For Thursday, December 6, 2012, We Recommend Against Investing

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Technical Comment:

The S&P 500 advanced 0.16% on Wednesday with volume above Tuesday and higher than the 30 day moving average.  Our automated forecast would likely change to an uncertain trend if the S&P 500 were to decline about 11 points (-0.8%) on Thursday.

Subjective Comment:

Wednesday was a strong-volume up-day.  The advance in the S&P 500 was mild with the other US markets mixed at the close.  Indications of a market rally would be larger advances on strong volume with multiple such days occurring in a short period of time.  We think this is going to happen in the coming weeks or couple of months.  We’re not sure US markets will make substantial headway in December, so we continue to subjectively recommend against investing right now.  However, the accelerating growth in the US money supply is starting to produce signs of an economic uptick.  Starbucks (coffee retail chain) has announced plans to open as many as 5,000 more stores and housing indicators continue to show strength in the applications for mortgages.  As more loans are made the money supply will grow even faster.  It appears the US is in the very early stages of another bubble-boom.  If the current trends continue there will be an opportunity to invest in index funds to take advantage of the growth and stay ahead of price inflation by using financial leverage.

We have written many times that money printing often leads to price inflation.  Money printing always distorts the economy by encouraging too much investment in capital intensive industries.  This is the boom in the boom-bust cycle.  Every boom is always followed by a bust.  Price inflation is also a very frequent consequence of money printing.  Sometimes worker productivity can increase enough to offset the money printing’s effect on prices, or perhaps the public increases their desire to accumulate large cash balances.  This is why price inflation can be delayed or obscured when money printing happens.  These counterbalancing effects do not prevent the boom and bust, they just mask what would otherwise be falling prices.  In addition to these real economic factors that can mask price inflation, there is also the manipulation of data and metrics in reporting official price inflation statistics.  A very good explanation of the historic manipulation of the Consumer Price Index was recently published at marketshadows.com (hat tip zerohedge.com).  We encourage you to read the article and to rely upon Shadowstats.com for accurate price inflation reporting.

Continue to avoid investing in Chinese and Eurozone stocks, and avoid all bonds.  Do not yet invest in US stock market index funds but be ready to do so in the near future.  Price inflation hedges remain a good investments for the long term.

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