For Wednesday April 10, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stocks right now.  Price inflation hedges remain viable alternative investments.  Continue to avoid all bonds as they will fall in price when price inflation eventually accelerates.  Avoid TIPS bonds, municipal bonds and bond funds for the same reason.

 Technical Comments:

The S&P 500 advanced 0.35% on Tuesday with volume above Monday but below the 30 day moving average volume.  Tuesday could be considered a strong-volume up-day based on volume being above Monday, but we tend to see it fitting the recent trend and being a light-volume up-day because it was below the moving average.  This is open to interpretation, but our pattern detection software looks at the patterns over several days.  Tuesday did not contribute to any pattern formation.  From our technical analysis we remain unable to forecast the future direction of the market, but the daily data contribute more towards a market decline in the future.  Should the S&P 500 decline about 18 points on Wednesday (-1.1%) our automatic forecast could change to an uncertain trend.

Subjective Comments:

Our analysis of the money supply is how we subjectively make investment recommendations based upon Austrian Business Cycle Theory.  We came across this news item today (hat tip ZeroHedge.com).

Federal Reserve Chairman Ben S. Bernanke said the Fed will raise the interest rate on excess reserves as its primary tool for tightening monetary policy rather than selling assets from its balance sheet.   “The principal tool that we contemplate is the interest rate paid on excess reserves,” Bernanke said [on Monday, April 9, 2013,] in response to audience questions at a conference in Stone Mountain, Georgia.

Every Thursday the Fed publishes money supply statistics, and every other Thursday they publish the reserves of the US banking system.  We have been telling our readers for months that the $85 Billion a month of Quantitative Easing has been flowing into Excess Reserves.  This is the reason the growth rate of the money supply has slowed down.  We can only guess why US banks might be hoarding QE cash as excess reserves.  It is certainty nice to earn 0.25% interest from the Fed on these excess reserves.  That’s $42.5 Billion of risk-free interest income (profit) for the banks.  Still, they could lend this money and potentially earn a higher rate of return, so why not?  Well, the way the Fed would tighten monetary policy, as suggested by Bernanke, is by increasing the interest on excess reserves.  The Fed Vice-Chairman, Janet Yellen, gave a speech last week where she suggested the Fed could slow the money printing in the future as the job market improves.  This means very little by itself because members of the Federal Open Market Committee frequently make speeches and talk about what the FOMC “might” or “could” do.  We’re guess here – if US banks think the money printing will slow and interest on excess reserves will rise, then perhaps they are reacting by hoarding the QE cash to maximize the risk-free profits the think the Fed will provide in the future.  This might be what’s going on, or maybe it is something else.  The fact remains US banks are not lending fast enough to keep the bubble-boom going.  If the current circumstances continue US markets will eventually fall.

World event could spook investors.  Hardly anyone believes North Korea will initiate a war.  Their new leader is acting like a bully looking for the international community to send him some cash.  It’s nothing but a shakedown / extortion racket.  What’s more likely to happen is a resumption of the Eurozone debt crisis, which might be absent from the headlines but has not been resolved.  France is reeling economically and is one of several Eurozone countries that could be the next headline.  Youth unemployment is high across the Eurozone, and that usually leads to unrest.  We’re not saying something will happen.  We’re pointing out the possibility, and with the US money supply growth rate having slowed recently, anything world event that spooks investors could trigger a decline in US markets.

Avoid US markets and avoid all bonds.  Price inflation hedges and cash are the safe places right now.

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