For Tuesday May 28, 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 barely declined on Friday, dropping 0.06% on very light volume.  Volume was below Thursday and below the 30 day moving average, making Friday a light-volume down-day.  It is common to see very light volumes on a Friday prior to an extended weekend as US markets are closed on Monday for Memorial Day.  If the S&P 500 declines about 29 points on Tuesday (-1.7%) our automated market forecast is likely to change to an uncertain trend.

Subjective Comments:

We reviewed the trends in the US M2 money supply (not seasonally adjusted) again after posting yesterday.  The zigzag growth with quarterly drops over the past 5 months has been very significant indeed.  To give you an idea of just how significant, recall that US M2 was growing at an annualized rate of 14% from last September through the end of December.  In January M2 dropped dramatically then resumed growth at 13% annualized.  The next M2 drop was in mid-April.  The growth since the mid-April drop is difficult to measure with only 3 weeks of data, but it appears growth will probably be around the same 13% to 14% annualized rate.  Those 2 drops in January and May completely eliminated all the growth since the end of 2012.  The most recent US M2 data shows M2 at $10.55 Trillion Dollars, which is just below the $10.57 Trillion Dollar mark for M2 on 12/31/12.  For the past four and a half months US M2 growth has effectively been 0%!  The money supply is growing again, but the current growth rate does not appear to be strong enough to sustain the bubble-boom caused by the M2 growth from 2012.

The collapse in the money supply growth is why we recommend against investing in the US stock market.  We want to remind our readers why we also recommend against investing in all bonds.  Bond prices are at historic highs because the Federal Reserve’s money printing is directed towards US Treasuries and Mortgage Backed Securities.  With the Fed printing money to buy bonds, this is keeping bond prices up and thus bond yields are very low. The Fed’s money printing from 2012 and earlier is causing mild price inflation now, but eventually price inflation will move higher.  When this happens, bond buyers will begin to demand a higher return to compensate for inflation.  This will cause bond prices to fall, even if the Fed keeps printing and buying bonds.  On the other hand if the Fed slows the printing presses and buys fewer bonds, demand for the bonds will fall and bond prices will fall in response.  Either way, bond prices are eventually going to fall.  Some think the fall will be sudden and large.  We’re not sure when or how fast bond prices will fall, but the will not go up from here.  This is why we recommend against investing in bonds.  Right now it appears the best strategy is to hold and accumulate cash and wait to see what happens.  Only invest in price inflation hedges if you’ve done additional research and are able to hold those investments for a very long period of time.

Thank you for the recommendations you’ve been making to your friends and family.  Readership is up, and we’re very excited to have new people signing up to get our daily posts via email.  Welcome to all our new readers.  Enjoy the long weekend!

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