For Monday January 7, 2013, We Recommend Investing in US Markets

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Technical Comment:

The S&P 500 advanced 0.5% on Friday with volume below Thursday but above the 30 day moving average volume.  It is typical for market volume to be light on Friday, so it is noteworthy that Friday’s volume was above average.  Our pattern recognition software did not classify Friday as a strong-volume up-day, but the fact remains the market is advancing on stronger volume.  That is a pattern typical of a market rally likely to continue.  By closing just above 1466, the S&P has reached a high not achieved since the end of December 2007, 5 years ago.  Additionally the S&P 500 over the past year has formed a long cycle pattern called a “cup with a handle” by technical analysis of graphical plotting.  The strong advance this past week (+4.5%) constitutes a breakout of this “cup” pattern, and that is considered a sign of continued growth.  The S&P 500 would have to decline about 40 points on Monday (-2.8%) for our automated forecast to return to an uncertain trend.

Subjective Comment:

The US economy and stock market are beginning a new bubble-boom phase of the business cycle driven by accelerated money supply growth.  US M2 (not seasonally adjusted) is now growing at an annualized 13% and has been for almost 4 months.  This is twice as fast as it had been previously.  Money supply grows from Quantitative Easing (money printing) from the Federal Reserve, and by the Money Multiplier from fractional-reserve banking.  Prior rounds of QE from the Fed saw most of the newly printed money accumulate in US banks as excess reserves.  Since banks did not respond by accelerating their lending, prior QE had a marginal effect on the economy and stock market.  Now that the Fed has launched QE4 with over $1.4 Trillion of excess reserves in the US banking system, banks have responded via accelerated lending.  It is this increase in bank lending that is causing a rapid growth of the money supply.  Initial indications are the doubling of QE3 to QE4 will further accelerate the current 13% to something higher.  In the summer of 2011 US M2 (NSA) grew at an annualized rate of 24% for two months.  With US banks having achieved a 13% rate for 4 months we now have enough money created to sustain a bubble-boom for around 6 months, assuming nothing changes and the summer of 2011 is predictive of the current situation.  Guessing how long a bubble might last is very dangerous as banks could quickly change their lending rate and slow money supply growth.  This is why it is very important to watch the money supply every week.

There were several news items recently regarding the Federal Reserve Open Market Committee (FOMC) minutes from the most recent meeting.  Another story that shows how stunningly ignorant many people are about money is the suggestion the US Treasury print a single platinum coin with a face value of $1 Trillion Dollars in order for the government to continue paying its bills without Congress having to raise the debt ceiling.  The best discussion of these topics we found today is at EconomicPolicyJournal.com.  While the rapidly growing money supply will drive a bubble-boom in the economy and stock market, there is a serious risk of very high price inflation.  Printing money is crazy when the Fed does it, but they’ve been at it for a century.  Minting a single Trillion Dollar coin is also crazy, but it is really not any different than what the Fed does and has done over the past 4 years.  We encourage you to read about the dangerous monetary policies and the crazy Trillion Dollar coin idea.  Having reached the debt ceiling it is likely there will be more political drama from Washington DC.  Credit rating bureaus could very likely further downgrade the US.  As this news flow heats up there could be downward pressure on US stocks as some investors sell.  Use this as an opportunity to accumulate a larger position.  We seriously doubt anything from the tax policies and from federal spending will be able to resist the upward pressure from the 13% US M2 growth rate.  Now is the time to invest, and use some leverage to accelerate your returns in order to stay ahead of price inflation.  Avoid all bonds as they will fall in price.  Price inflation hedges will do well over the long run but likely will not advance as much as US stocks in the near term.

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