For Tuesday October 29, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets and watching closely to see if an up-trend develops before investing.  Cash positions (including currency) and price inflation hedges are recommended right now.  Our subjective opinion remains unchanged, but we’re moving away from our prior bearish position on US markets and now hold a neutral opinion.

Technical Comments:

The S&P 500 advanced 0.13% on Monday with volume unavailable at the time of publishing this post.  We will comment on Monday’s volume when we post about Tuesday.  US markets were mixed with the Dow and Nasdaq both down a small fraction of a percent.  Should the S&P 500 decline about 51 points on Tuesday (-2.9%) our stop loss algorithm would likely change our market forecast to an uncertain trend.

Subjective Comments:

With the FOMC meeting Tuesday and Wednesday this week, it is not unusual to see US markets little changed prior to the policy announcement coming this Wednesday.  Many Fed watchers think monetary policy will remain unchanged while some expect an acceleration of the monthly money printing.  The people who are expecting acceleration are guessing the acceleration is more likely to occur in December instead of this week.  What is important to watch is not what the Fed says, but what the Fed does and more importantly how US banks react.  When the Fed prints, the M0 money supply (aka the Fed’s balance sheet) grows directly.  US M2 money supply grows by a combination of M0 plus the money multiplier created by fractional reserve lending.  Recently US M2 has accelerated without any change in the $85 Billion per month of printing by the Fed.  If M2 growth remains accelerated enough, then another boom could occur.

All of this money printing is very bad and will result in price inflation as well as distortions in the economy.  The distortions (aka “malinvestments”) are caused by the low interest rates associated with money printing.  In the absence of money printing and fractional reserve banking the interest rates would be set by the loan market.  When fractional reserve lending and money printing enter the equation the direct result is a reduction in interest rates.  This encourages investments (malinvestments) that would not occur at higher interest rates.  Those investments mostly turn out to be unprofitable, and the lack of consumer demand for those investments becomes obvious when the money growth slows.  This has occurred again and again throughout centuries of human history for the simple reason that it is incredibly profitable theft by the few with the printing press.

Unless and until these fraudulent (but legal) practices of printing money and fractional reserve lending end, we are stuck with the boom-bust cycle.  If a boom is starting again we will see the change in the S&P 500 data as well as the M2 and banking reserve data.  If the recent M2 acceleration was a blip and not sustained, then we will still see a crash relatively soon since the year-to-date M2 growth has been slower than the 2012 growth.  We encourage you to learn more about Austrian Business Cycle Theory and the history of money printing.  Here is a good article discussing some history of these evil practices.

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