J. Taylor's GOLD & Technology Stocks
Our Inflation/Deflation Watch Warns of Accelerating Inflation

Jay Taylor
Dec 15, 2005

You won't hear it discussed in the mainstream press because they have a vested interest in keeping you thinking things are going along well. The establishment wants you to keep on charging those credit cards because if you don't, given the enormous amount of debt held in America (now totaling $43 TRILLION), we are heading toward a 1930s Great Depression or worse!

To keep us feeling warm and fuzzy about our future, we are sent all manner of distorted economic statistics and smoothtalking spin. Most of what you hear in the mainstream press is highly filtered to keep this establishment inflationary machine in motion, because the Fed is very, very worried that if you stop spending it will be game over, lights out for the U.S. economy. So concerned is Ben Bernanke that Americans might one day regain their senses and start saving for a rainy day, that the soon-to-be Fed chairman, has even proposed taxing savings to force you to cough up your hard-earned savings to buy more of the world's junk. The policy makers are worried sick that we may face the same kind of thrift dilemma that was faced in the 1930s. The Keynesian theorists believe that if only we could have kept Americans spending rather than saving in the 1930s, we could have avoided that cataclysmic economic scene. They may have been able to delay the deflationary depression, but, ultimately, they could not have avoided it. And if they had delayed it further, our grandparents would have experienced an even deeper and darker time than they did experience.

That great father of lies of the 20th century, John Maynard Keynes, did tell one truth when he also said, "In the long run we are dead." So his theory of eat, drink, and be merry, for tomorrow we die," has become the mantra of modern day policy makers Greenspan and soon-to-be Fed chairman, Ben Bernanke.

In the long run, we humans die. That is fact, and so is it fact that we will die, economically speaking, from Keynesian and monetarist economic policies, because both theories, while offering short-term solutions, are perniciously poisonous longer term. But what seems clear is that policy makers will push the system to its inflation limit to buy more time before the day of reckoning. When that day arrives, we will without fail face an economic Judgment Day-that is, when the debt will have to be repaid and when Ian Gordon's view of the Kondratieff winter (a harsh season of massive unemployment and debt repudiation) takes place. Ultimately then, the current policies are leading to death and destruction not only of our economy but also of our democratic republican form of government. But until then, Richard Russell is right in saying that the policy of Ben Bernanke will be "inflate or die."

As long-time subscribers know, over the past few years I had been fixated on the deflationary side of this equation so much that I prematurely sold my primary residence, thinking a collapse in housing prices was all but imminent. That may still happen as higher inflation begets higher interest rates and when globalization continues to put downward pressure on wages. But what I believe is taking place now is that inflation is being pumped into the system in spades such that we will continue to witness dramatically higher prices for commodities, including oil and gas.

As this process continues to unfold, the purchasing power of your dollars will continue to erode at least as furiously as it has since the Fed was created in 1913, during which time the dollar has lost 92% of its purchasing power! How do decent, hardworking citizens protect themselves from this continued assault against savings and thrift? The answer is we need to buy assets that will rise in value at least as rapidly as the dollar purchasing power declines.

To help us prepare not only in predicting rising levels of inflation, but also in identifying areas that are rising more rapidly than the dollar is losing value, your editor composed what I call my Inflation/Deflation Watch. This indicator of inflation is suggesting that 2006 will give us an even more rapid decline in the purchasing power of the dollar, as it has risen 9.67% in the first ten months of this year. That amounts to something like 10.5% on an annualized basis, which I think will be more like the loss of purchasing power we face in 2006.

Here are the components of my Inflation/Deflation Watch and how they have fared during the first ten months of 2005:

S&P 500 +10.52%
Commodities (Rogers Index) +14.72%	U.S. Long Bond +1.62% (Rates up)
Wal-Mart Shares +2.21%	Copper +35.94%
Housing Builders Index +9.88%	Silver +31.28%
Real Estate Index +15.29%	Silver/Gold +6.09%
Auto Industry (Toyota) +22.66%	Rogers (commodities)/Gold - Down 10.69%
India Equity ETF (+36.64%)	U.S. Dollar/Gold - Down 14.78%
China Equity Index (+15.64%)	U.S. Global Liquidity Growth - Down 34.35%
Lt. Sweet Crude +1.61%

There were only three components of our "Watch" that pushed our reading toward deflation. First and most important was a 34.35% decline in the rate of U.S. dollar global liquidity from 14.47% to 9.67%. At one point, before I began calculating my Watch, this measure of global liquidity was growing at an annual rate of over 20% as Greenspan put the pedal to the metal to avoid deflation in 2003. But a growth rate of around 9% is not nearly rapid enough to stave off major liquidity problems, so I am anticipating that this measure of liquidity will soon start to rise again unless deflationary forces rip control away from policy makers. That is always possible but not likely in the near term. So although more modest U.S. dollar liquidity growth may account for the leveling off of energy and commodity prices during the past few months, I do not expect this to continue. The other two measures taking my Watch toward deflation have to do with gold relative to commodities and the U.S. dollar. Gold rose faster than both of those items, which we view as deflationary in our Watch.

Your editor's belief in the Kondratieff winter contraction remains intact. I just don't know when we will tip over into the cold winter deep freeze of the K-cycle. So what I needed was to find some mix of indicators that could give me a sense of what direction we are really heading, rather than where I think we must be heading based on K-cycle theory. The items in my Watch are believed to be forward looking and as such would seem to be telling us we are heading toward much higher levels of inflation next year. I know that isn't consistent with the propaganda you are hearing on CNBC. But it is what is really happening, which is why we are planning a more aggressive inflation hedging strategy in our Model Portfolio in 2006 and why we plan to start writing a newsletter in February 2006 titled, "J Taylor's Energy and Energy Tech Stocks." Our Model Portfolio in this letter will also reflect that view, though the new newsletter will provide more individual stock ideas in such sectors as uranium, oil and gas, and renewable sources of energy. On a positive note, we are very excited about the prospects of doing well in energy as well as gold and gold shares as we head into 2006.

Meanwhile, we will continue to watch our Model Portfolio for clues as to when we might begin facing the contraction phase of the current K-cycle. When that happens, we will most certainly look to bail out of our inflation hedges and move virtually all our assets into gold, gold shares, cash, and quite possibly some silver and silver shares as well.

Dec 14, 2005
Jay Taylor

email: jtaylor9@ix.netcom.com
website: www.miningstocks.com

J. Taylor's Gold & Technology Stocks (JTGTS), is published monthly as a copyright publication of Taylor Hard Money Advisors, Inc. (THMA), Box 770871, Woodside, N.Y.Tel.: (718) 457-1426. Website: www.miningstocks.com. THMA provides investment ideas solely on a paid subscription basis. Companies are selected for presentation in JTGTS strictly on their merits as perceived by THMA. No fee is charged to the company for inclusion. The currency used in this publication is the U.S. dollar unless otherwise noted. The material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. The information contained herein is based on sources, which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available information. Any opinions expressed are subject to change without notice. The editor, his family and associates and THMA are not responsible for errors or omissions. They may from time to time have a position in the securities of the companies mentioned herein. No statement or expression of any opinions contained in this report constitutes an offer to buy or sell the shares of the company mentioned above. Under copyright law, and upon their request companies mentioned in JTGTS, from time to time pay THMA a fee of $500 per page for the right to reprint articles that are otherwise restricted solely for the benefit of paid subscribers to JTGTS.

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