For Thursday July 18, 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 Wednesday with volume higher than Tuesday but below the 30 day moving average.  Our pattern recognition software classified Wednesday as a strong-volume up-day, but it was below average volume again.  The past 13 trading sessions have all been below average.  A strong market rally usually occurs with above average volume.  The weak volume suggests the market is likely to move sideways or down.  It is not likely to move much higher.  If the S&P 500 declines about 29 points on Thursday (-1.8%) our market forecast could change to an uncertain trend based on our stop loss algorithm.

Subjective Comments:

Federal Reserve Chairman Ben Bernanke gave testimony to the US House of Representatives on Wednesday.  His published remarks contained nothing new, so US markets did not react.  During the questions one Representative asked the Fed-Head “are you printing money?”  Bernanke replied “Not Literally.”  The Fed is in fact creating $85 Billion Dollars every month and has been since the beginning of the year and intends to continue into the foreseeable future.  We call this “money printing”, although the Fed calls it Quantitative Easing (QE).  What “Helicopter Ben” meant by saying “not literally” is the Fed is not printing “currency”.  Benny evidently is uncomfortable calling QE “money printing” since money printing has a long and disastrous history.  The credit in your bank balance can be spent by check, by credit / debit card, or by withdrawing currency and spending that.  It all spends exactly the same and that means bank credit and currency are very much the same thing.  The semantic difference between currency and other forms of money does not matter with regard to the economic consequences of creating bank credit or printing currency.  Mr. Bernanke, the Fed is printing money on your watch!

Ignore what Fed officials say.  Watch what they do.  The best way to watch is to monitor the money supply data published every Thursday.  Printing $85 Billion per month increases to the money supply, but fractional reserve bank lending also grows the money supply.  After banks have made many fractional reserve loans they can shrink the money supply by slowing the rate of originating new loans.  US M2 (not seasonally adjusted) is essentially unchanged since the beginning of the year compared to growing over 9% in 2012.  This means US banks are allowing loans to mature faster than new loans are being created, and the net decline in the US M2 money supply from restricted bank lending matches the $85 Billion of monthly money printing.  This is the only way US M2 can remain unchanged while $85 Billion of monthly money printing is happening.

Austrian Business Cycle Theory (ABCT) explains that economies and stock markets enter an artificial boom when the money supply grows at an accelerated rate.  Once the growth of the money supply fails to accelerate, or as in the current situation collapses from over 9% to under 2%, ABCT explains this must lead to an economic and market bust.  ABCT also explains that the longer the money supply grows, the worse the subsequent bust and recession will be.  The US economic structure of production is suffering from years of massive money printing.  This means there are too many investments in business and projects that will not be profitable.  Without M2 growth in double digits we will see businesses that make capital goods begin to suffer losses (as explained by ABCT’s structure of production).  Caterpillar Inc. stock price has been declining from revenue lossesIBM and Intel are also missing their revenue targets.  Mortgage applications dropped 45% from their highs back in May and are now near 2011 lows.  This evidence is consistent with ABCT.  Capital goods sectors crash first and fall further than consumer sectors, and that’s happening now.  We still think US markets are likely to crash by the end of October or sooner.  Our market forecast should identify the pending crash as it gets closer.  Continue to avoid US markets and all bonds.

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