For Wednesday May 29, 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 advanced 0.63% on Tuesday with volume above Friday but below the 30 day moving average volume.  Our pattern detection software classified Tuesday as a strong-volume up-day.  Should the S&P 500 decline about 36 points on Wednesday (-2.2%) our automated forecast would likely change to an uncertain trend.

Subjective Comments:

While Tuesday was a strong-volume up-day, the below average volume remains a concern for us in making a subjective recommendation.  Last week saw the occurrence of a strong-volume market declines.  Based purely on our technical indicators, the strong-volume decline last week could be random.  It is the persistent near-average and below-average volumes that have us concerned about the longevity of the current US market rally.  Also concerning us greatly is the slow-down in the US money supply growth.  For these reasons we continue to recommend against investing right now.

We have repeatedly written about the high likelihood of price inflation in the US as a result of the past money printing by the Federal Reserve.  We strongly recommend this article posted recently by the Ludwig von Mises Institute to help understand why we continue to think strong price inflation will eventually occur.  Many factors impact the timing and severity of price inflation following massive amounts of money printing.  There are few unlikely things that would prevent price inflation at this point.  For example, the Fed could increase the fractional reserve requirement for all US banks to immediately change the current $1.7 Trillion of excess reserves into required reserves.  We doubt this will happen.  Instead we think it is more likely price inflation will accelerate followed by increasing bond yields.  If bond yields begin to be much higher than the 0.25% annual interest the Fed pays on excess reserves, US banks will start buying bonds or making other loans from their excess reserves and this will accelerate money supply growth and price inflation when it happens.  How fast this happens is impossible to guess, but at least the M2 money supply can be measured every week.

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