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S&P 500...Where Is It Heading?

I am trembling in my pants as I am writing this post. The US economy is not growing at all. The Feds have tried every possible measure to stir up the economy but nothing is working. IBM, McDonald's and almost every company I know, is reporting decrease in sales. This decrease is not as prominent as it was in 1929 but the problem is pretty much the same. The Feds have drowned the economy with free fiat money and this has just delayed the pain. In 1929 the pain was severe and short in duration. In current situation the pain till now is less but it would persist much longer and it would cause an irreparable damage to the economy. Here are a few possible scenarios:

1) The economy lingers, the Feds keep pumping money and the fiscal deficit grows. This is a Keynes model and Japan is a living example. The USD will remain strong as there is no other alternative. The outcome will be that stock market will crash initially but the bigger problem is that the stock market would not come down as much as it should. The reason is that Feds are manipulating the market. This would give an undue hope to the investors that the market will get back but it would keep sinking. As the market would go down, the P/E ratio would keep increasing as the earnings would fall much faster.

2) The economy lingers, the Feds keep pumping money and the USD comes down. It would act as a catalyst for US exports to increase and imports to decrease. This is what the Feds are dreaming and to some extent it is a dream of our president too. Well when the reality hits, it hits hard. In my opinion, the world economy is tied to that of US's. So in short, USD would not come down and the exports will not increase.

3) The economy lingers, the Feds keep pumping money and the fiscal deficit grows. But now the politicians and Feds decide that Keynes is probably wrong and his prescription cannot be continued forever. The QE stops and then comes the shocker, the taxes are increased. This would cause a sharp fall in the economy. Everywhere there would be a chaos.

In my opinion, option 1 has a very high probability. Don't trust the Feds and keep your money under a watchful eye.

Satyajit Singh

Portfolio Manager

Singh Investment Funds