For Wednesday May 22, 2013, We Recommend Against Investing


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 advanced 0.17% on Tuesday on volume higher than Monday and above the 30 day moving average.  Tuesday was a strong-volume up-day and the 19th consecutive Tuesday where the Dow Jones Index advanced.  The Dow index advance streak for Tuesday’s is of no consequence; it is merely interesting.  The strong-volume up-day is more significant as the S&P 500 continues a 5th consecutive week of strong-volume up-days in a market rally with not strong-volume down-days detected by our pattern detection software.  These technical indicators suggest the bull market will continue.  Should the S&P 500 decline about 3.5% (-58 points) on Wednesday our forecast is likely to change to an uncertain trend.

Subjective Comments:

The slowing US M2 money supply growth and early indications of slowing economic conditions in the capital goods sectors remains the reason we recommend ignoring our automated forecast and maintaining your investable funds in cash.  Fed Chairman Bernanke testifies before congress this week.  There have been hints from other members of the Federal Open Market Committee that the Fed’s money printing (Quantitative Easing) of $85 Billion per month might slow down.  Most market participants understand the basic connection between the Fed’s monetary policy and stock market performance, but it appears most do not understand Austrian Business Cycle Theory (ABCT).  It would be best if the Fed did not print money.  Unfortunately the US M2 money supply has grown quite a bit recently, and this will lead to price inflation as the desire to hold cash balances begins to decrease.  US banks will eventually start lending, resulting in more inflation.  Consumers will eventually start spending and this will bid up prices and finally cause the price inflation we have been warning about.  Money printing almost always leads to price inflation.  Price inflation can be masked or offset by increased desires to hold cash balances, and also by increased labor productivity.  Labor productivity gains have not been sufficient enough to offset the massive money printing that has been occurring.  However, US banks hold $1.8 Trillion of excess reserves.  These excess reserves are cash balances that banks prefer to hold instead of lend, and this is why price inflation has not been as strong as the money printing.  When banks start lending we will see strong price inflation.  To get a better idea of what price inflation is doing we recommend and the MIT Billion Prices Project.  These data sources provide a better measure of price inflation versus the Bureau of Labor Statistics official Consumer Price Index (CPI).

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