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J. Taylor's GOLD & Technology Stocks
Dr. Robert McHugh Speaks of a Potential "Cataclysmic Nation Changing" Wave C

Jay Taylor
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 of it."

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 S&P500.

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 some
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 could go
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 of
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 briefly?

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 phi.

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, just 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, have we?

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?

McHUGH: Yes.

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 rates down?

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 back.

TAYLOR: That's Tuesday, December 9, 2008, right?

McHUGH: Yes.

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 bankers essentially.

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 would work

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 system.

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 line here?

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 goes on.

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 same time.

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 not?

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 been declining.

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 a moment?

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 done.

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 that

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 it.

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.

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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