For Friday June 7, 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 0.85% on Thursday with volume below Wednesday but above the 30 day moving average.  Our pattern detection software classified Thursday as a light-volume up-day.  If the above average volume were used the past four days would have been classified as two strong-volume up-days and two strong-volume down-days.  This is why our detection algorithm looks at volume relative to the prior day as its primary means of assessing a strong-volume day.  Thursday’s market advance was not enough to reverse the trigger of our stop loss algorithm, so our automated forecast remains for an uncertain trend.  If the S&P 500 advances about 1 to 2 points on Friday our forecast could change to a growth trend.

Subjective Comments:

If the market advances on Friday and our forecast returns to a growth trend, we will still subjectively recommend avoiding US markets right now.  The US M2 (not seasonally adjusted) money supply weekly update was published by the Fed and the current growth rate is effectively 0% for the last 6 months.  M2 as of 5/27/13 was $10.49 Trillion, and this is essentially unchanged from the $10.48 Trillion from 12/17/12.  During this time M2 has zigzagged between $10.35 Trillion on 1/28/13 and $10.68 Trillion on 4/8/13.  This is the longest period of zero M2 growth in almost the past 3 years.  This is happening despite the Fed’s massive $85 Billion a month of money printing.  Also, in the month of May the Fed Funds rate dropped from 0.15% to 0.09%.  This might not seem like much, but it was done during May and shows the Fed is trying to encourage the economy to grow by keeping interest rates low.  Regardless of these efforts, interest rates have been rising.  Austrian Business Cycle Theory (ABCT) explains how the boom-bust cycle is created by money supply manipulations and the current circumstances in the US economy, stock market and M2 money supply all show classic indications of a boom nearing its end.  The Quantitative Easing of the past several years has swelled US Banking Excess Reserves to almost $1.9 Trillion Dollars.  US Banks are not originating new loans fast enough to grow the money supply via the fractional reserve money multiplier.

The US economy is very large and businesses still have large amounts of resources.  This allows the economy to continue growing even when the money supply growth slows or stops.  Even large economies are subject to the laws of economics and the consequences of money supply manipulations by central banks and fractional reserve lending.  The bubble-boom in the US is slowing as a result of the past half-year of zero effective money growth.  If the M2 money supply were to dramatically accelerate soon, it is possible the bubble boom could resume.  Every day M2 remains at 0% growth the odds of a crash increase, as do the odds of the crash happening sooner than later.  We’re still guessing a crash in either July or October if M2 remains at 0% growth.  This guess is because those months follow quarter points.  Our technical analysis software has not identified a pending crash yet, so we freely admit we’re guessing as to the timing of a market crash.  We are not guessing about the cause and effect described by ABCT.  The US economy and market must eventually crash as a result of the massive money printing over the past several years.  Right now it appears this crash is getting closer.  Continue to avoid all bonds and stay out of the US stock market.  Accumulate cash and consider investing a portion of your portfolio in price inflation hedges, but only invest in such hedges if you can hold them for a very long time.

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