For Friday May 31, 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 0.37% on Thursday with volume below Wednesday and just above the 30 day moving average.  Our pattern detection software classified Thursday a light-volume up-day and as such Thursday has very little influence on overall pattern formation.  No predictive patterns have developed.  The strong-volume down-days, one last week and one this week, have not created an overall pattern that would warrant action by investors.  If the S&P 500 declines about 24 points on Friday (-1.4%) our automated forecast is likely to change to an uncertain trend.

Subjective Comments:

Austrian Business Cycle Theory (ABCT) explains how an accelerating growth rate of the money supply causes a bubble-boom and eventually produces a subsequent crash, also known as the business cycle.  The weekly statistics on US M2 (not seasonally adjusted) money supply and the bi-weekly statistics on US banking reserves have been published by the Federal Reserve.  US banking excess reserves continue to grow with the accumulation of money printed by the Fed’s Quantitative Easing program.  After the Fed buys US Treasuries and Mortgage Backed Securities, the money is winding up in US bank accounts and banks are not lending these reserves.  Excess reserves are now just $3 Billion below $1.9 Trillion Dollars.  Total M2 is currently at $10.5 Trillion Dollars.  With the official 10% reserve requirement from the Fed, US banks can, by fractional reserve lending, increase M2 by $19 Trillion by the money multiplier effect.  In practice US banks can actually increase the money supply even more.  While it can’t happen all at once, US banks have the ability to triple the US M2 money supply if they start lending aggressively.  This also requires borrowers to accept loans, but the point is the excess reserves represent a massive amount of money supply growth and subsequent price inflation when and if banks start lending.  US banking required reserves are a different and noisy data set.  Required reserves have had a lot of variability over the past 8 weeks so it is difficult to read the trend.  Our best interpretation is that required reserves are remaining flat or might have begun to grow.  This is consistent with US banks originating new loans at the same pace old loans mature.  That has the net effect of no bank lending.

US M2 (not seasonally adjusted) money supply is the more important data to watch.  For the week ending 5/20/13 (most current data) there was a slight dip in the money supply.  It appears the 4-week sub-cycle is still present in the not seasonally adjusted numbers.  If this trend holds, US M2 will grow for the next 3 weeks and then have a dip again.  In the past 4 weeks M2 has grown around 7% annualized, but this is after a 2-week 50% negative growth rate (annualized).  M2 is showing a sideways zigzag growth/decline pattern.  The M2 money supply is effectively unchanged (0% growth) since mid-December (5 months).  The preceding 5 months M2 had been growing at 14% annualized.  On a longer horizon of the past 20 months M2’s growth had been around 7%.  The key points is past growth was 7% (long horizon) to 14% (shorter horizon), and now has been effectively 0% for the past 5 months.  ABCT explains an accelerating growth rate will initiate and sustain a bubble-boom, but when the money supply growth slows or stops, like it has now, then the bubble-boom will end and asset prices will come down (including stocks).

It is possible that a strong acceleration in the US M2 growth rate could keep the current bubble-boom and market rally going, but every week that passes with M2 not growing increases the odds of a bust.  Businesses generally operate financially from quarter to quarter.  At the end of June will be the next quarter point where businesses will assess their financials, and then again at the end of September.  If M2 continues as it has, then we think a market crash is likely in either July or October, the months following the quarters.  This is speculation and should be treated as a best-guess and not a forecast.  ABCT explains a crash must occur.  Our market forecasting software is unable to predict the distant future, but it can identify with reasonable certainty when US markets are nearing a trend change.  Our software is not showing a trend change is coming soon, but it does not see patterns suggesting the current rally is very strong.  Keep watching M2 and follow our forecast.  These indicators will provide a good indication of when a crash is nearing, or if a rally will resume with more strength.  In the mean time we see the current circumstances as highly uncertain and recommend against investing is US stock markets right now.  Be prepared for future price inflation and avoid all bonds as they will drop in price when price inflation accelerates.

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