For Wednesday August 21, 2013, We Recommend Against Investing


Investment Recommendations:

No Change: Ignore our automated market forecast and avoid US stock markets right now.  Continue to avoid all bond investments. Price inflation hedges remain good long-term investments, but only invest in price inflation hedges amounts that you can leave invested for a very long time.

 Technical Comments:

The S&P 500 advanced 0.4% on Tuesday with volume above Monday but below the 30 day moving average.  Our pattern recognition software classified Tuesday as a strong-volume up-day because volume was above Monday.  Still, the volume was far below the average volume and barely above Monday.  This is why it takes several such days to form a pattern, both for strong-volume up-days and strong-volume down-days.  This one day does not constitute a sign of technical strength in US markets.  Tuesday’s market advance was not enough to reverse our stop loss trigger.  Should the S&P 500 advance about 9 points on Wednesday our market forecast could return to a growth trend.

Subjective Comments:

Although the S&P 500 and Nasdaq indices were up on Tuesday, the Dow index did close down just a bit.  With interest rates rising, as expected when the growth of the money supply slows, home buying is becoming more expensive.  As home prices go up, sales are going down and some mortgage origination companies are reducing staff.  The housing market is rightly considered part of the capital goods industries.  While homes are mostly bought by the end consumers, the high costs of construction, high prices relative to other consumer purchases and the fact the vast majority of homes are purchased with mortgage loans makes this segment a capital good.  Austrian Business Cycle Theory explains that capital goods sectors boom first and crash first within the business cycle and this is exactly the case again with the current business cycle.  Now that US M2 money supply has slowed for the past 8 months we have seen interest rates rise and the consequent slowdown in all capital goods sectors.  Now that employees are being let go it is becoming clear the leaders of those businesses have been experiencing a slowdown long enough that they expect it to persist.  This is more anecdotal evidence the US economy and stock markets are nearing the crash associated with the bust phase of the business cycle.

The slowing money growth does not mean price inflation will be slowing.  In fact the prior money growth is still fueling price inflation.  The 20th century had more price inflation than any other in history.  Measurements of inflation are rife with methodical variation, error and obfuscation.  Peter Schiff published an article explaining how CPI has been manipulated by the Bureau of Labor Statistics along with even more egregious manipulation in the “GDP Deflator” produced by the Bureau of Economic Analysis.  The CPI distortions are further documented by John Williams at  The government has been printing money and seeks to hide the effects by manipulating how price inflation is calculated.  Better estimates of price inflation are available from and from MIT.  Economists of all schools of thought agree that money printing causes price inflation.  Keynesians even consider it a good thing and frequently agitate for more.  Austrian Economics describes the harmful effects of money printing beyond simple price inflation.  Money printing artificially lowers the interest rate.  This in turn causes too much investment in the capital goods sectors, like housing, because these sectors are much more sensitive to interest rates.  Large purchases that have to be financed appear more affordable when loans are less expensive.  This type of economic stimulus actually misdirects too much investment into the capital goods sectors (called malinvestment by Austrian economists).  When the money printing slows down interest rates go up and sales in these sectors decline.  The longer the money printing lasts, the more malinvestments accumulate in the capital structure of the economy and the larger the crash will be.  This is what has been happening for the past century and especially the past few years with the massive money printing by the Federal Reserve.

When the market crash comes, do not listen to anyone who tries to blame capitalism or claims some sort of market failure.  The boom-bust cycle is caused by the Fed’s money printing and fractional reserve bank lending.

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