For Monday July 15, 2013, We Recommend Against Investing


Investment Recommendations:

Ignore our automated market forecast and 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 advanced 0.3% on Friday with volume below Thursday and below the 30 day moving average.  The S&P 500 index advanced every day this past week, but every day for the past 2 weeks has seen below average volume.  A strong market rally occurs on above average volume.  The light-volume up-days are not consistent with a strong rally.  These light-volume days have put temporal distance between the occurrence of strong-volume down-days, so there is currently no predictive pattern formation of growth or of decline.  If the S&P 500 declines about 42 points on Monday (-2.6%) our forecast could change to an uncertain trend.

Subjective Comments:

The US economy and stock market are heading for a crash, and we predict the crash will occur before the end of October this year.  If the US money supply growth rate remains where it is, a crash is sure to occur soon.  That is not a guess but an economic fact described by the Austrian Business Cycle Theory.  The guess we’re making is timing.  Our guess of the market crash timing by the end of October is based on historical observations that might not repeat themselves, but it seems likely in our opinion.  One such observation is the historical frequency of banking crises which start much more often in September than any other month.  The other is the similarity of the M2 money supply growth in 1928 and 1929 leading to the historical crash in October 1929.  Annual M2 growth was 3.78% in 1928 and 0.39% in 1929 (data here).  Our graph published in our prior post shows annual M2 growth was 9.2% in 2012 and has been an annualized 1.2% so far in 2013.  Finally, September is a quarter point and publicly traded companies will announce their performance in October.  This is why we’re guessing the coming market crash will be soon and most likely in September or October.

The only way a market crash could be delayed (not avoided, but delayed) is by sudden and strong growth of the money supply.  For that to happen US banks would have to change course and begin aggressively lending in order to accelerate money supply growth via the fractional reserve money multiplier.  Yesterday we explained this is unlikely because of Interest on Excess Reserves (IOER) paid by the Federal Reserve to US banks on the $1.98 Trillion Dollars of excess reserves.  We pointed out the likelihood that the Fed will increase the IOER rate based on the change in the H.3 data reporting made on July 11, 2013.  We searched our archives and here is what Bloomberg News reported on April 8th of this year:

Federal Reserve Chairman Ben S. Bernanke said the Fed will raise the interest rate on excess reserves as its primary tool for tightening monetary policy rather than selling assets from its balance sheet.  “The principal tool that we contemplate is the interest rate paid on excess reserves,” Bernanke said… in response to audience questions at a conference in Stone Mountain, Georgia.

With interest rates going up, US banks will desire to make loans to earn higher profits.  If the Fed increases the IOER rate, US banks will be motivated to keep excess reserves parked at the Fed instead of lending.  The Fed’s money printing of $85 Billion per month (almost $600 Billion since December) has failed to increase the M2 money supply.  This means banks are allowing loans to mature faster than new loans are being made, thus offsetting the Fed’s money printing.  If banks accelerate lending, the Fed is likely to increase IOER to slow lending.  All of this leads us to conclude it is extremely unlikely the US money supply will grow fast enough to avoid a crash before the end of October.

Do not be fooled by the new record highs in the US markets.  Market volume is below average and the money supply growth has collapsed.  Avoid all bonds and avoid US stock markets.  Accumulate cash for a coming opportunity to short the US market as the crash draws closer.  Consider price inflation hedges as long term investments for part of your portfolio.  We expect the Fed to accelerate money printing in response to the coming crash, and this will be the fuel that will continue to drive up price inflation.  Price inflation is already happening and is much worse than the official CPI propaganda from the Bureau of Labor Statistics.

Welcome to our new readers!  We’re excited to see a continued increase in our readership statistics and hope you’re finding our site valuable.  With the coming market crash please share our site with your friends and family, and consider “liking” our facebook page.

Have a great weekend!

3 Responses to For Monday July 15, 2013, We Recommend Against Investing

  1. Luke says:

    Analysis seems sound to me. ABCT don’t tell no lies.

  2. flow5 says:

    The action should be over by the 24th. But you should be watching Vt & not M.

  3. Pingback: For Tuesday July 16, 2013, We Recommend Against Investing | Development Site