For Monday August 5, 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 0.16% on Friday to another record high, but volume was below Thursday and below the 30 day moving average.  Friday was another light-volume up-day.  The dominate pattern in the past 2 weeks has had more strong-volume down-days than anything else, and this is an overall negative pattern.  Our software has not identified a predictive pattern but it is clear the daily market data is more consistent with a weak market versus a strong market.  If the S&P 500 should decline about 27 points on Monday (-1.6%) our automated market forecast could change to an uncertain trend.

Subjective Comments:

With daily market data showing more strong-volume down-days than anything else and the US M2 money supply growth rate virtually nonexistent, we simply cannot get enthusiastic about record market highs.  We think the market is topping and will begin a decline with a crash very likely before the end of October.  Others are starting to express similar opinions with large institutional investors are selling their equity holdings.  There are other indications of an economic slowdown in the capital goods sector.  US factory orders had their biggest 4-month drop in a year.  Austrian Business Cycle Theory (ABCT) explains the structure of production within an economy and how the two primary different sectors, capital goods and consumer goods, are affected by the boom-bust cycle.  The change in interest rates that results from money printing and fractional reserve bank lending causes the capital goods sector to boom first and stronger.  When the slowdown begins the capital goods sector crashes first.  The economic data show the slowdown in the capital goods sector (factory orders).  The cycle is occurring exactly as described by ABCT.

Some economic data might sound like good news, such as headline unemployment dropping again, now down to 7.4%.  Of course this is the highly manipulated propaganda from the government and nowhere near the real unemployment as shown by people not in the labor force and’s more reliable unemployment numbers.  Also glossed over by the headline news of unemployment is that 77% of the new jobs created in 2013 have been part-time jobs.  When the money supply grows, it enters the economy via the capital goods sectors where price inflation occurs first.  As the money moves through the economy it finally gets to the consumer goods sectors and then prices go up there as well.  This is why we’re starting to see price inflation accelerate in the consumer sectors (see MIT’s Billion Price Project).  Anecdotally we noticed this report about premium alcohol prices.  It shows consumption is remaining strong even as prices go up.  Usually consumption falls as prices go up per the classic economic law of supply and demand.  The law of supply and demand assumes a non-inflationary money supply.  When the money supply is expanding, prices and demand can and do go up at the same time.

All of the evidence points to an economy that is not strong.  From economic indicators, daily market data and money supply statistics, everything is pointing to a classic ABCT market top.  Avoid all bonds and stay out of US stock markets.  Price inflation hedges will go back up in the future and remain good long-term investments.  We think an opportunity to short US markets will occur in the near future, so we suggest having some cash available for investing if you’re willing to take the risks associated with a short investment position.  The economy is incredibly complex and predictions of the future are frequently wrong.  We are relying on past experience when we guess the pending market crash could occur before the end of this October.  Our only caveat is the growth rate of the US money supply.  Should the money supply begin growing, the crash could be delayed.  This is why we will continue to monitor the weekly money supply data closely.  We see the odds of a market crash increasing every week the M2 money supply remains near zero growth.

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