For Wednesday July 3, 2013, We Recommend Against Investing

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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 barely changed on Tuesday but did end the trading session down 0.05% with volume higher than Monday but below the 30 day moving average.  Our pattern recognition software classified Tuesday as a strong-volume down-day, even though the index was barely down and despite the below average volume.  One strong-volume down-day is nothing by itself, but the increasing frequency of their occurrence can predict a market decline.  Our software has not detected a fully formed predictive pattern, but with Tuesday we have seen the beginning of such a pattern emerging from the data.  If the S&P 500 declines about 15 points on Wednesday (-1%) our forecast could change to an uncertain trend.

US markets will be open on July 3rd but will close at 1:00 p.m.  US markets will then reopen on Friday, July 5th.

Subjective Comments:

While our automated forecast remains on a growth trend, we remain concerned about the money supply trends and the increasing frequency of strong-volume down-days as detected by our software algorithms.  Please ignore our forecast and remain in cash for the time being.  It is difficult to guess when our stock market investment advice might change.

We continue to recommend against investing in bonds.  We see bond prices falling if the Fed “tapers” back on their bond purchases.  This is the law of supply and demand.  Remove demand from the Fed and bond prices will fall.  If the Fed instead chooses to continue buying bonds, or if US banks should start buying bonds, the accelerating price inflation will cause other buyers to demand a premium interest rate to compensate for the declining purchasing power of the Dollar.  This will cause bond prices to fall.  Either way, bond prices will fall.  The recent decline in bond prices could well be the beginning of a major fall in bond prices.  Bond investors are accelerating the liquidation of their positions.  Avoid all bonds, including TIPS.  If you own any bond investments, we recommend selling ASAP.

The money printing the Fed has produced over the past several years has resulted in price inflation, but the serious price inflation that could occur as a result has been mitigated by US banks accumulating excess reserves.  Prior to 2008 US banks typically held very little excess reserves.  In October 2008, in response to the developing financial crisis, the US congress changed the law to allow the Fed to pay interest on excess reserves.  The Fed now pays 0.25% interest on excess reserves.  US banks now profit from holding excess reserves as a result.  If interest rates continue to climb, US banks could choose to accelerate lending from the over $1.9 Trillion Dollars of excess reserves they are currently holding.  If this occurs, price inflation could become very serious.  If banks lend fast enough, it could also ignite another bubble-boom in US stock markets as described by Austrian Business Cycle Theory.  Price inflation is already a problem for US consumers.  Some price inflation data can be isolated and referenced to suggest there is no price inflation, such as recently done with the price of a gallon of milk.  If you read this detailed analysis you’ll see that a steady price can still be price inflation when consumer demand is falling.  When demand falls, prices fall, unless there has been massive money printing.  Money printing pushes prices up.  The net effect on a specific commodity could be any outcome.  The absence of price inflation does not change the harmful effects brought about by money printing.  If the Fed keeps printing and/or if US banks accelerate lending, price inflation will get much worse, much has it has in Argentina.

Keep tracking the US money supply to see what the net effect of the Fed’s money printing and US bank lending is having.  If US M2 growth rate accelerates a bubble-boom could resume.  If not, and current M2 growth rates persist, then a crash is likely.  We still think the most likely outcome for the next several months is a US market crash.  If this happens, the Fed will likely accelerate their money printing.  The best suggestion we have right now is to hold and accumulate cash to position for what comes next.  If you think the Fed will keep printing and possibly accelerate printing, then take advantage of the low prices in commodities and add to your price inflation hedges.  JPMorgan thinks commodities could begin an upward move in price in the near future.  Be sure to do additional research on price inflation hedges to determine what the best option for your circumstances is; just be sure to avoid TIPS bonds.

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