The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 3, 2011.

Question: If the US is to maintain it's quantitative easing (QE) policy by at a minimum reinvesting the interest from maturing bonds, which should still be enough to keep official interest rates subdued for a while, then why would the dollar ($) rally in coming months? Answer: Because major US trading partners will begin to debase their currencies at even faster rates, making the $ more attractive. Thus, by July at the latest, and likely sooner given Japan has already begun this process (not surprising considering their economy is crashing because of the radiation problem), the $ should have made a bottom, which is normally associated with a resumption in the credit crisis these days, but in actuality, as per above, would not be the reason. All we need to make the turn in the $ a reality is for the euro to top out, where with troubles in the zone heating up once again, this should come sooner than later. The larger understanding here is the credit crisis never went away even though the economy appears to have been recovering since 2009, and now the weaker States in the Western alliance are crashing again, allowing for the fiat currency differentials on the global chess board to be realigned temporarily.

And any strength in the $ should prove quite fleeting in fact because not only are periphery economies crashing once again, but now, core economies, including the US, are threatening to do the same with their exploding deficits, increasingly unsettled debt markets, and out of control bureaucracies / plutocracies. So, it's important to understand this is why only short lived cyclical corrections in US$ priced asset / commodity groups into the fall at the latest should be expected once they arrive, which should be sometime around mid-May in a perfect world. I say 'perfect world' here because a goodly number of market timing services are expecting this to occur at this time, so, don't be surprised in the present trends run longer in order to frustrate initial waves of speculators looking to capitalize on what should prove to be intermediate degree turns. Of course I could be wrong in this regard with currency speculators now in a position to affect such a turn, so at a minimum, one should likely be applying hedges / lightening long position now to be safe.

Again however, and as with the central message in Martin Armstrong's latest, with no other avenues (think fiscal policy) to pursue that would be effective (late stage fiat currency economies are eventually consumed by the need for speed [in currency debasement] rendering all other measures impotent [hence the need for hyperinflation eventually]), don't expect any correction in the inflation trade to last long (expect a cyclical correction [less severe and temporal] lasting no longer than six-months), because the markets will react to a continued acceleration in currency debasement rates eventually no matter how well its hidden. We know this not just because of history or logic, but because signals are now arriving in the empirical world that work together to confirm such thinking. A good example of this is the monthly buy signals on the major US stock indices we got last week. As you know from above this does not mean they will go straight up from here. What it does mean however is even after a correction that takes prices back down, which again, should be cyclical in nature, new highs are expected next year, which is consistent with our thoughts on the unrelenting inflation being the bureaucracy's continuing modus operandi no matter what happens to the $, or bonds, or whatever, until it blows up. Then they will care eventually, when its too late, but not until then.

Until then they will play the game, which means printing money / expanding the monetary base and hoping nobody notices, creating distractions to keep the ever-increasing ranks of the poor (being taxed by inflation) occupied while the rich get richer. And the plutocracy has its larger bureaucracy in place in order to attempt maintaining the status quo, which again, means attempting to hide inflation at any cost. (i.e. note the smack-downs in gold and silver this week.) However this won't work for ever, where as alluded to above, eventually either the currency and / or bond market will blow up no matter what, which could also have a disastrous effect on stocks as well. For now however, our view is that starting sometime over the next month or so the inflation trade will have a cyclical / intermediate-term correction that could last up until November at the latest (May tops often lead to November bottoms), to be followed by a wild ride into next year as both inflation rates and prices explode higher. That's what the bond market is telling us, where although its been behaving well of late with weak data points and monetization practices still in full force, it should be noted that if the count below is accurate, Treasuries could begin misbehaving sooner rather than later. (See Figure 1)

Figure 1

This is of course not news to anyone who believes the end of QE2 will have a negative impact on Treasuries starting in June, where in fact it appears this timing could coincide with a continuation of the price slide that started last October, as can be seen in the inverse 30-Year US Treasury ETF above. Of course the system still has self-correcting mechanisms operating that could delay the day of reckoning for Treasuries despite all the manipulating to this end already by the bureaucracy's price managers, so speculators considering shorting long bonds soon should take this into account before acting. Here, with implied rates and credit spreads both on the rise, it's likely stocks begin a correction no later than June as well, which should keep a bid under Treasuries (despite QE2 ending) until equities find a footing sometime in the fall. And in speaking of equities, to be clear, we are expecting one more push higher off of the weakness experienced this week to end the larger degree sequence before the cyclical correction referred to above sets in, and the $ begins the counter-trend rally that we have been expecting to begin in late May / early June - right on time. Just watch for a non-confirmation in the Gold / Silver Ratio (stocks rally set against a divergence), along with the VXO (see below) re-entering the diamond it had traced out since 2008. (See Figure 2)

Figure 2

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