[MRM]

Wayne's prediction will surely come true in the long run, but it isn't going to happen any time soon. In the short term we will see significant deflation and strengthening of the dollar. The fundamentals of the economy still makes deflation inevitable, despite the money being pumped into the economy. The problem is that there are too many deflationary pressures for the money the government is throwing at the economy to have any real effect. Inflation will come, but it will happen because the feds won't be able to put the brakes on their stimulous spending fast enough when the turnaround starts happening. That's when Wayne's prediction of high inflation and even higher interest rates will come true.

In the short term, commodity prices have fallen due to weaker industrial and consumer demand. There is excess capacity worldwide. So the cost of goods is lower while demand is lower. Companies have to engage in price wars to maintain sales. Fourth quarter figures will be coming out soon. They will be worse than anyone is predicting. Stock prices will fall again, resulting in more wealth being destroyed, again offsetting the money the feds put into the economy. Lower sales leads to excess capacity, which leads to cost cutting, which means layoffs. Unemployment is high now and going higher. Unemployment is deflationary. Until the job market gets back on its feet, neither consumers nor industrial demand will strengthen. Without strengthening demand, there won't be any inflation. So the key is to watch the money supply and unemployment rate.

Unfortunately, the uneployment rate is a lagging indicator, so by the time we know the economy is back on firm footing, it will have been back for at least a quarter, and it will take another quarter to be sure it's not an statistical aberation, so it will be at least six months too late before the Fed will start pulling back. That's going to bring serious inflation. It will be like someone turned one switch off and turned the other one on.

The market will keep going down the first half of the year, probably going below October 08's lows, before bottoming out in mid summer. However, you will not see a real recovery until first quarter 2009.

The investment plan we can formulate with this information is to hoard cash in the short term. Don't invest new money in stocks until industrial demand starts ticking up. One demand kicks in, stocks will jump. Once that happens, inflation will follow within a year, followed by high interest rates. At that point you shuld get out of stocks, they will be stagnant for a long time after the big run up, and you should buy a ladder of Treasury bonds once they hit the 8-10% range. If I can lock in on something like that, even in the face of what appears to be raging inflation, I will. Until then, cash is the place to be.