The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, September 15th, 2009.

On one side of the formula we have the continued need for speed in monetary creation by whatever means, capably characterized by Doug Noland in his weekly commentary explaining that while it will all end badly, government largesse will likely get out of control before its all over. The point he is getting at here is that because of all it's meddling, the government (and us) is locked in an inflation death grip it necessarily needs to keep building on or face implosion. So in essence, Doug is alluding to the risk of hyperinflation, or the closest we will ever come to it on a macro-scale. And he is perfectly correct in this accounting of our dire circumstances, and the eventual disastrous effects of all this government intervention to keep the bailout finance bubble growing. One day this thing is going to pop, like all bubbles do, and it will be game over for the global economy, US Dollar ($) hegemony, runaway socialism, and unchecked fiat currency regimes.

And as per our discussion last week, enter Robert Prechter and his thinking that in spite the need for speed discussed above, the bureaucracy will fail in its attempts to keep inflating with abandon because the consumer is about to cave in, scuttling any such attempts, predicated on the concept the larger Elliott and Kondratiev wave patterns are suggestive deflation should grip the macro sooner than later. And this sentiment is also being touted as a timely matter by Harry Dent right now as well, adding considerable weight to this call, because he sees the two big D's coming into play - those being deleveraging and demographics. So the question then arises, which camp is right - the deflation or inflation camp? Let's take a look at this question to see if we cannot arrive at an appropriate answer within the increasingly complicated tapestry of our economies.

For me, it's all about deleveraging, where demographic trends will work to exacerbate the credit contraction trend into the future. Based on this belief, you might have guessed that I sit in the deflation camp as far as this being the primary condition of the larger economy, however one would need to be living in a vacuum not to notice the largesse (inflation) the bureaucracy has and continues to let loose, so you see there are dual paradigms that exist at the same time, with the latter designed to counter the former. In the end however, which for our purposes is fast approaching in a cyclical sense if the deflationists are correct, one paradigm will consume the other and become the obvious winner, with inflation's reign under the Keynesian influence most likely to finally succumb to gravity. We know this to be true because sectors that are not benefiting from monetization practices are seeing price weakness already, and the rest will follow when foreigners finally cut our drunken bureaucracy off of cheap credit.

Even without this things don't look good in the credit markets, where we have another mortgage debt implosion scheduled for next year already, one where unless accelerated monetization and low interest rates are maintained, the bureaucracy will be unable to keep real estate loans from joining all other sources of credit contraction, locking in a deflationary spiral the likes of which has never been witnessed in human history previously in either scale or scope. And who knows, the larger sequence could be starting right now formally with an apparent trade war between the US and China brewing. Is this why China is bringing its gold reserves back home for safekeeping, along with implementing a partial gold standard to protect its economy? If you need to think long about the answer to that question you are not doing enough reading, where this issue should be taken very seriously by all because no matter where you live or what you do.

Escalating trade wars would likely end globalization as we know it much as the Smoot Hawley Tariff Act of 1930 did the same over the next decade on a smaller scale. You had a spend happy democrat in the White House back then, and we have another one today consistently making history again, where igniting a trade war to guarantee a decade of Depression was all that was missing from the silhouette. And now, that piece of the puzzle has fallen into place too, all in good timing to trigger Chinese reprisals across a variety of markets they influence, with debt and precious metals topping the list undoubtedly. All they need to do is cut back further on US debt purchases and push gold comfortably over the $1,000 mark to send a message to Washington that they 'must be high', not that the drug addicts (they are hooked on printing money and feel invincible) in the bureaucracy would notice.

Be that as it may, if something like this were to occur in coming weeks concurrent to the seasonal inversion in stocks topping out in extreme timing territory (October / November), we would have the fundamentals to match the larger degree cycle turns (think Elliott and Kondratiev waves) in place, painting a scary picture for equities in 2010. You will remember this is Prechter's call, that next year would go down in the record books in the deflationary event department based on the Grand Supercycle wave structure in stock markets around the world. And based on the way things are developing this fall to set the trends in motion, it appears the dominos are all falling right on schedule. Even the September quadruple witching in the futures markets is helping the cause in this regard in that put / call ratios are high enough to aid price managers in continuing the low volume squeeze in stocks, with the trend about to be tested apparently. (See Figure 1)

Figure 1

There is no more significant test of the trend than the155-exponential moving average (EMA) on the monthly, the ultimate 'trend definer' in being the optimum Fibonacci derivative that has proven reliable in measuring profound directional changes. And as you can see above, the S&P 500 (SPX) is set to test the trend at 1070, where a break above this key resistance level would put stocks back into hyper-bubble mode. (I will discuss this further below as well.) In knowing how the psychology of markets work however, one would know such an outcome is not likely on an extended basis because once broken, bubbles of this scale do not return normally, which has been the experience throughout the ages. (i.e. think the South Sea Bubble, etc.) The Nikki is a good modern day example of this, and is likely leading US / global stocks in this regard, where it will probably never see the 1989 highs ever again.

The world's stock markets are simply more complicated these days, but not less profound in the sense bubbles associated with the last Grand Supercycle top in equities was also global in scale, albeit participation levels within the general population have never reached such extremes before. Even the peasants of third world countries have gotten involved in the present day mania, suggestive the hangover will be long lasting and profound even if reorganizations of new fiat currency based economies were possible, which of course is likely not the case. Once confidence and cooperation are lost on this scale it does not come back for generations, not without some new earth-breaking technology to formulate new economies anchored in geometric efficiency gains. (i.e. think the wheel, steam power, the microchip, etc.)

So, the next time the SPX falls through the 233-month EMA, as denoted above, you will know a high probability exists a Grand Supercycle Degree event in stocks could be unfolding, suggestive stocks could plunge to unimaginable levels to most. And you will see this same sentiment as it pertains to the SPX seen above denoted below with respect to the Dow, along with a target crash zone we should all hope holds. Because if the Dow cannot hold the 3,000 to 4,000-crash zone, then we could witness a 90% plus retrace, potentially involving a complete breakdown in modern day society. To hold this support zone with gold able to rally into the same numeric (a Dow / Gold Ratio of unity) would be a sign that new currency regimes involving partial gold backing would likely be formulated and define exchange in trade for a period of time. Again however, this does not mean the global stock markets will ever return to previous highs. (See Figure 2)

Figure 2

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Good investing all.