For Tuesday November 26, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets and watch closely to see what trend develops.  Cash positions (including currency) and price inflation hedges are still recommended.  There is too much uncertainty in US markets right now to make an investment recommendation, although it is probably safe to hold any currently owned equities through the end of the year.

Technical Comments:

The S&P 500 declined 0.13% Monday on volume below last Friday.  Volume was also below the 30 day moving average.  Monday was a light-volume down-day.  If the S&P 500 declines about 54 points on Tuesday (-3.0%) our automated market forecast could change to an uncertain trend.

Subjective Comments:

Minutes of the Fed’s October meeting published last week contain a concerning topic.  Confused Keynesian economists think savings is a bad thing for the economy and are always looking for ways to get people to save less and spend more.  The Fed is considering a reduction on the interest they pay on excess reserves (IOER).  As we previously reported, they are thinking of paying negative IOER. If the Fed goes negative on IOER,

Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4tn in reserves they hold at the Fed would lead them to pass on the cost to depositors.

We would be okay with commercial banks charging customers to hold deposits, but only if commercial banks ended the fraudulent practice of fractional reserve lending.  We doubt that will happen.  This would upset a lot of bank customers to be sure.  What is not clear is if people would pay the fees to banks or withdraw their money.  We suspect withdraws would occur, but would this translate into spending?  The Krackpot Keynesians probably hope it turns into spending, but could just as easily turn into other types of savings as individuals seek to do what is in their own best interests.  We will continue to watch what happens to the money supply as we fear commercial banks would accelerate lending should the Fed go negative on IOER.

We have discussed Austrian Business Cycle Theory (ABCT) and will continue to do so.  Austrian economists talk about inflating the money supply and what happens as a result, and the result is the boom-bust business cycle along with price inflation.  As long as the growing money supply is greater than expected, the nominal profits experienced by businesses continue to grow faster than forecasts.  Money printing has to continually accelerate in order to exceed business forecasts because business people begin to anticipate the impacts of ongoing money printing.  If the printing does not accelerate (or slows) the profits forecasted do not materialize.  With this in mind it is not encouraging that S&P 500 Q4 preannouncements are the most negative on record.  For every 1 company in the S&P 500 publishing a preannouncement of good earnings over 10 companies are warning earnings will be below their forecasts.  With the M2 money supply growth in 2013 having been below the 9.3% growth in 2012, this is exactly what is expected based on ABCT.  Without a sustained acceleration of money supply growth, which will be driven much more by fractional reserve lending rates than the Fed’s QE, we will eventually see the end of the current bubble boom.  Predicting when will be very difficult given the very violent swings seen in the M2 growth rate during 2013.

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