For Tuesday July 16, 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 0.14% on Monday with volume below Friday and below the 30 day moving average.  The S&P closed at another all-time high but on the lowest non-holiday volume of the year.  These light-volume up-days are not consistent with a market that is expected to continue growing.  Our pattern detection software has not yet identified a turning point.  If the S&P 500 declines about 38 points (-2.5%) on Tuesday our market forecast could change to an uncertain trend.

Subjective Comments:

US markets will crash in the near future if US M2 money supply growth remains as it currently is, at a very slow growth compared to 2012’s 9% annual increase.  This is an unavoidable economic reality explained by Austrian Business Cycle Theory (ABCT).  Precisely when in the future the crash will occur is subjective.  We are guessing before the end of October 2013.  In our prior posts we have provided these reasons to support our guess the crash will happen by October:

  • Banking crises most frequently start in September
  • September 30th is the quarter close and many publicly traded companies have to report results in October
  • The 2012 & Year-to-Date 2013 M2 growth rates are very similar to those in 1928 and 1929, and US markets crashed dramatically in October 1929

None of these reasons prove US markets will crash before October.  They merely support our opinion.  Market crashes are created by the rapid growth of the money supply followed by slower or negative money supply growth as explained by ABCT.  When these ABCT conditions are present, as they are now, markets show weakness and light trading volumes and become susceptible to a crash from some sort of spark.  There are several situations that could provide such a spark.  China is nearing a classic ABCT crash after years of mal-investments in unproductive and unwanted infrastructure, including construction of “megacities bigger than London or New York… at a rate of 20 a year.” The Eurozone debt crisis remains a serious problem.  There is speculation problems will be under-reported or bailed out just long enough to allow the German elections on September 22, 2013 to occur.  The US economy is not improving and the Fed’s Quantitative Easing (money printing) will not revive the economy nor support the stock market.  QE adds money to the M0 money supply, but without lending by US banks the fractional reserve money multiplier is not growing the M2 money supply.  We seriously doubt M2 growth will accelerate.

Price inflation is still a serious problem and likely to accelerate, although acceleration will be volatile with the collapse in the M2 money supply growth.  When newly created money enters the economy it does not immediately cause price inflation.  As the money is spent and circulates it causes prices to increase.  We are still experiencing a lag between money creation and price inflation.  We expect prices to continue to go up from the prior printing.  We also expect the Fed will rapidly increase the QE rate beyond the current $85 Billion per month when the market crashes.  This will cause more price inflation.

Our best advice is to move all your investments out of bonds and US stocks.  Our software algorithms should identify an opportunity to short US markets as the crash we’re predicting draws closer.  Having funds in cash will allow you to take advantage of the coming crash by investing in leveraged index funds that grow when US markets decline.  Price inflation hedges are also a sensible investment for part of your portfolio.

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