For Friday July 26, 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 advanced 0.26% on Thursday with volume below Wednesday and lighter than the 30 day moving average.  After two strong-volume down-days, the market advanced on light volume.  Declines on stronger volume combined with advances on weaker volume are patterns inconsistent with strong market growth.  Our pattern detection software has not identified a fully formed pattern.  If the S&P 500 declines about 8 points on Friday (-0.5%) our stop loss trigger could change our market forecast to an uncertain trend.

Subjective Comments:

This week the Federal Reserve published the weekly US M2 money supply statistics along with the biweekly Banking Reserve data.  Here is what the analysis of the data shows:

  • US M2 (not seasonally adjusted) is up $100 Billion since the beginning of the year.  This is an increase of 2.7% annualized compared to the 9.3% annual increase in 2012.
  • In the past 3 months US M2 (nsa) has grown at a 7.3% rate, but this is the most current up-trend in the sideways zigzag pattern that has produced only 2.7% annualized growth since the beginning of the year.
  • The US M2 (nsa) continues to show the 4-week sub-cycle pattern.  If this pattern persists we should see a dip in US M2 next week.  The timing for the zigzag pattern to occur again would be over the next 2 to 3 weeks.  Since the 4-week sub-cycle dip is expected next week it will take 2 to 3 weeks to determine if the zigzag pattern will persist.

Overall the US money supply continues to show very slow growth compared to the 9.3% growth of 2012.  Austrian Business Cycle Theory describes why this situation must eventually result in a market crash following the bubble boom.

US banking reserve data show a consistent picture.  Required reserves is a very noisy data set, but it appears any trends in required reserves are irrelevant as the most recent value of $114.6 Billion is very little changed from the start of the year value of $113.7 Billion.  Unchanged required reserves means the net amount of loans outstanding is unchanged.  What makes these reserves classified as “required” is they are the required amount in proportion to loans that have been made.  Since the Fed has not changed the regulatory requirements on this minimum proportion, the conclusion can be drawn that net loans are unchanged.  This means US banks are not growing their loan portfolios, and as a result the money multiplier effect from fractional reserve banking is not growing the money supply.

US banking excess reserves have now topped $2 Trillion dollars ($2.03T).  Excess reserves are the reserves in excess of the required minimum, and the growth shows all of the money printing from Quantitative Easing is simply being deposited back as excess reserves with the Fed where banks earn 0.25% interest.  Watch this video for a report that outlines what we have been writing about for months.  The report shows a breakdown of the banks holding the excess reserves, and it turns out foreign banks hold over half of these excess reserves.  Watch the video from time mark 9:50 to 13:40 for the relevant information.

Our interpretation of the money supply and banking reserve data continues to strongly suggest insufficient money growth to sustain the bubble-boom created by the 9.2% annualized M2 growth from 2012.  With foreign banks (mostly Eurozone banks) holding half of the excess reserves, it is clear from the ongoing Eurozone debt crisis that these banks are unlikely to increase lending.  US banks also appear highly unlikely to lend.  Without the QE money being lent by banks US M2 will not grow fast enough to keep the current bubble afloat.  We urge our readers to avoid US stocks and US bonds.  Investing a part of your portfolio in price inflation hedges makes sense as the prior money printing is starting to cause consumer prices to increase.  We predict increasing price inflation with a declining economy (stagflation) going into the latter half of 2013.  We’re confident a market crash is coming.  We’re guessing the crash will occur before the end of this October.  Our pattern recognition software is very likely to identify an opportunity to short US markets as the crash draws closer.  For this reason we encourage readers to hold part of their investments in cash, even though price inflation will erode purchasing power.  With cash you will be ready to short US markets when the crash draws near and this will be a big opportunity for profits.  If you don’t want to short the market, at least protect your wealth and exit US markets now.  Share this information with your friends and family.