For Tuesday September 24, 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 0.47% on Monday with volume below Friday but above the 30 day average volume.  Monday was a light-volume down-day and there has yet to be a new pattern detected by our software algorithms.  Should the S&P 500 decline about 40 points on Tuesday (-2.4%) our market forecast would likely change to an uncertain trend by the triggering of our stop loss algorithm.

Subjective Comments:

After the Fed’s “Taper? We were just kidding!  Ha ha, fooled you!” announcement, the S&P 500 has lost all of the gains that occurred from the surprise last Wednesday.  This week the Fed has scheduled 12 speeches to continue lying to us provide additional guidance:

  • Monday has 3 Fed liars: Lockhart (non-voter), Dudley (FOMC voter), Fisher (non-voter)
  • Tuesday has 2 Fed liars: Pianalto (non-voter), George (FOMC voter)
  • Wednesday we’re given a break from the propaganda
  • Thursday has 2 Fed liars: Stein (FOMC voter), Kocherlakota (non-voter)
  • Friday has 5 Fed liars: George (again), Evans (FOMC voter), Rosengren (FOMC voter), Evans (again) , Dudley (again)

Many investors will listen to the commentary closely and this could affect their decisions, and in turn the market could react.  We suggest ignoring the comments and watching the money supply data to see what is actually happening.  The Fed has printed up over $2 Trillion Dollars over the past few years, and this money is sitting in US banks as excess reserves.  It is a universally accepted economic truth that money printing (aka debasement) produces price inflation.  The time lag between cause (printing) and effect (price inflation) is affected by many things, including the desire of the public to hold cash balances and worker productivity.  Regardless of how long passes between cause and effect, printing money will produce price inflation.  It also distorts the capital structure of the economy and produces the boom-bust business cycle.

The Fed knows that money printing causes price inflation.  It’s not clear if they understand the impact on the capital structure and how the business cycle is created, but they do understand inflation.  The Fed appears worried that the $2+ Trillion Dollars of excess reserves could flow out of banks in the form of fractional reserve loans and accelerate price inflation.  In a mad experiment to try and control this, they are testing a new technique to encourage banks to lend to the Fed instead of making loans to the public and businesses.  They’re calling it a “Fixed-Rate Reverse Repurchase Facility”.  Sounds fancy.  The name and the propaganda surrounding it are intended to be confusing so people will not pay attention.  The Fed could prevent banks from lending by increasing the required reserve percentage as they did during the 1937 recession, but it would need to be enough of an increase to prevent any of the excess reserves from flowing out.  Since the Fed is owned by the private banks it supposedly regulates, it is unlikely this will happen.  Price fixing is bad economics.  Fixing interest rates, which is what the Fed says they are trying to do, is the worst form of price fixing and causes massive, economy wide distortions.

If interest rates continue to go up, banks will have more incentive to lend.  The question is if there will be sufficient demand to borrow as interest rates climb.  It is possible banks could find borrowers and accelerate lending.  If this happens, the M2 money supply growth rate would accelerate.  This could be enough money supply growth to delay the coming market and economic crash, but it would make price inflation even worse.  Without this change it seems the current M2 growth rate will not be sufficient to delay a crash.

We still think a market crash will occur by the end of October.  The Fed was afraid to taper.  The Reverse Repurchase Facility shows they are trying to prevent excess reserves from flowing into the economy.  It is unknown how effective they’re new Facility will be, but they clearly are worried.  Their actions and words are schizophrenic.  They appear to want more inflation but also seem afraid inflation will get out of hand.  With Fed Head Bernanke about to become the ex-head and Janet Yellen poised to take over, the members of the Fed are going through a transition.  This is contributing to the excessive speechifying, incoherent policy actions and overall uncertainty by the FOMC.  When the economy and market crash the Fed is to blame, along with the practice of fractional reserve banking.

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