For Thursday June 20, 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 dropped 1.4% on Wednesday with volume above Tuesday and higher than the 30 day moving average, making Wednesday a strong-volume down-day.  There have been 5 strong-volume down-days in the past 5 weeks.  This is not enough for our pattern recognition software to identify a pending market decline, but it is clearly not an indication of market strength.  Wednesday’s market decline was not enough to trigger our stop loss algorithm, but another decline on Thursday of about 11 points (-0.7%) on the S&P 500 would likely change our market forecast to an uncertain trend.

Subjective Comments:

Wednesday’s big market news was the Federal Reserve Open Market Committee (FOMC) announcement on monetary policy.  The printing of money shall continue at $85 Billion per month, but the FOMC thinks the US economy is showing signs of improvement.  This optimistic statement leads most market participants to the conclusion that the Fed will finally taper back the money printing in the near future, possibly as soon as September.  As a result, US markets declined after the FOMC announcement.

The removal of money printing (quantitative easing) is generally understood to be bad for a market after massive money printing has been ongoing for some time.  While many market participants understand this in a general sense, few understand Austrian Business Cycle Theory (ABCT).  ABCT explains why money printing leads to the business cycle of boom and bust.  What most people do not understand is that despite the $85 Billion of monthly money printing, the overall US M2 money supply has effectively not changed in 6 months!  $85 Billion times 6 months equals $510 Billion Dollars.  A half trillion dollars have been printed and used to by Mortgage Backed Securities and US Treasury Bonds in the past half year, and all of that money has been sitting in the banks.  US banking excess reserves are almost at $2 Trillion Dollars.  Old loans have been maturing at the same rate as the Fed has been printing money.  Effectively, US banks are not lending.  Prior to 2013 US M2 was growing at an annualized rate of 14%.  ABCT explains why this must lead to a market crash and slowing economy.  We have no idea what data the FOMC was looking at to conclude the economy is improving.  Saying the economy is improving is wishful thinking.  Economic data show contraction in the heavy industries that produce capital goods, just as ABCT predicts when the boom cycle nears its end.  Continue to hold and raise cash.  Avoid US markets and avoid all bonds.  If banks accelerate lending a boom could resume.  If not, a crash will come, and we’re still guessing either in July or October if the current circumstances remain unchanged.

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