For Thursday August 22, 2013, We Recommend Against Investing

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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 declined 0.6% Wednesday with volume below Tuesday and lighter than the 30 day moving average.  Wednesday was a light-volume down-day.  There are no developing patterns in the daily market data.  It is interesting that the three days of trading this week have been extremely light volume.  The most recent three day stretch of such light volume occurred the three trading days following last Christmas.  If the S&P 500 advances about 1% on Thursday our market forecast could return to a growth trend based on the reversal of our stop loss trigger.

Subjective Comments:

With bond prices declining it is interesting to note US stocks are also falling and there is very light volume on the S&P 500.  Typically money moves out of bonds and into stocks or vice versa.  The falling bond prices that have been occurring for the past few months have not seen commensurate inflows of cash into stocks.  Since the US M2 money supply has changed very little since the start of the year, we speculate the outflows from bonds are being used to pay off debt.

If you do a search on “mortgage layoffs” you will find several recent stories of banks letting go of employees who originate mortgages.  Wells Fargo announced over 2,300 nationwide layoffs and JPMorgan Chase announced last week a plan to cut 15,000 jobs.  This is happening with small mortgage originators as well as large banks.  These layoffs indicate new mortgage loans are not being made.  This is consistent with the required and excess reserve data of US banks.  Required reserves have been flat throughout the year while the money printing from the Fed has been growing excess reserves to over $2.0 Trillion Dollars.

News flow and the market reactions on Wednesday suggested many investors reacted to the release of the FOMC minutes and concluded the Fed could, gasp, “Taper” the money printing in September.  The Fed’s monthly printing of $85 Billion Dollars has been going into excess reserves.  It has not been growing the US M2 money supply.  As such, the money supply growth has already “tapered” back.  For many investors who understand the simple relation between money printing and the stock market, the idea the Fed could “taper” has them concerned about future market growth, and this is part of the reason US markets are declining right now.  What most investors fail to grasp is the major causal relationship between money supply growth rates and the boom-bust cycle as explained by Austrian Business Cycle Theory (ABCT).  The 9.2% US M2 growth in 2012 is what caused the recent market boom, and the very slow money supply growth since the start of 2013 is why US markets are topping and a crash is coming soon.  When the crash comes there will be some event that will be talked about as having “caused” the crash.  The people providing the explanation are most likely unfamiliar with ABCT.  The real reason for the boom-bust cycle is the expansion of the money supply and credit caused by money printing and fractional reserve banking.

Blame the Federal Reserve when the market crashes.  Capitalism does not have an inherent instability despite the theories posited by Karl Marx.  Free markets flourish in the absence of regulation and interference by governments.  The Federal Reserve should not exist.  A central bank would not come about in a free market.  The only way the Fed can exist is via the government grant of power to print money.  Setting interest rates via “monetary policy” is not a free market activity.  Price controls do not work.  Price controls distort markets and cause shortages when prices are set below where the market would have them.  If you agree price controls are bad economic policy, please remember interest rates are the prices of loans.  If it’s not okay for the government to control prices of goods and services, how is it okay for the central bank to control the prices of loans (interest rates) via monetary policy?  It is not okay.  Printing money is never okay.  It always leads to the boom-bust cycle, and it creates price inflation.  When money printing continues on and on, the consequences are calamitous.  Just look at what is happening right now in Argentina and India.  In the past with the markets have crashed the Fed responded with massive money printing.  When the markets crash again in the near future, it is likely the Fed will print faster and not “taper”.  This will drive price inflation higher and higher.  Protect your wealth with price inflation hedges and have some cash ready to short US markets as we are still guessing the timing of the coming crash is before the end of this October.

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