For Monday July 1, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US stock markets right now.  Continue to avoid all bond investments. Price inflation hedges remain good long-term investments, but only invest in price inflation hedges amounts that you can leave invested for a very long time.

 Technical Comments:

The S&P 500 declined 0.43% on Friday with volume higher than Thursday and above the 30 day moving average.  Friday trading usually has light volume, but this past Friday volume was both above average, and there was a spike in volume combined with an index decline right at the end of the trading session.  This is unusual.  It is even more unusual for it to occur on the last day of the quarter when fund managers typically try to increase stock prices to boost the performance of their financial reports.  If the S&P 500 declines about 19 to 20 points on Monday (-1.2%) our forecast could change to an uncertain trend.

Subjective Comments:

In our last post we commented on the drop of US banking excess reserves from $1.96 Trillion to $1.92 Trillion, which is a decline of $40 Billion Dollars in 2 weeks.  This could be just a blip in the data series.  Upon further reflection and reading other sources of information, it should be noted interest rates have been rising.  US banks are earning 0.25% interest on excess reserves from the Fed, but with increasing interest rates there is an increasing incentive for banks to make loans.  This is a very important point and means banking excess reserves need to be watched closely.  The next update to excess reserve data will be published in about 2 weeks on Thursday, July 11th. If banks accelerate the origination of new loans to take advantage of the increasing interest rates, the US M2 money supply growth would in turn accelerate.  This is the critical question: Will US banks accelerate new loans?

You can pretty much ignore all the speeches by the Fed officials.  The Fed seems intent on printing $85 Billion per month, yet with over $1.9 Trillion Dollars in excess reserves it is US banks that are in a position to grow the money supply if they choose.  This past week Bank of America announced more layoffs, so it is not at all clear the opinion of the bankers regarding lending decisions.  By tracking the money supply and interpreting the trends using Austrian Business Cycle Theory it will be possible to predict what will happen.  If banks do not accelerate lending then markets will crash.  If banks do accelerate lending fast enough then a bubble-boom could resume.  If lending accelerates a little then markets might not crash, but they would probably just move sideways.  Any scenario is possible from here, but we subjectively see the most likely outcome as a market crash between now and October.  We are guessing US banks will not accelerate lending, but it is impossible to accurately predict the future decisions of other people.  It is up to the bankers what will happen.  We will watch the data and explain any change in our opinion.  For now we continue to recommend holding and accumulating cash.

One Response to For Monday July 1, 2013, We Recommend Against Investing

  1. Nitro says:

    My brother was insisting on investing in some bonds but I didn’t allowed him, when he asked for a reason, I showed him this article and peace.