For Tuesday June 4, 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 0.6% on Monday with volume below Friday but above the 30 day moving average.  Monday was classified as a light-volume up-day by our pattern recognition software, but the above average volume could be used to interpret Monday as a strong-volume day.  Should the S&P 500 decline about 11 points on Tuesday (-0.7%) our automated forecast could change to an uncertain trend.

Subjective Comments: speculated US markets advanced near the end of Monday’s trading session in anticipation of market growth on Tuesday.  Traders have noticed over the past several months that every Tuesday has been an up-day for US markets.  There is no reason to think this trend will continue.  It is interesting that US stocks rose near the end of the day after having been down earlier.  On Monday the Manufacturing ISM was published and showed the worst headline value since June 2009.  Comments from survey respondents indicate business conditions (orders for goods and services) are slowing and there are concerns about rising prices.  This economic information is consistent with Austrian Business Cycle Theory (ABCT) predictions.  ABCT explains that a bubble-boom is caused by accelerated money supply growth.  The ever-accelerating growth allows borrowers (business borrowers mostly) to keep getting loans and stay ahead of price inflation.  When new loans slow, the prior money printing continues to bid up prices.  The increase in prices put pressure on business margins and their projects that appeared profitable at lower interest rates start to come under pressure.  Businesses also find there is much less demand for their products than they anticipated when interest rates were low.

As we have noted several times, the money supply growth rate has slowed significantly.  It has been as high as 14% annualized about 5 months ago, but since the beginning of the year US M2 has zigzagged up and down, resulting in effectively 0% annualized growth.  US bank lending is occurring, but only at about the same rate as old loans are maturing.  Also, interest rates are going up in response to the both the slow-down in money printing and increasing expectations of future price inflation.  As interest rates rise, bond prices fall. published these comments about increasing bond yields (rates).  Everything ABCT predicts is happening.  The slowed growth rate of the money supply has occurred in the past 5 months.  In the same time period interest rates have begun to rise and the details of the ISM show price inflation expectations are creeping upward along with the slow-down in business orders.  There is no way to avoid the crash and fall of asset prices.  When money printing causes a bubble-boom, there is always, always a crash.  The timing of the crash depends on when the money printing slows down (it has) and how long the economy can continue before the slowing forces the crash to happen.  The longer the US M2 growth remains near 0% (or below the prior growth of 14%), the odds of a near-future crash increase.  Should US M2 accelerate significantly the current bubble-boom could be extended, so it is critical to keep watching the money supply.

When we consider the US money supply growth, growing interest rates and the other corroborating anecdotal evidence from economic reports, our subjective recommendation is driven by ABCT.  Our automated forecast is predicting growth, but we are discounting our pattern recognition software as we see the near 0% money growth continue.  In the past 2 weeks there have been strong-volume down-days mixed with strong-volume up-days.  These types of conflicting technical patterns are common at market turning points.  Our forecasting system looks for turning point patterns and does not try to forecast the duration of a market trend.  Until a clear pattern emerges from turning point action we are hesitant to make a recommendation from just our technical analysis.  Continue to hold and accumulate cash, consider investing part of your portfolio in price inflation hedges and avoid all bonds.

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