For Thursday September 19, 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 advanced 1.22% on Wednesday with volume above Tuesday and higher than the 30 day moving average.  The S&P 500 set a new record high closing at 1,725.52.  Wednesday was a strong-volume up-day, and the volume was strong enough to pull the 30 day average above 3 Billion Shares.  However, there remains no fully formed pattern to predict the market will continue to grow.  Our technical analysis remains unchanged and predicts the odds of continued growth to be only 50%, meaning the odds of decline are also 50%.  If the S&P 500 were to decline about 72 points on Thursday (-4.2%) our market forecast would likely change to an uncertain trend.

Subjective Comments:

The advance in US markets on Wednesday, 9/18/2013, was entirely due to the announcement from the Federal Reserve that they would continue printing money at a rate of $85 Billion Dollars per month.  The Fed has been suggesting for months that they would consider tapering back the rate of money printing (aka Quantitative Easing) and announce the taper plan at their September meeting.  In our opinion the Fed has been misleading everyone by suggesting a potential taper.  This allowed Wednesday’s announcement of “no change” in monetary policy to be a surprise.  The market jumped up in response, but the surprise was unable to break 4 Billion Shares in daily volume on the S&P 500.  A few years ago the average daily volume on the S&P 500 was over 6 Billion Shares.  Today the daily volume is barely half that.  Wednesday was a strong-volume up-day, but the recent market rally will not last.  If anything Ben Bernanke is doing what he can to prevent the market from crashing until he departs and sticks the next Fed Head with the mess he’s responsible for creating.

We noticed a recent poll of 857 adult Americans reported that only 27% of respondents could pick the correct definition of Quantitative Easing from 5 possible answers (hat tip ZeroHedge.com).  We hope all of our readers are able to correctly identify “Quantitative Easing” for what it is.  It is money printing.  Should you encounter any objection to the cold, hard fact that it is money printing and nothing more, we suggest the source of the objection is either confused or lying.  The fact that QE is not actually the physical printing of paper currency means nothing.  QE is money printing, even though it might just be digits in bank accounts.  We spend the digits in our bank accounts using checks, credit cards and debit cards much more frequently than we actually spend cash.  Economically speaking, the digits in our bank accounts are equivalent to cash.  Hence, QE is money printing.

So, the Fed will continue to print $85 Billion per month.  What matters is the growth rate of the US M2 money supply.  Since the beginning of the year the US M2 growth has been less than 3% per annum.  This is less than one-third the 2012 growth rate of 9.2%.  Austrian Business Cycle Theory explains the economic reality that an accelerated money supply growth rate creates a bubble-boom, and the subsequent slowing of that growth creates the bust.  As long as US M2 growth remains subdued the unchanged rate of QE money printing will not prevent the coming crash.  Peter Schiff published a fine critique of the Fed today.  It’s worth reading and here is his final paragraph:

…the Fed will likely maintain the pretense that tapering is a near term possibility and that it has a credible plan on the shelf to bring an end to QE. In reality the Fed is stalling for time and hoping that the economy will inexplicably roar back to life. Unfortunately, hope is not a strategy.

The US economy will not come roaring back to life.  From this point, after years of massive money printing, there are only three paths forward:

  1. Modest money printing, which is what we have now.  The result is stagflation with an eventual market crash along with price inflation.
  2. Very aggressive money printing.  If chosen, a bubble-boom would result and make things temporarily appear to improve, only to be replaced by very high price inflation, possibly even hyperinflation.
  3. Stop printing money and let the market crash.  The US economy would be in for a strong depression, but this is unavoidable.  The length of the depression could be short if politicians would follow a Laissez-faire policy like the US depression of 1920-21.  In reality the current government policies would replicate actions of the 1930’s and another great depression would likely ensue.

Grim choices, but this is the reality.  We think option 1 is the default and what will happen.  We are about to be entertained with quite the circus act from Washington D.C. with the debt ceiling, the need for a continuing resolution, the debate over defunding Obamacare and the threat of a government shutdown.  This could spook the market, and since the US M2 money supply growth has been weak for the past 9 months the fear from such events could trigger a market decline.

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