For Thursday December 13, 2012, We Recommend Against Investing

undefined undefined

Technical Comment:

The S&P 500 barely advanced on Wednesday, closing up 0.04% on Volume above Tuesday and higher than the 30 day average.  US markets had been higher during the day but lost their gains during the last 2 hours of trading.  If the S&P 500 were to decline about 14 points on Thursday (-1%) our forecast would likely change to an uncertain trend.

The S&P registered a strong-volume up-day on Wednesday, although the virtually flat close at the end of the day negated any meaningful pattern formation as determined by our analytical process.  The higher volume reduces the odds of a strong-volume down-day on Thursday.  Our analytical process continues to forecast market growth based on a very old pattern formation and the absence of any stop loss triggers.  If our subjective opinion of the near future develops as described, we would expect to see multiple strong-volume up-days with large market advances occur in the near future.

Subjective Comment:

The Federal Reserve’s FOMC (Federal Open Market Committee) announced its new monetary policy on Wednesday, and it was what the market had been expecting for the past few months.  Back on September 13th, the FOMC announced QE3 of an indefinite monthly purchase of mortgage-backed securities at $40 Billion per month.  QE3 continues with the new policy combined with unsterilized purchases of US Treasuries of $45 Billion per month starting in January.  Since QE3 has not ended, the January net Quantitative Easing rate will be $85 Billion per month.  Should the $85 Billion of QE be called “QE3+” or “QE4”?  Whatever you call it, it will not be good in the long run.  The consequence will be price inflation and an eventual crash.  In the near term the $85 Billion per month of QE will strengthen the bubble-boom that started in September when QE3 was announced.  Here is what $85 Billion per month compares to with previous rounds of QE:

  • QE1: $36 Billion per Month – $600 Billion Total Mortgage Backed Securities (Early to Mid-2009)
  • QE2: $75 Billion per Month – $600 Billion Total Treasuries (Late-2010 to Mid-2011)
  • QE3: $40 Billion per Month – $120 Billion Total Mortgage Backed Securities (Oct – Dec 2012)
  • QE4: $85 Billion per Month – Total TBD, $40B to MBS & $45B to Treasuries (Starting Jan 2013)

Since September 2012 when QE3 was announced US M2 has accelerated to an annualized growth rate of 9.6% (using non-seasonally adjusted data).  To what extent the money supply will further accelerate depends on the lending rates of US banks.  Banks have been holding Excess Reserves relatively unchanged since the inception of QE3, so we assume the incremental $45 Billion per month of QE will have a proportional increase in bank lending.  What’s unknown is how quickly the money multiplier will kick in to affect money supply growth.  To make an educated guess, we applied the following assumptions to estimate the potential new annualized growth rates of the US M2 money supply:

  • 9.6% could grow to 15% if banks only lend the incremental $45 Billion / month
  • 9.6% could grow to 19% if banks double their lending rate since QE4 is about double QE3
  • 9.6% could grow to 33% if banks double the rate at which Required Reserves grow
  • In the Summer of 2011, bank lending accelerated to grow US M2 at 24%, so all of these estimates are at least realistic

The current annualized 9.6% US M2 growth rate over the past 3 months is already accelerated over the prior 7.25% rate.  In three months the economy is just starting to show signs of the bubble-boom, and the stock market will not be far behind.  If any of our estimates are correct, the US M2 growth rate would double from what it was in mid-2012.  The implications of this are absolutely staggering when interpreted via Austrian Business Cycle Theory.

With the time lag in the publication of money supply and banking reserves data it will be early January before an initial estimate of the actual impact on money supply growth can be determined.  The political uncertainty in the US (“Fiscal Cliff”) and the potential for downward movement in Eurozone and Chinese stock markets will likely keep US stocks flat for the rest of the year.  Aggressive investors should consider a process of accumulating a position in leveraged index funds that grow with US stock markets.  More cautious investors can wait until January and still be able to take advantage of the strong market growth that will occur in the bubble-boom that’s about to strengthen from all the money printing.  Price inflation hedges will do well over the long run, so hold your existing investments if you have any.  Consider your circumstances and decide how much of your portfolio you want to have in price inflation hedges and how much in the stock market.  You have time to figure this out now and begin investing in leveraged index funds in the near future.  Continue to avoid all bonds because price inflation will cause bonds prices to fall.  If you have any investments in bonds, sell them.  Our subjective investment recommendation is likely to change in the near future depending on the money supply and banking reserve data.