For Thursday, October 18, 2012, We Recommend Investing for Growth

We recommend investing with leveraged index funds to take advantage of growing US stock markets.

Technical Comment:

The S&P 500 advanced 0.4% on Wednesday with volume higher than Tuesday and above the 30 day moving average.  If the S&P 500 index were to decline about 27 points on Thursday (-1.8%) our automated forecast could change to an uncertain trend.

Subjective Comment:

Wednesday was the third consecutive strong-volume up-day for the S&P 500, although the Dow and Nasdaq did not advance as much.  Our analysis of the daily stock market data detects patterns from time to time, but not very frequently.  The current action creates the start of a pattern predictive of growth, but a fully developed pattern has not occurred.  It has been quite a while since a fully developed pattern has presented itself.

The Fed and other central banks around the world are all engaged in printing money at different rates.  When the US dollar weakens against other currencies there is a very strong inverse correlation to a rising US stock market.  It’s reasonable to conclude some causality, but the strength or weakness of the US dollar versus other currencies is one of many factors influencing stock prices.  Austrian Business Cycle Theory explains how accelerating growth of the money supply (money printing) causes a bubble-boom in economic activity and asset prices, including stock markets.  The growth rate of the money supply almost always leads to price inflation as well.  In the 1920’s the growing US money supply did cause a massive asset bubble in stocks which ended in the crash in October 1929.  It has been pointed out that price inflation during this time was not present.  The aggregation of many prices into an index did result in apparent mild price inflation, but specific prices did indeed go up.  The other thing that advanced in the 1920’s was labor productivity.  Productivity increases makes prices go down, so this had an off-setting effect.  Regardless, the money printing in the 20’s still causes asset bubbles and resulted in the depression when the bubble burst.  Money printing always does this.  Presently US price inflation, as measured by the methodology employed prior to 1980, is near 10%!  (Unlike the 1920’s and unlike the late 1990’s, the US labor force is not now experiencing a large increase in productivity.)  With the Fed initiating indefinite Quantitative Easing on top of the $1.4 Trillion Dollars of excess reserves in the US banking system, the circumstances in the US are ripe for fractional reserve lending to dramatically accelerate the US M2 money supply growth rate.  It is our opinion we are at the beginning of another bubble-boom in the US.

A big question is what will US banks do in response to QE3?  So far the excess reserves and required reserves indicate banks might react with accelerated lending.  CitiBank’s CEO has been fired due to simply awful performance.  Shares of Citi dropped 90% during Mr. Pandit’s tenure.  The financial performance of other big banks has been poor as well.  Will US banks react to their performance by continuing the practices over the past few years, or will they become more aggressive at making loans?  We think they will accelerate the origination of new loans, in turn causing the money supply growth to accelerate and ignite the bubble-boom.  Our investment advice is to put part of your portfolio in leverage index funds that grow with the US market.  Price inflation hedges are also a wise investment and should be held for a long time to come.  Bonds must be avoided as they will eventually drop in price when price inflation accelerates, which it eventually will.

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