For Friday March 22, 2013, We Recommend Against Investing


Investment Recommendations:

Continue to avoid US markets.  The updated money supply, banking reserves and our proprietary technical analysis are all pointing to a declining market in the future.  Price inflation hedges are a good alternative investment to stocks because the money supply is still expanding, just not as fast.  Avoid all bonds including TIPS because all bond prices will fall when price inflation accelerates thanks to the growing money supply.

Technical Comments:

The S&P 500 declined Thursday by 0.8% with volume below Wednesday and lighter than the 30 day moving average.  The light-volume down-day means Thursday by itself does not contribute to any pattern development, but it also does not reverse the negative pattern that has been developing over the past few weeks.  There have been many down days, several strong-volume down-days and a few light-volume up-days.  While the overall trend of the S&P 500 index has been up, the combination of direction and volume tells a troubling story for the current bubble-boom in the market.  A fully formed pattern still does not exist, but the daily market data is not consistent with growth.  The drop in the index was enough to re-trigger our stop loss algorithm and cause our automated forecast to chance to an uncertain trend.  If the S&P 500 advances about 3 points on Friday (+0.2%) our forecast could return to a growth trend, but this would be a reversal of the stop loss trigger and not necessarily an indication of a change in the prevailing pattern.

Subjective Comments:

The Federal Reserve published weekly money supply data and the biweekly reserve data for US banks.  Despite the Fed’s efforts to stimulate the economy by printing $85 Billion Dollars per month, US banks are not lending fast enough to sustain the bubble-boom that has been propping up the economy and stock market for the past half year.  US banking excess reserves continue to climb and are now at nearly $1.7 Trillion Dollars, an increase of almost $234 Billion Dollars since the beginning of the year.  Not only are banks accumulating the Quantitative Easing money, but they appear to be accumulating maturing loans faster than new loans are originated.  There are $36 Billion Dollars more in excess reserves than the $85 Billion per month of money printing would account for.  Required reserves are different from excess reserves.  Excess are the reserves banks are permitted to loan under a fractional reserve system.  Required reserves are those dollars banks must retain and are directly proportional to the net amount of loans outstanding.  Required reserves appear to be shrinking.  The data series has a lot of noise, so there is room for error in this conclusion, but there is a downward slope.  Together the data for excess and required reserves both support the conclusion that US banks have slowed lending over the past 10 weeks.

The direct measurement of the US M2 money supply (not seasonally adjusted) also shows a slowed growth rate.  For the past 7 weeks M2 has been growing at an annualized rate of 9%.  Our regular readers will recall the M2 rate collapsed 8 weeks ago and has been slowly accelerating ever since.  7 weeks is a short period of time to draw definitive conclusions about the numeric value of the growth rate, but its magnitude compared to the prior 14% annualized rate is significantly smaller.  The reduced growth rate combined with the slower loan rate from US banks paints a consistent picture.  It is clear US Banks were lending aggressively for 5 months (14% growth) and then 2 months ago slowed their lending rates significantly.  When banks lend faster than loans mature, the money supply grows via the money multiplier.  The money multiplier works in reverse to shrink the money supply when loans mature faster than new loans are made.  Since the money supply is still growing we must conclude new loans are being made, but not at the same rate seen 2 months ago.

The Fed announced no changes to their monetary policy, so they’re going to keep printing.  US banks have decided to slow lending.  As long as the current circumstances persist the economy and stock market are increasingly likely to crash.  For now we think the bubble-boom growth will slow and level off.  Price inflation remains highly likely to accelerate later this year.  Any remaining up-side the market might produce is not worth the risk of investing in stocks right now.  Circumstances could still change, but until they do it is our advice to avoid US stocks and track changes in the money supply for clues what will happen next.

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