For Friday July 19, 2013, We Recommend Against Investing

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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 increased 0.5% on volume above Wednesday and just above the 30 day moving average.  Thursday was a second consecutive strong-volume up-day as classified by our pattern recognition software.  The above average volume was the first above average day in 2.5 weeks.  The moving average volume has been declining in response to all the light volume days recently, and that is why Thursday was finally a day with above average volume.  Consecutive strong-volume up-days are suggestive of market strength, but it will take many more days in quick succession to form a predictive pattern.  If the S&P 500 drops about 32 points on Friday (-1.9%) our stop loss algorithm could trigger and change our market forecast to an uncertain trend.

Subjective Comments:

We think the market strength (and record highs) in the past 2 days comes from the Congressional jawboning of Fed-Head Bernanke.  Our subjective investment recommendation will not change without many more strong-volume up-days combined with evidence the money supply growth accelerates strongly.

The Fed published the weekly US M2 (not seasonally adjusted) money supply data and the growth trend remains virtually unchanged since the beginning of the year.  On 12/31/12 US M2 (nsa) was $10.567 Trillion, and as of 7/8/13 (most current data) US M2 (nsa) is $10.667 Trillion.  That is only a $100 Billion increase in 27 weeks (half year).  The M2 (nsa) data series has week-to-week variability in excess of $100 Billion, so there is statistically no change since the start of the year.  Mathematically the $100 Billion increase represents a 1.6% annualized growth of M2 which is an absolute collapse compared to the 9.2% annual increase that occurred in 2012.  If the zigzag growth pattern in M2 we’ve seen since the start of the year continues, then we should see a large drop in M2 in about 4 to 6 weeks.  We think this is likely because US banks are not lending.  So while M2 is on an upward “zig”, we think a “zag” will happen and keep overall M2 essentially flat versus the start of the year.

With no growth in M2 following a 9.2% annual increase last year, Austrian Business Cycle Theory explains why the bubble boom economy caused by the expanding money supply must pop and contract when the money supply growth rate slows.  It would take a sudden, sustained and large increase bank lending to avert the pending crash in US markets, but this would only delay the crash and not prevent it.  We must suffer a crash after the years of M2 growth that has occurred.  Money supply growth creates bubble booms, and all such bubbles pop.

We were asked by a new reader how long we have been recommending against investing in US markets.  We changed our subjective investment recommendation the evening of February 21st this year when it became obvious the US M2 money supply had stopped growing.  Since then the S&P 500 has managed to continue growing, but the growth has been on very weak volume.  We researched history to find a similar example to the current circumstances, and we discovered US M2 stopped growing at the beginning of 1929.  The collapse in the M2 growth in 1929 followed 5.4% annual growth in 1928.  It was late October in 1929 when the market finally crashed, although it had been declining prior to the crash.  If 2013 turns out to be a comparable year (and it has so far), then the S&P 500 will probably begin a mild decline very soon.  We think a crash by the end of October this year is very likely.  There is clearly a lag between a change in the M2 growth rate and the reaction in the stock market, and the lag time is difficult to predict.  6 to 9 months appears to be a thumb rule, but it is still an estimate.  Back in late February we evidently were too soon in changing our subjective recommendation.  Given circumstances right now we firmly stand by our present recommendation to avoid investing in US markets.

Avoid all bonds!  Detroit declared bankruptcy today and municipal bond holders are likely to get nothing.  Too bad Detroit can’t print money like the Fed (sarcasm).  The US government debt is about $54,000 per person in the US.  That’s twice as large as the $26,000 per person debt that Detroit has.  The printing press can maintain the appearance of government solvency, but in truth many municipalities, states and the US government are all broke.  Bond holders will suffer losses as bankruptcies and money printing continues.

With price inflation remaining a concern we are anxious about holding cash, but we still see this as a better alternative than investing in US stock markets right now.  Price inflation hedges remain a good investment over a very long investing horizon and we think a portion of your portfolio should be in price inflation hedges.  If you have a cash position you will be able to short US markets as the crash draws near.  Please continue checking our site and we will publish a short recommendation when our pattern detection software identifies the nearing of the coming crash.  Please tell your family and friends to get out of stocks and bonds now to protect their wealth.  Please do not get caught by another crash like what happened at in the fall of 2008.

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