For Friday June 28, 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 0.62% on Thursday with volume below Wednesday and lighter than the 30 day moving average.  Thursday was the third consecutive light-volume up-day for US markets.  These light-volume up-days are not an indication of market strength, but they are putting distance between the occurrences of strong-volume down-days.  This means the formation of predictive patterns is unlikely in our technical analysis, but the overall daily data remains more consistent with a market likely to decline.  If the S&P 500 were to decline about 26 points on Friday (-1.6%) our market forecast could change to an uncertain trend based on our stop loss algorithm.

Subjective Comments:

The weekly US M2 money supply (not seasonally adjusted) data and biweekly US banking reserve data was published on Thursday.  The zigzag growth of the money supply continues with the past 7 weeks growing at 9.3% annualized.  The more important growth rate is the annualized growth over the past 6 months which is 2.9%.  Following the 14% annualized growth during the last 4 months of 2012, the 2.9% growth since is an absolute collapse of the money supply growth.  Per Austrian Business Cycle Theory the current conditions are unable to sustain the bubble that has occurred in stock prices and a crash is coming.  Over the past 2 months the money supply growth has been accelerating, but the rate of growth is nowhere near the 14% it would need to achieve to have any hope of restarting the bubble-boom.  At this point 14% would probably just delay the crash without really driving more bubble-growth.

The US banking reserve data showed an interesting blip in the otherwise steady growth of the Fed’s balance sheet (M0) and excess reserves.  Instead of continuing on their upward trend, each slowed in their growth.  M0 still grew, but at a much slower rate.  Excess reserves actually declined from $1.96 Trillion to $1.92 Trillion, which is a drop of $80 $40 Billion dollars.  Required reserves remain too noisy to evaluate for a trend and appears to be growing slightly or not at all.  This minor A similar change in the banking reserves and Fed balance sheet occurred about 8 weeks ago, promptly followed by a resumption of the prior growth trends.  It is too early to tell if the most current change in these trends means anything or not.  It will be two weeks before the next update, at which time we will be able to see if something has changed.  Our best guess is that the Fed’s assets had a large number of Mortgage Backed Securities mature resulting in a decline in their balance sheet, and this is probably tied to the decline in excess reserves.  The other possibility is that the Fed actually started “tapering”, but we think this is unlikely.

Putting together the US M2 money supply and banking reserve data, it appears the Fed continues to print at $85 Billion per month and US banks continue to let that money accumulate as excess reserves.  US banks are refusing to accelerate their pace of new loan origination.  We’re guessing the M2 money supply will continue its current pattern, which means 8% to 10% annualized growth for the next 5 weeks, at which point another zigzag could appear with the money supply falling again.  The odds of a crash in the near future continue to increase.  Our best guess is a crash anywhere between now and the end of October.  Avoid all bonds, avoid stocks and hold your price inflation hedges for the long term.  Accumulate cash for a potential opportunity to short US markets.  We think the opportunity to short US markets will occur with the coming crash which we guess could occur within the next 4 months.