For Friday May 03, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stock markets right now, but be prepared to move available cash into leveraged index funds that grow with US markets.  Price inflation hedges remain good long-term investments.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 advanced 0.94% on Thursday with volume below Wednesday and lighter than the 30 day moving average volume, thus classifying Thursday as a light-volume up-day.  Thursday regained Wednesday’s loss and the S&P 500 set another record high.  Our technical analysis is still showing conflicting signs.  Light-volume up-days are not supportive of growth nor of decline patterns, but they occur more often during bear markets.  If the S&P 500 declines about 28 points on Friday (-1.8%) our stop loss algorithm could trigger a change in our automate forecast to an uncertain trend.

Subjective Comments:

We have analyzed the weekly US money supply data and the biweekly data of US banking reserves.  Something changed.  US banks aggressively originated new loans in the past two weeks.  We don’t know why, and we don’t know if this is a new trend or a short term aberration.  If the change is a new trend, it is likely US markets could advance soon.  The difference in the recent trends appeared in the biweekly Required Reserves (not seasonally adjusted) for US banks.  When required reserves increase it means US banks are lending faster than old loans are maturing.  This data set has a lot of noise, so changes in trends can be hard to spot unless they are large.  For the two weeks from 4/17 through 5/1 there was a very large increase in required reserves.  During the same period of time the excess reserves declined.  The $85 Billion of monthly Quantitative Easing money printed by the Federal Reserve has been accumulating as excess reserves.  During this 2 week period excess reserves dropped $42 Billion Dollars!  The rate of QE is $85 Billion, which is roughly $40 Billion in 2 weeks.  The $42 Billion excess reserve drop means US banks lent over $80 Billion in the past 2 weeks.  One possible explanation is that maturing loans simply dropped off and the existing origination rate continued unabated, restating in this dramatic net change.  If true, this could be a one-time event.  The other possibility is a new trend by banks.  If it is a new trend, there is no telling how long it will last.

US M2 (not seasonally adjusted) money supply followed the predictable 4-week sub-cycle decline.  The sub-cycle sees a dip in the week-to-week M2 change every 4th week, with 2 down weeks every 3rd cycle.  Next week could be low again as we are at the 3rd cycle.  Of course there is absolutely no reason this pattern will continue.  US M2 data published Thursday is through 4/22, so it does not yet reflect the change in banking reserves discussed in the prior paragraph.  If the banking reserves change is real and not a data anomaly, then US M2 ought to accelerate with next week’s data publication.  This would likely overwhelm the sub-cycle and M2 should advance.  We will see next Thursday.

US M2 (NSA) has been growing at 11.2% annualized based on a straight line fit through the past 3 months of data.  This is down from last week because of the expected sub-cycle decline.  The 20-month US M2 growth rate remains near the 7.6% range.  Also remember that US M2 had been growing at 14% annualized for almost 5 months from last September through early January.    We think US M2 growth needs to get back to the 14% range for the current bubble-boom to continue.  The current 11% growth is enough to prevent a serious decline for a short while, but without growth acceleration the likelihood of a market crash is growing.  This is why the change in banking reserves is so important to watch.  If the banking reserve change turns into a new and sustained trend, then US M2 would likely accelerate beyond 14%.  This will drive price inflation higher and faster, but it will also drive us the US stock market.  Argentina is experiencing very high inflation, and their stock market is advancing, both from the massive printing of Argentinian Pesos.  This is the expected outcome of massive printing as explained by Austrian Business Cycle Theory.  We are not advocating for this outcome.  Inflation is not desirable.  Money printing and fractional reserve lending are the reasons inflation occurs and this is the root cause of bubble-booms, but only if the money supply growth accelerates.  We encourage our readers to be prepared to invest for growth in the near future.  Watch the market closely and the money supply every week.  If banks maintain this lending rate the resulting bubble-boom and price inflation will be very strong.