For Friday June 14, 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 1.5% on Thursday with volume above Wednesday but below the 30 day moving average.  The advance was the best single day for the S&P 500 index this year, but volume was below average.  The strong-volume nature of Thursday (volume above Wednesday) provides nothing significant to our pattern recognition software.  The advance was enough to return our forecast to a growth trend, but if the S&P 500 were to decline about 15 points on Friday (-0.9%) our forecast would likely change again to an uncertain trend.

Subjective Comments:

Some good news in economic data about initial unemployment claims and retail sales might have given a boost to US markets on Thursday.  Towards the end of the day a news article by John Hilsenrath suggested the Fed might keep the Fed Funds rate low even if the money printing is “tapered” back.  Treasury auctions on Thursday were ugly, suggesting continued weakness in the bond markets.  It’s hard to guess what might cause the stock market to change on any given day.  Even the best day this year still has the US markets down over the past few weeks.  What matters is the rate of growth of the money supply.  Regardless of daily market action, when the Fed prints and Banks practice fractional-reserve lending the money supply grows or shrinks as a result.  This is what ultimately causes bubble-booms and market crashes as explained by Austrian Business Cycle Theory.

We have analyzed the weekly US M2 (not seasonally adjusted) money supply and the biweekly US banking reserve data.  The trends continue to increase the likelihood US markets are heading for a crash.  M2 has grown around 5% annualized over the past 5 weeks, but this is not relevant at all when the effective M2 growth over the past 6 months is effectively 0%.  It appears the money supply is returning to the zigzag growth seen in the past 6 months.  If this pattern continues M2 will accelerate mildly over the next 2 months, but that would not bring M2 growth anywhere near the 14% annualized growth experienced over the final 5 months of 2012.  Despite the Fed Funds rate declining to 0.09% and the $85 Billion per month of money printing by the Federal Reserve, US banking excess reserves swelled to $1.96 Trillion and required reserves remain unchanged.  The money printing is no longer growing the money supply fast enough to keep the bubble-boom going.  It appears there will be mild M2 growth going forward, so price inflation remains a serious concern considering how much money has been printed in the past 4+ years.  Banks are accumulating excess reserves, and this is why we predict US markets will no longer grow from here.  There will be up-days, even large up-days, but not many more.  The occurrence of down-days will become more frequent and eventually US markets are going to crash.  We still are guessing either a July or October crash as these are months following a quarter-close where most businesses evaluate their quarterly performance.  This is a guess.  We will rely upon our software pattern recognition for a better indication of a pending crash and inform our readers when this occurs.  We’re becoming more skeptical with every passing day that the money supply can accelerate its growth sufficiently to extend the current bubble-boom.  If we change our opinion we will explain why, but it will require supporting data which will be presented when relevant.  Last week we published a graph of the M2 money supply growth.  The data this week does not merit an update to that graph.

Thanks to all of our readers!  We’re very happy you continue to follow us and trust you’re finding our information useful.  Welcome to our new readers.  We hope you’ll stick around.

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