GOLD & Technology Stocks
Dr. Robert McHugh Speaks
of a Potential "Cataclysmic Nation Changing" Wave C
Dec 18, 2008
I was was greatly impressed
by an insightful article I found back in 2005 on the Internet
titled, "The Feds Are at It Again. What Do They Fear?"
It was written by Dr. Robert McHugh, who was, just as I was,
once a banker before he became a newsletter writer. Unlike your
writer, who worked for well-established foreign multinational
banks in New York, Robert actually founded a local community
bank in Eastern Pennsylvania that ultimately became known as
Main Street Bancorp. Talk about a "ground
floor" opportunity; as one of the founders of the bank,
Robert was one of 13 employees when it started. From zero deposits,
the bank grew to $3 billion in deposits and had 500 employees
when management chose to sell out in 2000 because they believed
the economy looked like it was ready to head south.
Dr. Robert McHugh
Robert was the second
ranking member of management. He was an executive vice president
and he was also the company's CFO. So he was responsible for
funding the bank's portfolio. He also was involved in managing
the investment portfolio of the bank. It was at that time that
he gained a great interest in technical analysis, which he used
as an investment tool. So, when the bank was sold and Robert
had plenty of time on his hands, he decided to really dig into
technical analysis by returning to school and acquiring his Ph.D.
in that field.
Robert is one of the few people
I know who has been a part of the establishment's money creating
machine who understands the virtues of gold as money. That factor,
along with his strong analytical skills and his exceptional quest
for objective truth- enhanced, I believe, by his strong Christian
faith-makes Dr. McHugh a very interesting and valuable addition
to our growing list of noteworthy interviewees. We are very thankful
to Dr. McHugh for graciously granting us an hour of his time
on December 8, 2008 to talk about some extremely dire predictions
that his Elliott Wave analysis is warning us of. During this
season of "joy and good tidings," we are not eager
to pass along Dr. McHugh's gloom and doom message. However, we
have always believed it is better to see the freight train barreling
down the tracks than not to see it heading our way so that we
can best prepare for the protection and welfare of our families
and others whom we love. As my old mine engineering friend Ricardo
Campo used to say, "It is what it is. Let's make the best
TAYLOR: Robert thanks again for taking the
time to talk to our subscribers. The last time we interviewed
you was in July, 2005 and a lot of things have happened since
then. I'd like to begin by asking you about a couple of dire
predictions you have made recently. I'm going to quote something
that you have written in the last couple of weeks, "We find
ourselves in a catastrophic bear market Grand Super Cycle degree
wave four down which is correcting the bull market from 1718,
before the United States even started." My question here
is how do you know this? What makes you so sure that is the case?
McHUGH: We have been keeping track of the Elliot
Wave structure for the markets. We have a long term chart which
goes way back. The credit for a lot of the traditional work building
up these wave cycles goes to Robert Prechter. He went into the
past with a lot of historical analysis and identified Grand Super
Cycle waves going way, way, way back Based upon those waves and
just taking it from the point of time where the United States
existed, if you started counting the waves forward, we had a
Grand Super Cycle wave three top in October of 2007. The reason
we know that happened then was because of something that happened
a few weeks ago: The S&P500 fell below its intraday low of
2002. That's a problem because it means that the rally from 2002
to 2007 had to have been a complete five wave structure. Originally,
we were hoping it was just Intermediate degree wave one up of
an ongoing bull market. But in Elliot wave terms, wave two can't
fall below wave one's starting point. Wave two correcting the
rally from 2002 to 2007 would have had to have stayed above the
bottom in 2002. It did not. It fell below that level three weeks
ago. This means that the move from October of 2002 to 2007 could
not have been a wave one, because we have dropped below that
level. It has to have been a complete full five wave cycle. We
had marked a primary degree wave four bottom in October 2002.
It means that the top in October 2007 has to be a primary wave
five, which also happens to complete a cycle wave five which
happens to complete a super cycle wave five.
That is based upon the wave
identification going back centuries. Therefore, this means that
the October 2007 high was the completion of a Grand Super Cycle
wave three. It is kind of like a logic sequence, if this, then
that, then that, then that. It is all because the S&P500
fell below that October 2002 low. So we now have confirmation
of this Grand Super Cycle degree, which is a horrible development
because the degree of trend for the Great Depression was one
lower (smaller) degree. The Great Depression was a Super Cycle
degree wave four. This is a Grand Super Cycle degree wave four;
therefore the damage that is going to happen now will be greater
than the damage that happened in the Great Depression.
TAYLOR: Robert, perhaps now would be a good
time to explain to our readers, Elliot Wave analysis. You talk
about these waves; I believe you are talking about Elliot Wave
theory. In general terms, could you explain to our readers a
little about that?
McHUGH: Sure. There was an accountant named
Ralph N. Elliot who made the observation back in the 1930's that
stock markets move in repetitive wave patterns that are predictable.
Generally, progressive moves, or moves that are taking prices
toward the primary trend happen in five waves and then after
those five waves are completed, markets always reverse in shorter
corrective waves that are generally three waves, although there
are other corrective patterns in addition to three wave patterns.
You can have triangles which are five wave patterns. But generally
speaking, to keep it simple, bull markets move forward in five
waves and move backwards in three waves. In bear markets, it
is the opposite, they are going to move down in five, retrace
and correct (rally) up in three waves and then move down again
in five. It is really that simple. What it says is that psychology
moves the markets. It's not the fundamentals, earnings per share,
so to speak. The earnings per share numbers are a function of
market psychology. Market psychology of human masses, of jumping
on the bandwagon in total, moves markets. That's why some days,
the market will go in a direction and nobody has an explanation.
Watching CNBC today is an example, when the market was down 200-250
points and a trader on the floor being interviewed commented,
"I have no explanation for why it went down today."
Because if we look at last night's wave structure that we presented
to our subscribers, it was simply time for a correction, we had
just completed five waves up in a very small degree.
TAYLOR: So this behavior is predictable then
to an extent, this mass psychology or mass behavior is predictable
in these waves?
McHUGH: Yes, it is predictable. However, it
is not always easy to apply. A price wave can start out in the
direction where you think it is going, then it can morph into
something else. For example, something that looks like three
waves up can morph into five waves up, it can just keep going.
Or something that looks like it is going to be a three wave correction
can progress into a triangle formation, which would be five waves.
So, while you are in a price move, it is a little hard to master
or predict it, although there are other tools you can use to
help you. But when you look back, it is a fabulous photograph
or map of where you have been. I love Elliot wave particularly
for its mapping value. It does have predictive value, but I use
a lot of other tools for prediction that I would rather rely
upon. What I like about Elliot Wave Analysis is that it gives
you the overall big picture, an idea of where you are headed,
the map so to speak, identifying what is likely going to be the
investing environment in the future. That is basically Elliot
Wave in a nutshell.
TAYLOR: Excellent, thank you. You have talked
recently about the Supercycle (A) wave, which I take it was the
big leg down in the equity markets. Now you are talking about
a (B) wave up, sideways to up. You have said that we should really
enjoy every second of this, because when it is over, we are going
to start wave (C ) down, which will be the big one. I think you
have used the words "cataclysmic decline" and "nation
changing event." Those sound like enormously dire predictions.
As you were saying before, what you are seeing in the wave patterns
looks considerably worse than what we saw in the 1930's. So,
we are in this (B) wave now, how long do you think it will last?
McHUGH: From a time perspective, Grand Super
Cycle wave 4, to correct something that started in 1718, you
would think this thing would last for 20, 30 or 40 years. So,
time wise from proportionality, that's what you would estimate.
However, the price damage that is happening is so rapid and so
powerful and so fast that, a Grand Super Cycle wave four could
correct three centuries of bull markets in a very short relative
period of time, something on the order of two to six years, let's
say. Our hope is that it is over in two years, but that will
happen only if the degree of labels that I have marked in our
analysis is correct, the highest levels. In other words, I have
the decline from last October to this November's low as a Super
Cycle degree decline because it was a 50% drop. If I am wrong
and that is only a Cycle degree drop instead of a Super Cycle
degree drop, that means that Cycle wave (A) down, the first leg
of this Bear Market, isn't even over yet. Any correction of the
Grand Super Cycle is going to be three waves, most likely. (A)
down, (B) up, (C ) down, of the Super Cycle highest degree. If
I am wrong, and these labels are too high, then this thing is
going to last for six years and we could be seeing stock markets
plummet further, the DJIA could go down to 1,000 or 500 and the
S&P500 down to a similar level, to 50.
TAYLOR: To 50?
McHUGH: Yes, if it is going to be a four to
six year event, that's a possibility, and that's terrifying.
TAYLOR: I think I read somewhere that you were
talking about an S&P to 500 possibly. My good friend Ian
Gordon, who loves your work and is a Kondratieff wave proponent
of a major bear market now. He thinks also that we could see
something worse than the 1930's. Ian asked me to ask you if we
are going to see something worse than the 1930's, then why would
we not see something worse than a 500 on the S&P? Maybe I
didn't understand you or he did not understand you right. What
are your predictions for the S&P500 on the downside assuming
you are correct?
McHUGH: That's a difficult number to come up
with because the Grand Super Cycle wave four can take three different
shapes. It can be a zigzag down (first chart on left) which is
the worst case scenario and in that case we will see the S&P
below 500, possibly going all the way to 50. That would mean
the third wave, the (C) wave, would be a dramatic wave like the
(A) wave has been. The second (second chart) possibility is flat
where the C wave will not take us down that far. It may take
us down to slightly below levels where we saw with the (A) wave
and that would be more like a
5000 target on the industrials (DJIA) and a 500 target on the
Or it could be a triangle (CHART
III), which in this case, a lot of wave fours are triangles.
It will be five waves. It will be an A, B, C, D, E pattern and
we will actually finish higher than the November lows, meaning
the November lows will be the low for this bear market in terms
of price, but it is going to extend for a long time. If it is
a triangle, we are talking five to six years, but the price damage
would be over and then it will be a sideways struggle.
TAYLOR: That will be the best of all worlds,
as you see it?
McHUGH: That is one way of looking at it, the
best case scenario, price wise. Time wise, it is not, because
triangles take time.
TAYLOR: Because my friend Ian his question
was, in the 1930s, in the Dow (DJIA), we saw a decline of almost
90% at one point in time, so a decline to the S&P500 would
be about a 65% decline. So I guess that was his question, but
I think you have answered it.
TAYLOR: Ian had noted that during the 1930's,
the Dow (DJIA) ultimately declined almost 90% at its low, so
if we had a decline in the S&P500 to 500, that would be a
loss of "only" about 65% from the all time high last.
But are you saying that depending on the wave structure down,
it may dip below that.
McHUGH: It really is based on probabilities.
Nobody knows the future. We know there are three different patterns.
Zigzags are the most common. However, wave fours do get triangles.
The Great Depression did not get a triangle. It got a zigzag
of Super Cycle degree. So if we get a zigzag of Grand Super Cycle
degree, we are going way, way lower. That is why I am telling
everybody to raise cash. I think we are now in the Super Cycle
wave (B ) up. It could be Cycle degree. In any case, we are going
to be up for a while. If everybody is wrong, at least you were
conservative. You saved yourselves a ton of aggravation, a ton
of losses. If this is the worst, great, you have cash and you
can get some pretty cheap prices down the road, if this zigzag
event does not happen.
TAYLOR: Robert, if this is a Grand Super Cycle
wave (B), where do you think we can go on the S&P500 and
on the Dow (DJIA)?
McHUGH: Typically a B wave is not going to
be a deep retrace, it is a shallower one. Again, it can form
a triangle. Wave Bs and
wave fours form triangles. If this is a B, it could form a triangle,
in which case, it's not going that high. If it is going to be
sideways pause, maybe we get as high as 9500 on the Dow (DJIA).
If it is a zigzag up, we could go to 11,000. If it is flat, we
to 10,000 on the Dow. At this point it is really hard to tell,
we are going to try to identify it as soon as we see where it
is going. We
always try to make the assumption without knowing, that it will
be a zigzag. We are looking for something in the neighborhood
the 10,500 area for the Dow, 1050 in the S&P500 if a normal
zigzag happens. The retrace percentage often times with a B wave
would be a Fibonacci 38% of the move down. The move down was
50% or roughly 6800 points on the Dow, so 38% of that gets you
back up above 10,000 and above 1000 in the S&P500, that would
be about a 38% retrace. We also use other tools. We have a bullish
(reverse) head and shoulders pattern that is targeting 10,000.
We would expect to see at least 10,000 in the Dow Industrials
and 1000 in the S&P500 before Wave B completes, but again,
if it goes to a triangle, we may not get that high or if it gets
there, it will be brief and then it will bring it back down and
it will go sideways for several months. The first wave (A) down
was about a year, year and a month. Wave (B) up should be shorter
than that, could be 3-4 months long. Wave (B) is normally a shorter
time frame than wave
(A). Once that correction (rally)
is over, the final wave (C ) down, if this is a zigzag or a flat,
should last about the same amount of time as the wave A did and
that would be about a year.
TAYLOR: Could I get you to comment on the phi
mate turn date? That is a very important tool that has been very
accurate from what I understand. Could you just comment on that
McHUGH: Sure, there are a lot of different
sciences to technical analysis which all bases itself upon the
concept that psychology moves markets. One of the tools is cycles.
A cycle is a periodicity where history repeats itself. We came
across a cycle pattern that is fascinating. We have discovered
that, since the January 14, 2000 top in the industrials, most
of the tops and bottoms since then have occurred a Fibonacci
number of trading days from that date to another top or bottom
since then. It has a phi relationship. Phi is the value .618,
which is kind of like pi, it goes to infinity, but we round it
off to .618. It is known as phi. It is not a random number, most
of the physical world we live in, the science of it, is earmarked
by phi relationships. Back in the 12th century, Fibonacci identified
this number. He found out that nature or God has designed the
world primarily using a relationship of Fibonacci numbers, particularly
For example, a gentleman's
belly button is approximately 2/3s or phi (.618) of the total
distance from his toes to his head. It is amazing. If you look
at all the great art and architecture of history, they use the
relationship of .618 to .382. If you look at a frame of a picture
on the wall, it will look right if the sides are .382 in relation
to the width which is .618. That is when it looks right. If you
use any other relationship, it won't look right. The architecture
of the Greeks, Romans, Egyptians all used phi. This is just because
this is the way our physical universe has been established mathematically.
Note: For those readers
who would like to find an excellent definition and explanation
of phi and gain anunderstanding of the many places in nature
where the "golden ratio" exits, please visit the Golden
Number web site at: http://goldennumber.net/neophite.htm
TAYLOR: That is very interesting because then
it suggests that perhaps the activities of policy makers are
an exercise in futility.
McHUGH: Correct. The way that I put it is this,
you think about all of the billions of transactions that go on
daily by the millions of people using thousands of computer models
and hundreds of business models, all buying and selling in stock
transactions on any given day and time and yet a mathematical
formula using a phi number can pick tops and bottoms. Is this
God's sense of humor telling mankind, "You can be busy and
do all you want to do, but ultimately I am going to decide and
control when the tops and bottoms happen." It is amazing,
TAYLOR: Well, Robert, I would like to go back
to our interview of 2005 then and maybe quote a little bit of
what you had to sayabout Mr. Greenspan's activities and his attempt
to keep things going, to keep the housing bubble moving forward
and of course in2005, it was just getting underway in earnest
about then. I said to you, "So, Mr. Greenspan has been erring
on the side of liquidity. He's afraid that things might come
unglued if he doesn't keep pumping lots of money into the system."
And you said, "Yes, I think so, the Fed Chairman is a student
of the Japan deflation and I think it scared him beyond belief,
so he has really gone overboard to make sure that that does not
happen here, but the truth of the matter is that once the foreign
holders of our dollars, bonds and stocks, and they are becoming
a larger and larger percentage of the ownership of our financial
assets, lose confidence and decide to sell those assets for whatever
reason, the Fed is not going to be able to pump enough money
supply into the system to offset what is going out the door,
because as you get a big wave of selling from foreign securities
holders, it is going to drop asset values sharply lower. They
will be wiping out trillions of dollars of financial wealth and
I think once something like that happens, the Fed will see that
they are standing under an avalanche. What are they are going
to do? Pump 100% money growth to try to make up a 30% or a 50%
drop in avalanche gets started." As far as I know and at
least on a grand scale, we have not yet seen evidence that the
Chinese and other foreigners have stopped buying our Treasuries,
McHUGH: No, that is the event that is yet to
come that may be what happens with the wave (C ) down.
TAYLOR: And yet, we are seeing a Federal Reserve
and a Treasury Department doing incredible things, trying to
pull rabbits out of hats and nothing is working so far, would
you say that is true?
TAYLOR: It would seem that, so far, they are
not able to defy the laws of nature. In spite of the fact that
we haven't even seen the cessation of lending from foreigners
at least on a grand scale. Do you see any evidence of what they
refer to as "quantitative easing" where the Fed is
buying our own Treasuries to keep the price down and interest
McHUGH: Bernanke actually admitted two weeks
ago that he was going to start buying the long end. I think that
with this whole Treasury bailout, Congress basically gave the
Treasury and the Fed carte blanche to fix it. There is very little
accountability over their actions and a lot done in secret. Today
we had a four week Treasury bill auction that went out at 0%.
Zero percent interest, $32 billion in Treasury bills were sold,
with four times that amount bid. People are so afraid of holding
money that they just want to park it someplace where they think
it will be safe and they can immediately get their principle
TAYLOR: That's Tuesday, December 9, 2008, right?
TAYLOR: That's incredible.
McHUGH: Incredible. So what has happened is
that confidence in the system is down the drain. We haven't seen
the foreigners give up on us yet. The evidence is that the Fed
has just buys Treasuries with money they have printed out of
thin air. They have the right to do it. They can legally do it.
It is not illegal. They have a mandate from Congress to do whatever
is necessary to fix the mortgage problem. They already have a
plan of up to $700 billion where they are going to buy bad assets
from banks and replace them with Treasuries and then those Treasuries
can be used to acquire cash. They have already started that process.
They can certainly buy Treasuries from the Treasury Department
any time they want to or in the open market. They can buy any
term they want to for cash they print out of thin air. They have
hidden M3 now, so it will be hard to track what they are doing.
They stopped disclosing M3 which disclosed a lot of the Fed repo
Treasuries for cash transactions. They stopped revealing M-3
two years ago. They now can do whatever they want to do with
little accountability. Clearly with the way interest rates are
dropping, some of this is a flight to quality, but there is also
the invisible large hand of the Fed at work purchasing securities
to lower interest rates.
TAYLOR: Is it a flight to quality, or is it
just as Bob Hoye, an analyst in Vancouver, calls it, a giant
short covering rally in essence, where the margin clerk is calling
the shots, because you have this great unwind of the credit expansion
now into a credit contraction, which creates a demand for dollars.
In that sense, I guess it is a flight to quality, or is it that
the dollar is getting stronger for all of the wrong reasons?
McHUGH: Yea, but that game is not going to
last because at some point, the missing link in the whole process
is the American household. The whole reason this thing unraveled
in the first place is because the American household lost its
income, lost its ability to borrow. Everything started squeezing
the American household. They were not able to make their payments.
That let the whole house of cards fall. Unless they address the
balance sheet of American household, it is not going to get better.
Now that we have seen essentially one year's gross domestic product
drop out of the stock and real estate markets and we are going
down even further, they have to pump about $13 trillion into
this economy and get it into the hands of American households
as fast as they can to fix it. Well, so far, they have pumped
a couple of trillion and none of it has gone to the households.
TAYLOR: It is going into the hands of the rich
McHUGH: That's exactly right. So, two of the
thirteen trillion dollars is gone, given to these bankers and
nothing has gotten to the American households. I don't want to
just be a critic here, I'm recommending a constructive solution.
My thought is, let's rebate three years of income taxes which
would come to about $13 trillion dollars. Let's get it into the
hands of American households.
Require them to take half of
it and pay off their debt. What that will do is clean up most
of the bad assets that Wall Street and other financial institutions
are holding. All of a sudden bad loans become good loans, bad
securities become good securities. Those payments are made and
the benefit trickles up. The American household cleans up its
balance sheet. It has picked up significant cash to spend, cash
that will replace income and wealth. It has gotten rid of its
debts. Wall Street and banks suddenly have clean assets that
before were bad assets that the Fed has just been monetizing
according to the current bailout plan. That's a strategy that
It's going to cost $13 trillion.
The deficit is going to be through the roof and it's going to
force a devaluation of the dollar.
We are going to have to devalue
the dollar as part of the cleansing process. Then we are going
to have to start looking at gold as a monetary standard against
it to boost our currency..
TAYLOR: Ok, what are the chances of government
doing that? It's not the common folks that carry much weight
in the electoral process these days. At least that's my cynical
point of view. It is really the heavy hitters (lobbyists and
special interests) that have access to these characters in Congress.
So, if that's the case then, in light of an Obama presidency,
what chance is there that we might see a more equitable distribution
of income along the lines of what you are suggesting?
McHUGH: Probably slim to none, but this thing
is going to get worse if there is not. At some point, they are
going to be looking for creative solutions like this. They continue
to put the Wall Street bankers in positions of political power.
The next Treasury Secretary was the Federal Reserve Bank's New
York branch president. He was a coauthor of this current bailout
plan that isn't working, so
TAYLOR: More of the same
McHUGH: More of the same. Rubin was a Treasury
Secretary under Clinton. And now he is head of Citicorp. They
needed a $250 billion dollar bailout. You've got Paulsen running
Treasury now, who came out of Goldman. The first thing he did
was let Lehman go down the toilet and destroyed the confidence
in the entire system by allowing that to happen. He let his competitor
go down the john and then he bailed out what seemed like everybody
else on Wall Street. There is a lot of politics, a lot of games
going on, a lot of nonsense for letting the bankers run things.
The grass roots people have to get a hold of their representatives
and shake them and say, "look, we are starving out here,
I can't put my kids through college." Our credit rating
is destroyed by the credit card companies that are charging 30%,
because they mailed out a bill two weeks before it was due and
I didn't get a chance to pay it. Or we just lost our jobs and
we can't pay it. Credit ratings right now are getting annihilated.
Credit card companies have just announced that they are going
to wipe out $2 trillion dollars of available lines of credit
from the consumer. The household is getting smashed and that's
why we are headed into a depression that is greater than the
depression of the 30s. There is no talk of anybody doing a darn
thing for the American household other than the ridiculous comments
like a $1500 tax rebate that Bush put out a year ago. That's
nonsense. We need big money for the household. My plan is for
a minimum payment of $50,000 per household. The average payment
would be $130,000 per household.
TAYLOR: Ok, so we're agreeing that probably
their plan is not going to work right away at least. They are
probably going to continue bailing out Wall Street. The fat cats
will continue to walk away with more money in their pockets,
keep their fancy multimillion dollar homes on the south shore
of Long Island and their penthouses in Manhattan. Life will go
on as it has been. Given that political scenario, where do you
think we are going to go in the bond market? I am really concerned
about the bond market. Like you said a little bit ago, where
is the money going to come from if the foreigners finally decide
they are not going to lend to us or even roll over what they
currently own? Even if they do roll over what they currently
own, given the trillions of dollars that our government is going
to be spending to bail out the fat cats, where is that money
going to come from if they monetize it? At what point in time
do lenders to the Federal government say we have to have more
for our money? When are they going to say this 3.5% 30 year Treasury,
we are not willing to lend to you at that level? When do you
think that will happen?
McHUGH: There is a problem if that happens.
The ball game will be over, and we are going to have a new country.
This isn't going to be the United States of America anymore.
TAYLOR: So if the interest rates spike up,
what would happen? Would we hyper inflate then?
McHUGH: Yes, the Fed would buy the debt. We
would monetize our own debt, basically devalue the dollar and
declare a year of jubilee where all government debts are no longer
payable to anybody. Then if China wants to sell their holdings,
the Fed will buy it and it will be a big sham. Then they are
going to be forced to look at a gold standard, a brand new currency
or the whole country will collapse. And that is the problem with
this Grand Super Cycle Bear Market as I said earlier. Grand Super
Cycle degrees change governments and economic ideologies. There
is a paradigm shift of the way the world is structured. That
is what is scary about this Grand Super Cycle Wave four. The
potential is there and you just laid out a very good scenario
for how it could happen. That is why it is urgent that the government
get a smart policy of rehabilitating the American household now,
before it is too late. While $13 trillion sounds like a lot of
money to rebate, they are going to spend it anyway. They have
already identified $8.5 trillion in bailouts, excluding entitlement
payments from social security and medicare. Why not go a little
further, to $13 trillion, they are going to get there anyway,
and save the American household, and perhaps capitalism at the
same time? They are trying to save the system exclusively, but
they have to do it together, save both the household and the
TAYLOR: I agree with you Robert on what you
are saying, but given the realities of politics, and as you suggested,
it is probably not going to happen right away. Now, people are
tripping all over themselves to lend to the Treasury (buy Treasuries).
As you were saying a little earlier, we have zero interest rates
(on Treasuries) today. So if we get this Grand Super Cycle, is
it likely that no one will want to lend to the Treasury anymore?
McHUGH: That's why I am telling everybody to
raise cash as wave (B) unfolds here.
TAYLOR: If we start to hyper inflate and is
that what you think is likely to happen here?
McHUGH: Yes, it has to happen.
TAYLOR: They are going to hyper inflate, the
Treasury is going to have to buy the debt because certainly Americans
don't have the money to buy it.
McHUGH: No, that's the problem. The Fed and
Treasury are going to have to do it all. If they let this thing
go down the drain, if they don't do something aggressive for
the American Household, to rebuild the grassroots now, the Fed
and the government will have to devalue the dollar anyway. It
will almost have to be an official devaluation. They will have
to buy out all of the debt with lower, cheaper dollars. And I
am not sure what is going to be left standing when that happens.
People are going to be crying and screaming for government protection
and for government solutions and that is how you slip into totalitarianism.
That's how you slip into socialism. That's how you slip into
fascism. That's the danger here, if the American household is
not fixed now, before it is too late, when we get to the bottom
of this Grand Super Cycle, they will be screaming for a new political
structure just like they did in Germany. That is how Adolf Hitler
rose to power. This is how the dictators of history have risen
to power. And that is a danger.
What might be the form of that?
Who knows? It is anybody's guess. Maybe what happens, is that
there is an international consolidation of nations, where the
United States becomes a state within a larger nation, maybe with
Europe, maybe with Canada and Mexico.
TAYLOR: Right, there is certainly some talk
of that. Congressman Paul has even confirmed that there are some
tentative plans for going in that direction with an Amero currency.
Unfortunately, that all seems very possible to me as a person
who has been observing this scene for some time. So, we are looking
at the possibility of a major increase in interest rates. Could
one make some money shorting the long bond somewhere along the
McHUGH: Maybe that will happen, but my own
personal opinion is that I don't think the Fed will let interest
rates rise on the long bond. They will buy them all up if they
have to first.
TAYLOR: So, they will keep the interest rates
down and that means buying them at an accelerated rate as time
McHUGH: What will happen is that the Federal
Reserve will print money out of thin air, go into the market
and buy up all of the United States Treasury debt. All the debt
will be held by the Fed and money, dollars, that will be worth
a lot less, it's a form of devaluation of the dollar, will float
into the government and into the economy. What happens is, that
creates a hyperinflation and keeps interest rates down at the
TAYLOR: Well, John Walter Williams, the economist,
had been strongly suggesting a hyperinflationary scenario by
2010, but given recent developments, has moved that up to as
early as 2009. That, in a way would dovetail with your scenario
of a very rapid unwinding of this Grand Super Cycle, would it
McHUGH: If that is the case, that means we
are having an accelerated wave and that's right, it would be
a shorter term thing.
TAYLOR: You've talked about gold a little bit,
Robert. Can you use analyze gold the same way, with the Elliot
Wave techniques that you use on the equity markets? Can you use
the same Elliot Wave analysis on any number of markets?
McHUGH: You can use Elliot Wave on anything.
It works on any market, on any instrument. We do use it on everything
we cover, gold included.
TAYLOR: How do you see gold now?
McHUGH: The other thing we use for gold to
help us, is to look at the monthly and weekly full stochastics,
which is a momentum measure. When stochastics get to an oversold
level, that points toward a turn. So with the combination of
the two, what we see now for gold is that gold is bottoming.
It has been in a corrective phase, but there are strong momentum
indicators indicating that gold is bottoming and should head
much higher. If we see the dollar devalued or hyper inflated,
gold has to grow in value. Gold becomes money at some point here
as this crisis deepens. It becomes something that is tangible
and has monetary value that people want to have their hands on.
It is just going to add more demand for it. Right now, you can
hardly buy gold coins anywhere. The demand for them is greater
than the supply.
TAYLOR: And yet the paper price for gold has
McHUGH: Yes, and there is some manipulation
going on there or what you would call government manipulation
or market manipulation from other sources than government. They
try to keep the price of gold down because they want people to
continue to turn to the fiat currencies like the dollar and the
Euro. What happens is, as people lose confidence in those currencies,
they are going to look to gold as real money. At some point here,
gold's value increases as these fiat currencies get shakier and
shakier and central banks hyper inflate more and more volume
of them. The central banks don't want gold's value to increase
at all. Their whole strategy is to preserve the dollar, preserve
the fiat currency system to keep the bankers in power and control.
They need to keep the lid on gold, but at some point, supply
and demand forces, fear, and the break up of the financial system
will drive people to what has traditionally been, for thousands
of years, real money, which is gold and silver.
TAYLOR: I think it is remarkable Robert, that
that insight comes from an ex-banker. I just pass that along
to my readers because most bankers wouldn't think that way.
McHUGH: Well, I'm a renegade banker. I have
sat in at meetings where the Federal Reserve came in, sat down
and "said stop lending, we think there is a recession coming."
The very fact that we were told to stop lending caused a recession.
That happened in 1990-1991. Word of that finally hit the mainstream
media and one of the first acts Clinton did was that he grabbed
the regulators by the throats and said, "why don't you let
the bankers start lending again." The next time they came
in, they told us to start lending.
They have that kind of power.
They decide when recessions and depressions happen. They decide
when hyperinflation happens.
They can do it through a lot
of different tools. The hidden one is the regulatory agencies
where they come in and intimidate bankers and tell them what
to do. They have a lot of power. They can have the boards of
directors of banks thrown in jail. They can have people fired.
They use those powers behind the scenes, nobody knows about them.
As a banker, I have seen the dark side of the Fed. I have watched
them rate good loans as bad loans, and charge off loans when
in fact, customers were fine, the loans were fine. We are in
a bit of that environment again now. What happens is, the last
thing these government agencies want to happen is that they get
called on the carpet before Congress. So they become overzealous,
overcautious at precisely the wrong times. There is a lot of
action by the Fed that messes with the normal business free market
cycles that would prevent excesses. A lot of the publicity in
today's market is that there wasn't enough government intervention,
there wasn't enough regulation and that is true too, they got
too far in one extreme, but they create imbalances and create
these problems by overacting as well.
TAYLOR: Robert, while we are on this topic,
I have to ask you about the Plunge Protection Team, or in more
polite circles, known as the President's Working Group, which
you talk about frequently in your newsletter. You have some way
of measuring their activity. Could you just talk about that for
McHUGH: Yes, it's hysterical. I started to
get into technical analysis to a large degree back around 2000.
Prior to that, I was a user of technical analysis, when I managed
money, millions and billions of dollars, and I appreciated it.
When I got into it closely and started preparing a lot of it
myself, instead of reading other people's work, I learned real
quickly that there is manipulation in the markets. There are
unexplainable moves that are outside the parameters of normal
indicators, and normal things that work. I really saw it increase
and intensify to a degree I had never seen before in the mid-2000s,
I'd say about 2003 to even today. I researched the President's
Working Group and sure enough, it is legal for the Federal Reserve
or the Treasury or the SEC or the other members of this Working
Group to authorize the purchases of stock, to authorize the purchases
of futures, to manipulate stock markets, to manipulate bond markets.
They have the right to do this under the legislation that was
passed right after the 1987 stock market crash.
From say 1987 to 2002, I just
don't think that the PPT's actions were used to keep markets
going up, up, up. They did it to stop major declines and prevent
collapses. There were prudent opportunities to use it, to intervene,
such as the LTCM hedge fund collapse and the Asian crisis in
the late 90s. Those were appropriate uses for the Plunge Protection
Team. What I noticed is that the market never went down after
2003. It never went down when it should. There were no corrections
to speak of. There were months and months and months of straight
up. Just when all of the indicators that you would normally be
able to rely on, would anticipate a correction, nothing would
happen, the correction would suddenly reverse.
TAYLOR: So, what we are really talking about
here Robert, is the President's Working Group. That is directly
from the Executive Branch of the United States Government, then?
McHUGH: Yes. There are no minutes to their
meetings. There is no disclosure. There is no transcript. It
is completely hidden. It was all circumstantial evidence. I would
have e-mails from subscribers, from traders, from floor traders.
The Working Group is allowed to use Goldman Sachs and a few of
the other major investment banking groups to conduct their transactions
for them. I had traders on the floor e-mail me saying, "our
mystery buyer has ordered Goldman Sachs to buy the market."
Sure enough, it turned it on a dime and the thing flew up. It
got to the point, where the traders just followed this mystery
buyer operating through Goldman and so on, to make a profit.
I realized that at this time, we had an intensified degree of
market manipulation throughout the middle of the first decade
of the 21st century. So I played around and found a proprietary
indicator using data I can measure that can actually predict
when it is probable, not guaranteed, but probable that government
intervention into the market will occur, and approximately when
it is probable that it won't. I have been using this tool for
three or four years. It's called my plunge protection team indicator,
my PPT Indicator. It has been astonishingly accurate at pin-pointing
the environment and periods of time when markets are more likely
to go up than go down and vice versa. Interestingly, the last
six months or so, the PPT has not gotten heavily involved in
jacking the markets up to the degree that I expected them too.
These indicators allowed for large periods of time where markets
could slide, and in fact, they did. I don't know whether it was
a change in philosophy or whether the selling pressure got so
great that even the Working Group's (a.k.a., Plunge Protection
Team) efforts were starting to fail.
TAYLOR: Just overwhelmed perhaps by the sheer
magnitude of the decline.
McHUGH: Yes, as the house of cards collapses,
their ability to manipulate the markets unravels.
TAYLOR: So, let me get back to gold just briefly
then, in terms of your medium and long term view of gold
McHUGH: My long term view is that I am bullish,
incredibly bullish, because I do think it will eventually have
to be used to back new currencies or existing currencies. If
we are headed into this Grand Super Cycle depression, they are
going to have to recreate the currency, so gold is really critical
there. Intermediate term, I am also bullish, looking at both
stochastics on a weekly basis, which is my intermediate signal
that allows for a nice rally. The longer term, which would be
the monthly full stochastics, allows for a nice rally. Short
term, the daily full stochastics and the Elliot Wave count allow
for some more give and take, a slight minor decline back and
forth. All in all, I think gold is going to hold up fairly well
in relationship to how other financial market instruments have
Relatively speaking, gold has
held up pretty well and should continue to do so. Once the short
term correcting phase is over, gold should take off, perhaps
even in 2009.
TAYLOR: Well, it's interesting that you say
what you did about the fact that gold has held up relatively
well compared to most other things. Gold has, of course, risen
dramatically compared to oil, compared to copper, compared to
the Rogers Raw Material Fund, compared to a whole broad base
of things. One of the beliefs that I've had is that gold mining
shares should do well as they did in the 1930s because the cost
of producing gold goes down much more than the price goes down.
We are seeing that actually happen now, which leads me to one
of my final questions, for you Robert. With respect to gold shares,
how do the gold share markets look to you, maybe the XAU or one
of those indices?
McHUGH: Well, the HUI is really the one we
pay a lot of attention to and it did not do well. It really fell
almost hand in hand with the entire general market. In fact,
it even fell more, which surprised me a little bit. I thought
that although it is below ground gold, I thought the fact that
it was tied to gold would help it a little bit
TAYLOR: Actually, I believe that is exactly
what happened in the 1929-1930 time frame as well. Homestake
and some of the others went down initially with the market and
then we had a bounce up in the equity markets before the next
plunge down, but gold shares continued to perform well then after
McHUGH: And that is what we hope will happen
now is that, in the next leg down in the major stock indices,
the HUI will not follow its stock component, but will follow
its gold component. It did not do that in the first leg down.
That's disappointing, but at some point, they have got to get
their hands on gold as demand increases, and it is going to increase
for it. They are going to have to mine it because the coins are
drying up and.
TAYLOR: liquidity, to get real liquidity back
into the system.
McHUGH: I think what happened too, is that
as liquidity became a real problem, I think gold and precious
metals and the HUI, it was the first part of the portfolio that
a lot of these hedge funds and so on threw out the door.
TAYLOR: Sure, they didn't see the value of
McHUGH: They didn't see the value of it. They
are more short term focused with margin calls, redemption requirements
and survival issues than they were about the long term future
of currencies. I think the HUI is the baby that got thrown out
with the bath water. I do believe that you are making an excellent
point and I had not done that research. That is fascinating to
know that and it makes logical sense that it (the HUI) would
not perform as poorly on the next leg down.
TAYLOR: Do you see anything in your Elliot
Wave work with respect to the shares that give us some hope for
a more bullish picture?
McHUGH: It is the exact same scenario as with
gold. Monthly full stochastics are bullish. We are bottoming
and are due for a rise. The weeklies are bottoming and due to
rise. That means the long term and intermediate term future of
the HUI looks positive. The daily is not quite as positive and
is subject to some downside risk in the short run, but over the
long run and over the intermediate term run, the position for
HUI looks very similar to gold, which would be positive.
TAYLOR: Robert, I would just like to thank
you for your time and for sharing your views with our readers.
I know that you work very hard for your subscribers. I can tell
you that every day, I look at your letter now. In order of importance
during these tumultuous times, I read your letter first and secondly,
I always read Richard Russell. I find yours and Russell's to
be mandatory reading in this environment. In particular, you
keep your finger on the pulse of the markets on a daily basis.
I am telling my subscribers that they should sign up for your
service, even if they can't follow all the wave analyses and
detail, you provide a good overview and an executive summary
that I find very, very helpful. So how can our subscribers learn
more about your service?
McHUGH: We are available at www.technicalindicatorindex.com.
For new subscribers, we have a free 30 day trial subscription.
That is what we recommend everybody
do first. It is easy to sign up. There is a button on the upper
right hand corner of the home page. Just click it and fill out
the information. They can test us for 30 days. We produce a daily
report and an expanded weekly report. If they like us, we have
some nice subscription specials. We run a lot of specials, so
it's affordable. One of the things we try and do is keep it affordable
to the mom and pops because they are the ones really getting
hurt here. I am sure that I have a lot of sophisticated investors
and a lot of hedge funds and companies that can afford to pay
a lot more for it, but I don't want to price the households out
of this because I think it is a service that I think a household
needs to be able to afford and that is what we try to do.
TAYLOR: I thank you very much for that. Is
there anything else aside from subscribing to your service, any
summary advice or remarks you might want to make?
McHUGH: No, it is one of those situations where
you really have to do the risk analysis and say, "ok, we
are in a potential situation that could be cataclysmic."
There is potential, there is no guarantee. Play it safe, play
it conservative, prepare, over prepare and if a better scenario
comes out, if wisdom reigns, if we get God's good blessings and
this thing does not fall apart, then you have a lot of cash and
you are in a position to take advantage of some cheap prices
on a lot of things. If you are right, and the worst case scenario
does occur, you will be glad to be able to function as a family
with cash, with a new currency and a new regime established.
It changes the rules and you can adapt to that.
TAYLOR: Thanks Robert for spending your valuable
time with our subscribers. God's blessing to you and your family
in these very difficult times.
McHUGH: Thank you Jay, and thank you so much
for your time. I have really enjoyed talking with you.
J. Taylor's Gold &
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