For Friday May 17, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US stock markets right now.  Price inflation hedges remain good long-term investments.  Continue to avoid all bond investments.

 Technical Comments:

The S&P 500 fell 0.5% on Thursday with volume below Wednesday but above the 30 day moving average.  Thursday is considered a light-volume down-day by our pattern detection software even though volume was above average.  The technical analysis we use continues to see nearly 4 consecutive weeks of market growth on strong volume and decline on light volume.  On the strong volume days we continue to see volume being just above average and not strongly above average.  If the S&P 500 were do decline about 49 points on Friday (-3%) our automated forecast would likely change to an uncertain trend.

Subjective Comments:

The weekly US M2 money supply (not seasonally adjusted) and biweekly US Banking reserve (not seasonally adjusted) data was published on Thursday.  After dropping dramatically in the prior two weeks, in the most recent week US M2 moved upward a bit.  M2 remains lower than where it was 3 weeks ago.  US M2 growth rate over the past 4 months is now at 7.6% annualized when measured by the best-fit straight line.  This is a slowdown of growth compared to the 14% seen at the end of 2012.  Over the past 20 months M2 growth is 7.4%.  This means the current bubble-boom remains at risk of popping.  Austrian Business Cycle Theory (ABCT) explains that accelerated money supply growth is the cause of bubble-booms, and when the growth rate fails to remain accelerated then the boom will end.  Our best guess is the US market will continue to grow or remain where it is now for a while.  If US M2 remains at the current growth rates the bubble will eventually pop.

Two weeks ago we noticed a drop in both the US monetary base and US banking excess reserves.  In the most recent data published the drop now appears to have been a data glitch because the previous growth trend has resumed as though no dip had occurred.  Also noted two weeks ago was a dramatic increase in US banking required reserves.  Those required reserves have fallen back to where they were previously but there does appear to be slight growth in excess reserves, but not much.  This means US banks have NOT resumed aggressive lending as we thought 2 weeks ago.  Instead the data shows that the money printing by the Federal Reserve continues to accumulate in US banks as excess reserves.  The US M2 data and Banking Reserve data now support the conclusion US banks are not lending faster than existing loans are maturing.  The absence of aggressive bank lending is why US M2 growth is slowing.  ABCT explains these circumstances will result in a crash.

Our warning that a crash is coming is based on US M2 growth remaining where it is or slowing.  It is of course possible these circumstances could change.  If US M2 growth accelerates the current bubble-boom could continue.  The longer the current circumstances persist, the less likely the current bubble will continue.  It is for this reason we cannot recommend investing in US markets right now.

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