For Thursday April 25, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US stock markets right now, even though our automatic forecast predicts market growth.  Price inflation hedges remain good long-term investments despite last week’s drop in the price of precious metals.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 advanced 0.01 points (0%) on Wednesday with unknown volume.  Last week on Wednesday Standard and Poor’s delayed the publication of the daily S&P 500 volume data.  This week it appears to be delayed again.  This is highly unusual as the daily market data is typically available between 8PM and 9PM Eastern time.  Regardless of what the volume was the S&P 500 index was essentially unchanged.  Our pattern recognition software would discard Wednesday in the formation of a multiday pattern.  The prevailing patterns remain much more towards market weakness and decline than towards growth.  If the S&P 500 declines about 24 points on Thursday (-1.5%) our stop loss algorithm will likely trigger and change our automated forecast to an uncertain trend.

Subjective Comments:

The boom-bust business cycle begins in those industries of production furthest from consumer goods.  Austrian Business Cycle Theory (ABCT) describes the structure of production (or capital structure) within an economy as the distribution of businesses.  Watch makers produce consumer goods, but they buy tools and parts from industrial suppliers.  Those suppliers in turn purchase other tools and raw materials from other businesses.  In the production process of different businesses the outputs are either used by other production processes or consumed by the end user.  Higher order goods are those produced for use in other production processes.  When cheap credit is artificially produced via money printing and fractional reserve lending, the production of higher order goods occurs first.  This is because the production of these types of goods usually takes more time.  Mining and construction of heavy equipment can take months or years, so interest rates have a much larger effect on the profitability of long-cycle production processes.  This is why durable goods (higher order goods) boom first and crash first as the money supply growth changes.  For this reason, it is important to not only watch the growth rate of the money supply, but economic data that measures durable goods helps show when bubble booms are starting, and when they are ending.

Today the US Census Bureau released their advanced report on durable goods manufactures’ shipments, inventories and orders.  New orders for durable goods dropped 5.7% in March.  Nondefense new orders for capital goods decreased 10.6%.  The weakness in this sector of the economy is consistent with ABCT’s description of the structure of production, given that the US M2 money supply has not appreciably accelerated in the past 20 months.  US bank lending has slowed, and as a result we expect US M2 money supply growth will not accelerate enough to sustain the bubble-boom that has been occurring in the US economy.  This could change and there is probably still time for to keep the current bubble growing, but bank lending must accelerate to cause the money supply to grow faster.  We are not advocating for this monetary policy.  We are only describing the reality of the situation per our understanding of ABCT.  If bank lending slows even more then the necessary crash will happen sooner rather than later.  We look forward to providing our readers with a prediction for the US stock markets, up or down, once it becomes clear which way things will go.

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