For Monday April 15, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stocks right now, but be prepared to invest for growth in the near future.  US money supply growth, measured by a straight-line curve fit, is accelerating after dropping about 3 months ago.  This means price inflation will continue and likely accelerate.  It also means there are increased chances the current bubble-boom in the stock market will continue.  Price inflation hedges remain good long-term investments.  Continue to avoid all bond investments across the board.

 Technical Comments:

The S&P 500 declined 0.3% on Friday with volume below Thursday and lighter than the 30 day moving average.  This past week the daily market data has been predominantly bullish.  The decline Friday was on light volume.  The market advances were mostly on stronger volume.  The strength of the up-day volumes was not much above average, so the technical patterns do not yet predict continued growth.  It is still noteworthy because the prior several weeks had been mostly the opposite.  If the S&P 500 declines about 28 points on Monday (-1.8%) our stop loss algorithm could change our automatic forecast to an uncertain trend.

Subjective Comments:

It will be interesting to watch the market next week to see if the strengthening technical patterns continue.  When the Federal Reserve publishes money supply and banking reserve data this coming Thursday we will carefully evaluate our subjective investment recommendation.  If the daily market patterns remain strong and the Fed’s data suggest US banks have accelerated loan origination rates, we are likely to recommend investing for growth.

Yesterday we discussed our initial analysis of the most recent US M2 (not seasonally adjusted) money supply data.  We have analyzed the data again to look at the longer term rates.  We use a control chart of the straight-line-fit residuals to monitor the M2 growth rate.  When out-of-control conditions indicate a change in the growth rate, we reset our straight-line-fit to measure the new rate.  In the past year there have been 5 different growth rates.  A straight-line through all 5 of these different rates produces a 1-year rate (55 weeks) of 7.3% annualized, which is equal to the prior annualized growth rate (see graph).

US-M2-NSA-Growth-11APR2013

Austrian Business Cycle Theory (ABCT) explains that an accelerating growth rate in the money supply (M2) is necessary to initiate and sustain a boom.  This means an initial acceleration of money supply growth will cause a bubble-boom when M2 grows faster than before.  If M2 continues growing at a steady growth rate, eventually the bubble-boom will end.  Since August 2011 (20 months) US M2 average annual growth has been 7.3%.  For almost the past 3 months US banks have been originating loans fast enough to grow M2 at 11%+ (annualized), but there is no way to know if banks will continue this pace or not.  It was just over 3 months ago that the same banks allowed the net new loan origination rate to fall so much that over 3 weeks M2 shrunk (deflated) at an annualized rate of 39%!  Just before that M2 was growing at 14% annualized.  US banks in the past 7 months have had a new-loan origination policy best summed up as this: Go-go-go-go-STOP-go-go-go.

Our ABCT interpretation of the data suggests M2 must continue to grow at 8% or more to keep the US stock market bubble going at this point.  If the current growth of 11% annualized continues, we think US markets will continue to rise.  If banks suddenly slow lending again, the market will decline.  It is the 7.3% effective annual M2 growth for the past 20 months that has us concerned.  20 months is long enough that further acceleration of the growth rate is needed to keep the current bubble going.  We think the daily market advances recently are consistent with the longer term M2 growth rates.  Market growth has been on weak volume until this past week.  Now market growth is occurring with slightly stronger volumes and the money supply appears to be just beginning acceleration above the 20-month trend.  This is why we estimate a minimum of 8% annualized M2 growth as the necessary rate to keep the current US stock bubble going.  With over $1.7 Trillion of excess reserves, US banks can lend-lend-lend if they choose.  The daily market data patterns and the weekly money supply data will show if banks choose to do so or not.  Our investment recommendation will follow accordingly.

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