For Wednesday, April 11, 2012, the market forecast is uncertain

Our forecast for US stock markets is an uncertain trend.  If you choose to liquidate and hold cash, please avoid money market funds as they have exposure to European sovereign default risk.

Technical Comment:

The S&P 500 index declined 1.7% on Tuesday with volume higher than Monday and above the 30-day moving average volume.  Tuesday was another strong-volume down-day, creating the 4th such day in the past 5 trading sessions, and 5th in the past 9 sessions.  The index decline was the largest single-day drop in the past 4 months, resulting in the S&P 500 declining below its 50-day moving average.  The drop below the 50DMA is a technical indicator of weakness followed by many market participants and could motivate them to continue selling their equity holdings.  Our automated forecasting process has not identified a pattern predictive of decline but the recent market weakness is why our forecast is “uncertain”.

Subjective Comment:

Should the S&P 500 advance strongly on Wednesday our automated forecast could change back to growth, but if it does our subjective advice would be to ignore a growth signal unless it persists for a few days.  The recent weakness in technical indicators combined with the low and steady growth in the US M2 money supply is why we are very concerned US markets will halt their recent advance and possibly decline from here.  Sell your equity positions or otherwise move to a risk-off position.

The Federal Reserve evidently has something to say, or at the very least has something they want you to hear.  This week (4/9/12 – 4/13/12) there are 18 speeches that have been or will be given by Fed officials.  This comes soon after Fed Chairman Bernanke’s series of four lectures at George Washington University School of Business (3/20/12 – 3/29/12).  18 speeches is a lot compared to the average monthly rate of 4.4 since July of 2008, and more than the 6.5 per month preceding that back to January 2006 when Ben Bernanke became chairman.  In this time period the most speeches by Fed officials in any given month was 12 in June 2006.  Chairman Bernanke gave the first speech this week and is scheduled to give the last of these 18 on Friday.  The chart below (raw data here) better shows how 18 speeches in a single month is a big change.

We’re not going to provide an analysis of the content of any of these speeches.  Government officials and central bankers responsible for a nation’s currency and money supply historically have engaged in deception, and there’s no reason to think the Federal Reserve is changing this practice now.  While there are several examples of this reprehensible behavior, we’ll share one story provided by Henry Hazlitt in his book What You Should Know About Inflation (2nd Edition, 1965, pp. 22-24).

Ever since the end of World War II, the public in nearly every country has been told… what is needed… is “monetary management” by the experts.

When Sir Stafford Cripps, then Chancellor of the Exchequer, announced the devaluation of the British pound on September 18, 1949, Winston Churchill pointed out that Cripps had previously denied any such possibility… Sir Stafford emphatically denied at least a dozen times that he would do what he did.  The excuse has been made for him that naturally he could not afford to admit any such intention in advance because no one would then have accepted sterling at [an exchange rate of] $4.03 [US Dollars per pound].  This “defense” amounts to saying that unless the government had lied it could not have successfully deceived the buyers of British goods and holders of sterling.

…this is what “devaluation” means.  It is a confession of bankruptcy.  To announce that IOU’s hitherto guaranteed to be worth $4.03 are in fact worth only $2.80 is to tell your creditors that their old claims on you are now worth no more than 70 cents on the dollar…  This is what governments have now been doing for a generation… “Monetary management”… is merely a high-sounding euphemism for continuous currency debasement.  It consists of constant lying in order to support constant swindling.

We recommend Mr. Hazlitt’s book.  He was a professional writer with a solid command of economics.  We think the above quote is an excellent example of his writing style.  With price inflation getting worse, it is a timely topic.  We recommend researching investment hedges against price inflation and investing part of your portfolio accordingly.  As price inflation gets worse interest rates will rise as lenders will demand an inflation-premium.  In turn this will cause bond prices to fall, including TIPS bonds.  Avoid all bonds and sell any you own as fast as you can.