For Friday January 25, 2013, We Recommend Investing in US Markets

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Technical Comment:

The S&P 500 advanced 0.01 point on Thursday, which is essentially no change.  US markets were up and down on Thursday before ending unchanged.  Volume was higher than Wednesday and above the 30-day moving average.  The minor upward movement in the S&P 500 index avoided a strong-volume down-day, so the technical pattern consistent with market growth continues.  A single strong-volume down-day would not have broken the current pattern.  It takes multiple strong-volume down-days to raise a red flag.  If the S&P 500 declines about 6 points on Friday (-0.4%) our automated forecast could change to an uncertain trend based on our stop-loss algorithm.

Subjective Comment:

The Federal Reserve published the weekly US money supply statistics and biweekly US banking reserves data on Thursday.  For the past 19 weeks (4 months) US M2 (not seasonally adjusted) has been growing at a 13.5% annualized rate based on a straight-line curve-fit.  This is lower than our previous estimate of 14%, but the reduction appears to be typical data fluctuation and not a slow-down in the growth rate.  The week-to-week decline from 1/7 to 1/14 was a bit larger than in recent trends, but it was not outside the control limits on the I-MR chart we use to identify trend changes.

US Banking reserves show an interesting and somewhat expected development.  Remember the Federal Reserve doubled the rate of money creation in January to $85 Billion Dollars per month, up from $40 Billion per month.  There is an obvious up-tick in the monetary base (M0, aka “Fed Balance Sheet”) in mid to late January, as expected from the doubled rate of money printing.  US banking required reserves continue to grow at nearly the same rate as before, while excess reserves jumped up from $1.45 Trillion at the end of December to $1.52 Trillion as of January 23rd.  It appears US banks continue to originate new loans at the same rate since late summer (as shown by the relatively unchanged growth rate of required reserves).  We thought this would accelerate as a result of the doubled money printing from the Fed.  Instead the accelerated money printing has caused excess reserves to go up instead.

The data does not mean money growth has slowed, nor should it be inferred by this discussion that the bubble-boom will not continue.  The growth rate of the money supply for the past 4 months is still twice what it was previously.  Enough new money and credit has been created to fuel a bubble-boom for the US economy and stock markets.  We speculate US banks have been unable to accelerate their lending due to a lack of capacity.  We further guess US banks are likely hiring aggressively to add the needed staff to increase the rate of originating new loans.  As new staff is hired and trained, we think bank lending will soon result in a further acceleration of the money supply growth rate.  Even if we’re wrong, it still makes sense to invest aggressively in leveraged index funds that grow with US markets.  Price inflation will result, so holding price inflation hedges makes sense.  If we’re right and the money supply growth does accelerate, it just means stocks and price inflation will grow faster and further.  Continue to add to leveraged investments tied to growing US stock markets, and avoid all bonds as they will fall in value when price inflation heats up.

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