Momentum Stocks Mauled, A Lesson in ABCT

RUTNDXDJIASPX-divergences

Momentum Mauled: http://www.acting-man.com/?p=29724#more-29724

When momentum stocks crack, this is what it feels like: http://youtu.be/go9uekKOcKM

When retail investors blindly buy Yelp, Tesla, Concur Technologies, and IBB, I see:

YELP

SPLK

CNQR

A reader asked if ABCT was helpful in timing purchases or sales.  I don’t believe so, but you see where the canaries are beginning to die in the coal mine. If artificially manipulated interest rates–through the Fed’s manipulating the value of the currency (The Fed monetizes the debt through “quantitative easing” which is just currency debasement/printing up fiat currency)–cause mal-investment, then you would expect to see the first cracks in the most over-valued areas of the market first.  Note the collapse of sub-prime in 2007 before the general equity collapse in 2008/09.

Here Ludvig Von Mises(1881 – 1973) explains, “The boom can last only as long as the credit expansion progresses AT AN EVER-ACCELERATED pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.”  Note that the Fed is “tapering” or buying fewer bonds with newly issued fiat currency.   For the boom to continue, the Fed would need to VASTLY INCREASE the monetary madness.

This fractional reserve banking system allows banks to engage in credit creation by issuing notes and bank balances unsupported by any new wealth. Or the Fed simply creates the money out of thin air to purchase Treasury Debt from other individuals and institutions.  Since money substitutes are created out of thin air, the whole process is a risky venture. On its face, such a practice would be fraudulent except that it has a legal basis whereby central banks give commercial banks the legal right to issue “counterfeit” money.

All the interference of free market prices by the Fed to lower interest rates just promotes business activity that would be uneconomic at normalized interest rates (read: a higher cost of capital). Can you be surprised when Tesla, Yelp or Pets.com (in 2000) are the first to plunge?

Fed buying

 A great blog: http://www.marketanthropology.com/2014/04/a-staggered-start_7.html  In the chart above, note the last time in the 1940s when the Fed was monetizing the government’s debt to pay for WWII.

Today:Recent Fed Buying

 While perhaps investors and their money are moving here:
Staggered Start

 

One response to “Momentum Stocks Mauled, A Lesson in ABCT

  1. If only we did this:

    The Forgotten Depression
    1921: The Crash That Cured Itself
    By James Grant
    customer reviews
    By the publisher of the prestigious Grant’s Interest Rate Observer, an account of the deep economic slump of 1920-21 that proposes, with respect to federal intervention, “less is more.” This is a conservative rejoinder to the Keynesian stimulus applied by Bush and Obama to the 2007-09 recession, in whose aftereffects, Grant asserts, the nation still toils.

    James Grant tells the story of America’s last government-untreated depression; relatively brief and self-correcting, it led to the Roaring Twenties. His book appears in the sixth year of a lackluster recovery from the “heavily medicated” downturn of 2007-2009.

    In 1920-21, Woodrow Wilson and Warren G. Harding met a deep economic slump by seeming to ignore it, implementing policies that most 21st century economists would call backward. Confronted with plunging prices, wages, and employment, the government balanced the budget and, through the Federal Reserve, raised interest rates. No “stimulus” was administered, but a powerful, job-filled recovery was under way by late in 1921.

    In 1929, the economy once again slumped—and kept right on slumping as the Hoover administration adopted the very policies that Wilson and Harding had declined to put place. Grant argues that well-intended federal intervention, notably the White House-led campaign to prop up industrial wages, helped to turn a bad recession into America’s worst depression. He offers the experience of the earlier depression for lessons for today and the future. This is a powerful response to the prevailing notion of how to fight recession. The enterprise system is more resilient than even its friends give it credit for being, Grant demonstrates.
    – See more at: http://books.simonandschuster.com/Depression-that-Cured-Itself/James-Grant/9781451686456#sthash.4oGcjbPn.dpuf

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