For Thursday, August 9, 2012, We Recommend Against Investing

We recommend selling your equity positions or hedging for a risk-neutral position.

Technical Comment:

The S&P 500 advanced 0.06% Wednesday with volume below Tuesday and below the 30-day moving average.  Should the S&P 500 decline about 37 points (-2.7%) on Thursday our forecast would likely change to an uncertain trend.

Subjective Comment:

US markets moved between positive and negative throughout the trading session on Wednesday before finishing virtually unchanged.  The S&P 500’s very tiny advance was on light volume.  We continue to watch very closely in the daily market data for any technical indication of a bull market.  So far we do not see it.  The volatile advance in US markets over the past several weeks looks like a bear-market rally.  A growth pattern was detected by our automated process last week, so we’re trying as best we can to set aside any subjective bias and look at the market data objectively for indications of serious growth.  The lack of very strong volume is why we still view the recent up-trend with suspicion.

Our subjective judgment regarding the economic conditions of the US and other major world markets remains grim.  After a period of very low interest rates caused by money printing, an economy winds up with too much capital invested in unprofitable projects and businesses.  When the money printing that encouraged these mal-investments slows down, the lack of consumer demand for the output of these projects exposes their unprofitability.  Without money printing (money supply growth) at the prior rapid pace, there are insufficient funds to keep low-interest funding available to bailout these bad enterprises.  The problem created during the boom has to be corrected and this causes the bust.  We have described how the US M2 money supply grew for over a year at over 7% annualized growth.  In the past 4 months this growth rate has collapsed down to 2.6%.  This sets up the conditions for the bust and crash that follow the boom.  After 4 months of the crash in M2 growth, business results are starting to show the unprofitability associated with this phase of the business cycle. noted the following about the earnings of most of the S&P 500 companies:

With 86% of the S&P 500’s market cap reported, 2Q earnings growth has been negative, with profits down 1.6% excluding Financials. This marks the first quarter of year-on-year profit declines since 2009. Moreover, while EPS surprises have been positive, they have been the weakest of the current recovery cycle, and revenue surprises have been negative. Following 2Q announcements, companies have issued weak guidance, resulting in increasingly rapid downward revisions to analyst estimates. At present, consensus expectations are for earnings to decline by 1.5% in 3Q. (Emphasis Added.)

This is consistent with Austrian Business Cycle Theory.  The slowdown in the money supply growth for the past 4 months has resulted in declining quarterly profits.  The US economy and stock markets are going to crash, and this is a healthy and necessary thing to correct the bad investments that have been made.  The good news is we can see it coming and can position our portfolios into cash to avoid a loss in value.  The crash could still be delayed into the future if US M2 suddenly starts growing at double digit rates.  Without this, the crash is unavoidable.  We’re still guessing the timing is 1 to 3 months, but we’re absolutely confident the crash will come.

In addition to avoiding stocks, we also strongly advise avoiding all bonds.  This includes domestic and foreign bonds, government and corporate bonds, and municipal bonds.  Absolutely all bonds should be avoided.  Right now a lot of money is moving into bonds as they are perceived to be “safe” investments.  In the US there are many local and state governments in too much debt and they will file for bankruptcy.  This crashes the value of bonds.  Also, the Federal Reserve has been printing a lot of money, and they will respond to the crash when it happens by accelerating money printing again.  This will drive price inflation much higher.  When that happens, bond prices will drop as investors demand higher interest rates to stay ahead of price inflation.  For additional insight on bonds we recommend these links from

Hold and accumulate cash, or establish a risk-off position in US equities.  Avoid all bonds.  Hold your price inflation hedges for the long term.  If conditions change there will be time to reposition your portfolio.  Right now the most conservative investment strategy is cash for wealth preservation, but this is a short term strategy which will have to change if the money supply growth rate suddenly accelerates.  If you are going to invest in holdings other than cash be sure to do additional research.

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