For Tuesday June 11, 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 declined 0.6 points (-0.03%) on Monday with volume below Friday and lighter than the 30-day moving average.  Monday was a light-volume down-day, although the market index was essentially unchanged.  If the S&P 500 had been up on Monday, the light volume would have remained the more interesting feature of Monday’s market action.  The light volume does not cause Monday to contribute to any pattern formation, and this leaves our technical analysis devoid of a fully developed pattern.  If the S&P 500 declines about 20 points on Tuesday our stop loss algorithm could trigger and change our automated forecast to an uncertain trend.

Subjective Comments:

The absence of a fully developed pattern is common with our technical system.  Our pattern recognition software looks for turning points, so a great deal of time can elapse between the occurrences of fully developed patterns.  While our proprietary software did not identify a pattern, US markets are producing other patterns that have been noted by others, including where it was reported that there has been a cluster of the technical patterns called Hindenburg Omen.  There have been 4 occurrences of the Omen in the past 5 weeks and 3 in the last 7 days. provided a very good explanation of the Hindenburg Omen pattern and how it is consistent with human action.  We find it very interesting to see the Omen occurring in the daily market data as the US M2 money supply has been showing sideways zigzag growth and declines, netting to zero growth over the past 6 months.  We continue to subjectively see increasing risk of a market crash based on the crash in the US M2 growth rate and how Austrian Business Cycle Theory (ABCT) explains what will happen to asset prices as a result.  We consider ABCT to be the proper theory for interpretation of the economic conditions.  Technical analysis, including the Hindenburg Omen and our Pattern Recognition Software, are useful in identifying when a crash or boom is approaching.  The Omen is thought to predict a market decline from 30 calendar days to 30 business days in the future, but like all technical indicators it is not perfect.  Our Pattern Recognition Software is likewise not perfect, but it is not yet predicting imminent decline in US markets.  We continue to think a market crash is likely in July or October since those are months following quarter points.  It remains possible but less likely that a crash can be delayed.  The only way a crash can be delayed and the bubble-boom extended is if the US M2 growth rate accelerates to a level higher than it has been in the recent past, and this would be in excess of 14% annualized growth.

There is no way to avoid the consequence of a bubble-boom once it has begun.  A crash must occur, and the longer the bubble-boom has been going the worse the crash will be.  Ludwig Von Mises explained there are only two possible endings to a bubble-boom created by money printing.  When the money supply growth slows, a crash and depression will follow.  The only other alternative is what he called the “crack-up boom”, which is a hyperinflationary period where the currency involved depreciates rapidly and becomes worthless.  We are not predicting hyperinflation in the near future for the US economy.  The money supply must continue to grow at an ever accelerating pace to create a hyperinflation.  The US M2 money supply has zigzagged for the past 6 months resulting in zero growth.  This is why we say a crash is coming and the odds it can be delayed diminish every week US M2 growth remains below 14%.  The reason we continue to advise vigilance in tracking the money supply is because of the nearly $1.9 Trillion Dollars of excess reserves available to US banks.  Should banks begin rapid lending of new loans using these excess reserves, they could easily grow the M2 money supply in excess of 14%.  In the summer of 2011, 2 years ago, banks initiated rapid lending and grew M2 at an annualized rate of 24%.

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