For Friday, August 3, 2012, We Recommend Against Investing

We recommend selling your equity positions or hedging for a risk-neutral position.

Technical Comment:

The S&P 500 declined 0.74% on Thursday with Volume below Wednesday but above the 30-day moving average volume.  The S&P 500 would have to decline about 26 points (-2%) on Friday to trigger the stop-loss algorithm in our automated process and turn our forecast to an uncertain trend.

Subjective Comment:

The daily S&P 500 market data had another down-day on Thursday.  Our analytical process considers this a light-volume day because Wednesday’s volume was higher.  Subjectively Thursday could be considered a strong-volume day since it was above the 30-day moving average.  Either way, Thursday was typical of a weak market.  Our technical analysis shows no reason to think the US market will grow.  Our automated forecast is showing growth because the stop-loss trigger was reversed several weeks ago.  The rapid growth followed by high volatility is usually confuses our stop-loss algorithm and can cause frequent flips between a growth forecast and an uncertain forecast.  There have been several points over the past several weeks where our forecast almost changed to uncertain.  The high volatility is likely to cause our forecast to start flipping again.  Our subjective opinion is to ignore our automatic forecast right now, and we explain why in the following paragraphs.

The US M2 (not seasonally adjusted) money supply weekly numbers were published and show no indication of acceleration in the growth rate over the past 4+ months.  (Data Here, H6, Table 7.)  The straight-line annualized growth rate has been 2.4% for the past 19 weeks, from 3/12 through 7/23.  Last week we noticed a potential trend in the seasonally-adjusted data.  That trend is still visually present but statistically non-significant.  This data is less reliable because of the adjustments.  The NSA data shows completely random fluctuation about the 2.4% growth rate.  Around the same time the Federal Funds rate, which is fixed by the Federal Reserve’s open market operations, began creeping up from 0.10% up to 0.17%.  Two weeks ago on 7/19 the Fed Funds Rate dropped to 0.14% and has stayed around this lower value.

Of additional note this week was the monetary policy announcements from the Federal Reserve and the European Central Bank.  Neither of these central banks changed their monetary policies.  Mario Draghi, President of the ECB, also answered questions.  After saying last week the ECB would do “whatever it takes to preserve the euro,” Mr. Draghi’s announcement on Thursday was not effective in raising market confidence.  The money supply growth rate data from the Eurozone also shows the growth rate of the Euro has not changed significantly.

While the recent change in the Fed Funds rate suggests US Money Supply might be growing a little faster, the available M2 (NSA) data shows a continued slow-growth of 2.4%.  To put 2.4% in context, M2 (NSA) had been growing at 7%+ for about 10 months prior to the slowdown 19 weeks ago.  This is setting up the US economy and markets for a crash.  This is happening at the same time the Eurozone and Chinese economies and markets are also heading for a crash, all based on the same circumstances.  When the money supply grows rapidly and then slows or shrinks the business cycle of boom followed by bust is created.  Austrian Business Cycle Theory clearly demonstrates the cause and effect relationship.  All three of these major world economies are in the same phase of the business cycle.  Each is experiencing the slowing of bubble-boom growth that occurs before the crash.  If the respective central banks had chosen to accelerate money growth the crash could be delayed but not avoided.  The consequence would be even worse price inflation.  The longer each central bank delays accelerating their money supplies, the more likely the crash will happen sooner than later.  It appears very likely these central banks will wait too long and a crash in one location will likely spark the crash in the others.  The central banks will probably try to reverse the crash by massive money printing, but by then it will be too late.

We continue to recommend holding and accumulating cash to avoid losing wealth in the crash we see coming.  Hold any price inflation hedges you own for the very long term.  The coming crash is likely to put downward pressure on some price inflation hedges.  Only add to such positions if you have done additional research.  We also advise against owing any bonds.  US bonds might see a price rally during a crash as they are still seen as a safe investment by many people.  We see this as an opportunity to sell any US Treasuries you might own.  When price inflation accelerates, and it eventually will, all bond prices will fall.  There is also significant risk European bonds will default, and this could cause downward price pressure on other bonds.  This is why we strongly recommend against owning bonds.

Please be prepared for a crash in the near future, and please consider sharing a link to our website with your friends and family.  Thank you for your continued interest in our blog.