For Tuesday July 30, 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 declined 0.37% on Monday with volume above Friday but below the 30 day moving average.  Our pattern detection software classified Monday as a strong-volume down-day since volume was above Friday but the S&P 500 index was down.  Our pattern detection software places more weight on day-to-day volume comparisons since the 30 day moving average change necessarily lags based on the math of the calculation.  In the past 4 weeks there has been only one day with above average volume.  In the past 5 trading days there have been 3 strong-volume down-days when evaluating volume based on prior day.  This is how patterns are detected within the daily market data.  So far the strong-volume down-day accumulation has not been sufficient to provide a predictive forecast, but the development is interesting and needs to be watched closely.  The index decline was just enough to trigger our stop loss algorithm, so our automated market forecast has changed to an uncertain trend.  If the S&P 500 advances about 1 point on Tuesday our forecast could return to a growth trend.

Subjective Comments:

Welcome to our many new readers!  We’re excited you’ve chosen to follow our commentary.  When our stop loss trigger changes our automated forecast we always want to discuss the limitations of the stop loss algorithm.  This algorithm is intended to trigger a forecast change when a sudden drop occurs.  When the market moves generally sideways with the daily ups and downs it can confuse the stop loss algorithm and cause our forecast to cycle back and forth between growth and uncertain.  This is currently very likely.  Since our subjective recommendation is to ignore our forecast right now and stay out of the market, this should hopefully not present a confusing situation for our readers.

Why would we subjectively advise against our proprietary investment system?  Our system uses only the daily market data to produce the technical forecast.  We subjectively interpret the money supply trends using Austrian Business Cycle Theory (ABCT) to provide additional insight.  ABCT and the US M2 money supply are why we strongly recommend against investing in US markets right now.  In fact, we are encouraged to see our pattern recognition software identifying developing trends that might predict a market decline.  This puts our forecasting software in a position of being consistent with our subjective evaluation of the economy and market based on ABCT and M2.

The Federal Reserve Open Market Committee (FOMC) meets this week to update monetary policy.  The meeting is Tuesday and Wednesday with a statement scheduled at 2:00PM Eastern Time.  FOMC meeting minutes are always closely watched by the market and have the potential to move US markets, but only for a short term.  The overall change in the money supply will drive what happens to US markets and right now commercial bank lending is the driving force of the money supply growth rate.  The Fed’s QE policy is printing massive amounts of money, but all of it is accumulating as excess reserves as US banks refuse to accelerate lending.  Watch US M2 and pay little attention to the FOMC B.S.

Speaking of B.S., the Bureau of Economic Analysis will be revising how US GDP is calculated.  The revision will cause a restatement of GDP all the way back to 1929!  GDP is a poor economic indicator and this revision will make it worse by double counting.  If you hear good news that GDP has increased, remember the “improvement” is really just a change in the calculation methodology.

Another interesting note today was a Fast Food Workers Strike where workers demanded a doubling of the minimum wage from $7.25 to $15 per hour.  Their demands show the same misunderstanding of the minimum wage that is pervasive in our culture.  Keep in mind that US unemployment is very high.  Official U-3 unemployment is around 7.6%, and this is the headline number frequently reported in the press.  U-6 is the broadest measure from the Bureau of Labor Statistics and it’s just under 15%.  However, if the BLS were to report U-6 unemployment the same way they did back in 1994, unemployment would measure around 23%!  The minimum wage law outlaws employment below a set minimum.  When the minimum wage is increased, the effect is to outlaw more employment!  Anyone currently making above the minimum but below $15 would most likely lose their jobs if the rate were raised to $15 per hour.  This is an economic fact deduced from the law of supply and demand when applied to the labor market.  Why would Fast Food Workers agitate for more unemployment?  The answer must be they misunderstand what will happen and are under the misperception that increasing the minimum wage would result in a pay increase.  If we forgive them for this very common misunderstanding, it becomes very interesting to see they want their wages increased.  Consider this quote from one of the protesters:

I can’t even order something off the menu with what I earn.

The protest for higher wages in order to afford to purchase more stuff is a clear symptom of PRICE INFLATION!  We have been writing that price inflation will get worse despite the manipulated government statistics and popular press reports that inflation is not a problem.  All of the past money printing is finally causing consumer goods to increase in price.  We expect more evidence to present itself in the coming weeks and months.  Anecdotal evidence like the Fast Food Workers strike will support the reliable CPI statistics produced by

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