For Friday March 8, 2013, We Recommend Against Investing

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Technical Comment:

The S&P 500 advanced 0.2% on Thursday with volume below Wednesday and lighter than the 30 day moving average.  Thursday was a light-volume up-day following two up-days that could be considered strong volume.  In the past three days volume has been very close to the 30 day moving average.  If volume had been much stronger than average it could be seen as a possible upward turning point.  Instead the technical interpretation of the past 3 days after two weeks of negative data must be continued uncertainty.  The recent 50/50 growth or decline pattern continues to dominate the daily market data.  It is not clear which way the market will go from here.  Should the S&P 500 decline about 22 points on Friday (-1.4%) our stop loss trigger could change our automated market forecast to an uncertain trend.

Subjective Comment:

We are closely watching the daily market data for any indication of the direction the market will take.  The strong-volume up-days on Tuesday and Wednesday suggested growth might be in order, but Thursday’s light-volume up-day puts doubt on the idea of market growth.  Our automated forecast and pattern detection software indicates uncertainty.  Based on the market technical data alone, we cannot guess which way US markets are about to move.

Thursday the Federal Reserve published the weekly money supply statistics and the bi-weekly data for US banking reserves.  Using Austrian Business Cycle Theory (ABCT) to interpret the money supply growth rate changes, we are very concerned US markets are heading for a crash in the near future.  From mid-September to mid-January the US M2 (not seasonally adjusted) money supply was growing at 14%, which was double the previous growth rate.  This growth acceleration of the money supply is why economic data recently published shows signs of a boom.  It is also why US markets have been growing recently.  ABCT explains cause and effect.  Accelerating growth of the money supply is needed to initiate and sustain a bubble-boom.  By the end of January US M2 had collapsed, declining over $170 Billion in a few weeks.  This was enough to wipe out the 5 months of accelerated growth.  Since mid-January US M2 has barely been growing at all.  With the most recent data just published through 2/25, US M2 is now growing at an annualized 1.2%.  That is over a 90% collapse compared to the previous growth rate.

The root cause of the collapse is the lending rate of US banks.  The Federal Reserve continues to print $85 Billion a month to purchase Mortgage Backed Securities ($40 Billion/Month) and US Treasury Bonds ($45 Billion/Month).  Consider for a moment this tangential observation:  The Fed is printing $85 Billion per month and hardly anyone seems concerned about this.  The “Sequestration Drama” is Washington D.C. was about $100 Billion less growth in government spending per year, and it appears to be the end of the world if you believe the news and politicians.  It will take much deeper cuts in government spending before there would be any real consequences.  Back to our main point: US banks have slowed significantly the rate of new loan originations.  Through January and February excess reserves have advanced $185 Billion, while required reserves have increased only $3 Billion.  The $3 Billion increase in excess reserves is likely statistical noise in the data.  The Fed printed $170 Billion in these 2 months, all of it (and more) wound up in excess reserves.  Required reserves go up when banks make loans, and required reserves are not going up.  Excess reserves are going up, so all the money printing by the Fed is just sitting in the banks.  This is why US M2 growth has collapsed.

How much longer can the economy and market bubble-boom continue with M2 growing at 1.2%?  It is impossible to know.  There are too many factors to have sufficient knowledge to guess an answer to this question.  What we do know with certainty from ABCT is the current bubble-boom must eventually crash if money supply growth remains below 14%.  US banks have over $1.6 Trillion in excess reserves, so they are in the driver seat.  If they choose to keep loans tight, the economy and stock market will crash.  If they choose to accelerate lending, the current bubble-boom could be extended before the crash comes.  Our advice is to keep watching M2 every week and avoid investing in US markets right now.  We are not able to predict a decline for US markets at this time, and we think right now it would be unwise to short US markets.  Instead we recommend holding for a very long term any price inflation hedges you already own.  If you do not own any price inflation hedges, do some research and consider putting part of your portfolio into those assets.  This is a long-term investment, so only invest what you can afford to leave invested for a long time.  We still expect price inflation to accelerate in the future, and this will drive bond prices down.  For this reason we recommend avoiding all bonds, including TIPS.  We recognize our advice right now leaves our readers wondering what to do with cash available for short term investments.  We stick to predictions of the US market.  This is our area of expertise.  If things change and it becomes clear if growth or decline will occur, we will let you know.