfortunately it always eventually ends up in the commodity markets.

Folks no matter what anyone one tries to tell you, it’s not possible to print 10+ trillion dollars and not get inflation. The Fed would like the inflation to stay in the stock and real estate markets, but as we all know, it’s not possible to escape reality and the reality is that eventually that liquidity is going to leak out of the stock market and real estate markets and find its way into the commodity markets. It happened in 2008 and it’s going to happen again.

As you can see in the long term chart above inflation began in the stock market and real estate markets in the early 2000s. It culminated in a massive parabolic spike in commodity prices in the summer of 2008 that destroyed the global economy and spiked oil to $147 a barrel and gold above $1,000 an oz.

This time will be no different. We have massive inflation in stocks and even an echo bubble forming in the real estate markets. Ultimately the story is going to end the same way as it did in 2008, with a stagnating stock market, a second crash in the housing market and another parabolic move in commodities. It absolutely will drive another C-wave advance in gold just like it did in 2008 and 2011. Only this time the move will be even bigger. As I’ve noted in several past reports, I’m confident that gold is forming a midpoint consolidation in a very large T1 pattern that should ultimately target about $3200-$3300 at the next C-wave top.

It doesn’t matter whether sovereign central banks impose short term manipulation or how irrational the short term movements get, nothing is going to alter reality and the reality is that printing a trillion dollars a year is going to drive another C-wave in gold’s secular bull market. End of story.

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