Excerpted from the August 22nd edition (#47) of Notes From the Rabbit Hole.

My bias is bearish. That is because I do not believe that an economy can be run effectively by using fiat money creation and taxation to produce funds for stimulus, which is then aimed at consumer spending, some very unproductive infrastructure boondoggles and other pet projects. I do not believe that pumping new life into the big banks and big Wall Street houses - the very institutions that led the US to ruin while chasing ever higher morally hazardous short term gains - can do anything other than misallocate capital once again, on a grand scale.

But my bias was bearish all through the 2003-2008 inflation fueled 'bull' market as well, and by keeping perspective, I was able to keep my bias under control and capitalize very nicely. So NFTRH will not be a perma-bear sentinel keeping guard over the bearish case while smart aleck bulls run rampant. It will not dig in and wait for the day that it gets its crash and trumpets 'I told you so'. No, too much time can elapse during which some serious damage can be done to those who dig in their heels too firmly.

That said, we do not have our signal for the all clear on strongly participating in another market and economic 'recovery' born of inflation policy. In fact, we have many signals that are in alignment with the current 'risk is high' stance. Contrary signals like these headlines from Bloomberg, just yesterday:

"Global Economy Emerging From Recession as Recovery Takes hold"

"Bernanke, Trichet See End to Global Slowdown, Remain Cautious on Recovery"

"Treasuries Fall on Existing Home Sales Jump, Bernanke Outlook on Growth"

Growth... isn't that what it is always about? We must grow, grow, GROW! We must continue to grow already sublime levels of debt. We must keep people spending and at all costs, not allow the economy to naturally correct itself of its excesses. That is because deflation, once a normal and healthy part of the economic cycle, is now a toxic outlier with the potential to destroy the entire shell game. But this we all know.

So inflation it is. I started this newsletter on September 28, 2008 as the deflationary impulse was gathering momentum toward the historic crash that immediately followed. Good perspective can often be found by reaching back to a different time and circumstance for review. From NFTRH1:

When considering shear size of the IOU's being printed up to fund the hoped for bailout of players who gamed and were enriched by a corrupt system, when added to the socializations of Fannie and Freddie, the relative chump change at AIG and so many other components of FrankenMarket one has to realize that the 'money' has to come from somewhere.

We are just coming off of a cycle of highly elevated inflation expectations and have descended quickly into the gaping maw of deflationary Armageddon. I find it best to stick with the script that has been in play all along:

• Inflation fuelled party comes to a screeching halt in the face of declining prices and tanking markets as commodities positively correlated to the economy are exposed for the manic plays or bubbles they were.

• Leveraged players begin to fail.

• Gold outperforms most assets.

• The all or nothing 'Hail Mary' is contemplated as even the geniuses who helped create this leveraged mess are afraid of the consequences of actually letting deflation root itself into the system. With the public terrified of a meltdown, the pressure will be on to save the day through inflationary policy, signaling the birth of a brand new inflation cycle.

So the question remains, are we there yet? Is this the beginning of the new cycle in inflationary moral hazard? Is the global casino rebuilt and ready for business (as usual)? My parameters, shown in the following segments remain close at hand, but as yet untriggered. So my stance, best described as 'cautiously patient' remains intact.

Perspective is key now as the markets woo those with no fundamental, technical or moral compass. As you can see by what was written in late September, I have had no doubt of a new cycle. But I continue to have doubt as to its timing. 

Let's start off today's analysis with the 'Stock Market' segment and a look at the smart vs. dumb money... (much more follows in NFTRH47).