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Hold Cash, Gold and Hard Assets Until ‘Funny Money’ Frenzy Fizzles Out

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With the U.S. stock market off to its best beginning in 21 years, skepticism among some segment of market observers is to be expected. But David Santschi, who analyzes fund flow data for investment research firm TrimTabs, borders on the apocalyptic when he warns that central bank actions are overwhelming the natural forces in the market.

The U.S. Federal Reserve has pledged to keep rates at near zero until the end of 2014, while the European Central Bank has recently unleashed 120 billion euros of cheap loans to European financial institutions. “They’re just getting warmed up,” Santschi (left) said in an interview with AdvisorOne, adding that the two central banks’ combined balance sheets could, in theory at least, reach $10 trillion in a year or two.

“They can print $10 trillion any time they feel like it … Eventually it becomes like funny money. We’re advising people that they need to hold some hard assets in their portfolio,” he said, noting that whereas money printing led to wage inflation in the 1970s, today it is fueling asset speculation.

TrimTabs is putting its money where its skepticism is. Its best performing model portfolio over the past several years–a model that is based strictly on demand-side data–has moved to 100% cash as of Jan. 19.

The investment firm’s analysis is based on the supply and demand of shares of stock and the money used to buy that stock. “Companies control the supply of shares; investors determine the demand for shares,” Santschi said. And in an interview with AdvisorOne on Jan. 13, Santschi said investors were not falling for central bank market manipulation but were pouring their money into bank savings and checking accounts in near record amounts.

Santschi has updated his warning, spotlighting the role that the Fed and the European Central Bank are playing in creating “fake” demand. The two central banks together are printing $5 billion per business day, he says.

“Zimbabwe tried it for a while,” he says, his dark humor anticipating ruinous results.

“All the money printing that has happened, it’s hard to stop. You have to keep doing it and doing it. You’ve got rates at zero and the debt is going up at 1.3 trillion a year. You can’t raise rates … Eventually you just blow up. Confidence is a very fragile thing. As you saw in Europe in August and September, confidence can change very fast. Eventually you reach a point when you abuse people’s confidence and then things can get ugly really fast.”

Santschi says the reason central banks find it hard to stop printing money is to avoid the short-term pain of economic adjustment. The problem is widespread, he says, noting the Chinese may be printing more the U.S. “No one wants to have a recession, unemployment up, wages down–so everyone’s stimulating the system.”

Another systemic problem: “You have over $700 trillion notional value of derivatives. How will that ever get settled? It’s spun out of control.”

Santschi’s advice for financial advisors? “Make sure that [your] clients have some hard assets to protect against all the money printing that is happening and is probably going to happen.” TrimTabs recommends investors own some gold, or at least some other hard asset.

“Farm land, real estate priced well … [Invesetors] need to hold something that is real as insurance against a bad outcome. Eventually you just abuse the confidence, then you reset the system,” citing the 1944 Bretton Woods agreement when the world’s war-battered economic powers set new rules for conduct of the international monetary regime.