For Monday July 29, 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 barely advanced 0.08% on Friday with volume below Thursday and lighter than the 30 day moving average.  Friday’s advance was on very light volume.  This past week saw two strong-volume down-days with the rest being light-volume up-days.  This pattern suggests continued market growth is highly unlikely.  Should the S&P 500 drop about 5 points on Monday (-0.3%) our market forecast would likely change to an uncertain trend.

Subjective Comments:

Thanks to the Federal Reserve’s money printing and commercial bank lending last year, US M2 money supply increased 9.2% in 2012.  Since the beginning of the year the M2 growth rate has collapsed.  This is setting up the classic conditions for a market and economic crash as explained by Austrian Business Cycle Theory.  Price inflation is also accelerating from last year’s money supply increase now that the money has moved through the capital structure into the consumer sectors.  This creates a crummy set of circumstances known as stagflation.  Per Wikipedia, stagflation is “a situation where an inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high.”

The slowdown in money growth has caused support for bond prices to weaken.  The Fed’s taper talk spooked the bond market and bond prices have been falling as shown by rising interest rates.  The increasing interest rates will make it more expensive to borrow money.  Business projects that were started from low interest loans are running into problems as prices increase.  There was never real demand from consumers for these business projects, but the low interest rates fooled entrepreneurs into borrowing and starting projects.  The boom from 2012 money growth is nearing its end.  There will be an increase in bankruptcies, both municipalities and companies.  Unemployment will get worse.

This situation makes investing very tricky.  Holding cash is a bad strategy long term because price inflation erodes the purchasing power of cash balances.  Price inflation hedges should do very well as price inflation accelerates, but these investments should be considered very long term investments and not short term speculations.  We recommend avoiding all bonds for the indefinite future, including all bond-based investments.  We also suggest putting a part of your portfolio into price inflation hedges.  Do the research to determine the best hedges for your circumstances.  Finally, we suggest holding a portion of your portfolio in cash.  Avoid US stocks as the coming market crash will destroy a lot of wealth.  Any purchasing price erosion will be minimal compared to the losses the next crash will bring.  More importantly, having cash ready to invest will present a big opportunity as the crash gets closer.  Using inverse leveraged index funds you can grow your investments when the US market declines.  Continue to follow our market forecast.  When the crash nears we expect to detect a pattern that predicts market decline.  At that point inverse index funds will become a short term opportunity for large gains.  Our best guess right now is the US stock markets will crash sometime before the end of this October.

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