For Friday April 5, 2013, We Recommend Against Investing

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Investment Recommendations:

We saw some data suggesting continued growth in US markets, although the market drop on Wednesday and weak growth on Thursday could indicate weakness.  The weekly money supply update discussed below encourages us to wait a little longer before recommending investing for growth.  Price inflation hedges remain viable investment options.  Continue to avoid all bonds as they will fall in price when price inflation eventually accelerates.  Avoid TIPS bonds and municipal bonds; they will fall in price when price inflation gets worse.

Technical Comments:

The S&P 500 advanced 0.4% on Thursday with volume below Wednesday and lighter than the 30 day moving average.  Thursday was a light-volume up-day, and that makes a few days in a row where the daily market data is more consistent with weakness than with growth.  The technical analysis we use continues to offer no solid clue regarding the future direction of US stocks.  If the S&P 500 declines about 7 points on Friday (-0.5%) our automated forecast could change to an uncertain trend.

Subjective Comments:

We have analyzed the weekly US M2 (not seasonally adjusted) money supply data and the biweekly data of US banking reserves.  For M2 the 4-week sub-cycle has returned.  This sub-cycle had 3 weeks of data following a trend followed by a 4th that is below the trend line.  In the past the 4th week dip has had 2 weeks in a row of a dip at the end of each calendar quarter.  If the quarterly pattern occurs again then next week would see another value below the recent trend line.  Indeed, M2 declined from the week ending 3/18, resulting in a straight line growth rate of 9.4% annualized.  The decline from last week is not significant and is within the statistical variability on the residual control chart.  The M2 growth rate, however you choose to measure it, is unchanged over the past 9 to 10 weeks.  This leaves the economy and stock market is a precarious position because 9.4% is still less than the 14% growth that had been occurring during the last few months of 2012.  Based on the M2 growth rates over the past year we conclude the current rate is not sufficient to sustain the bubble-boom that is currently in progress, but we’re unable to guess how much longer it will last before it pops.  Should M2 growth accelerate then the bubble can continue and there would be an opportunity to then invest for growth.

US banking reserves continue to show banks are accumulating most of the $85 Billion of monthly money printing (Quantitative Easing) as excess reserves.  Required reserves measure the net lending by banks.  Bank lending appears to be flat or it could have become a net negative growth rate.  There is too much noise in the reserves data to determine for sure, but it is clear the required reserves are no longer growing.  This means US banks are not lending any faster than the rate old loans are maturing.  As long as this continues the Federal Reserve’s money printing will not be sufficient to sustain the bubble-boom.  Only US banks, if they accelerate lending sufficiently, can cause US M2 to grow fast enough to continue the bubble.

Austrian Business Cycle Theory explains that an accelerating growth rate of the money supply is needed to sustain a bubble-boom.  The fact US M2 has slowed but continues to grow puts the current bubble at risk of popping.  However, US M2 continues to grow, just not as fast.  When the money supply grows eventually price inflation follows.  We are still predicting price inflation will accelerate in the future.  We had thought this would occur sooner than later.  There are so many other factors that impact price inflation that we feel the need to hedge and say price inflation will continue but the increased rate could occur later.  Price inflation hedges remain good investments for the long term.

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