For Thursday August 8, 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 declined 0.38% on Wednesday with volume below Tuesday and lighter than the 30 day moving average, resulting in a light-volume down-day.  If the S&P 500 drops about 5 to 6 points on Thursday (-0.3%) our market forecast is likely to change to an uncertain trend.

Subjective Comments:

Yesterday we shared the appearance of a predictive pattern that suggests a 50% chance of a market advance, and conversely a 50% chance of a market decline.  This prediction is based on the large clustering of strong-volume down-days over the past few weeks.  If more strong-volume down-days occur soon, additional predictive patterns could be detected by our analytical software.

In prior blog posts we’ve linked to this article by The Economist (magazine) to reference the historical frequency at which banking crises begin.  From 1920 to 2011 this IMF study identified 147 banking crises with the vast majority of them starting in the month of September.  Here is the graph from the study:

Banking_Crisis_Frequency-WP-12-163

Possible reasons for the high frequency in September were theorized as follows:

One theory blames the October 30th fiscal year-end of American mutual funds; managers trying to avoid losses or hold onto gains for the year were more likely to succumb to herd behavior as that date approached. But that wouldn’t explain why the pattern holds in other countries which, I assume, have different year-ends. Maybe it’s because policy makers and bankers don’t confront their problems until they get back from vacation…

Whatever the reason might be, it is indeed an interesting historical pattern.  We know US markets are headed for a crash.  We’re guessing the crash occurs before the end of this October.  The basis for estimating this timing is the duration of time the US money supply has not been growing.  Similar to 1928 and 1929, and similar to 2007 and 2008, the US money supply grew in the prior year and then stopped growing.  That is the case with the current US money supply (M2, not seasonally adjusted).  In both of these historical cases the market crashed by the end of October.  The IMF study of the frequency of bank crisis is another interesting factor influencing our guess.

We want to be very clear about what we know and what we’re guessing.  We know, based on Austrian Business Cycle Theory that US markets are going to crash.  This is an economic fact and an unavoidable result of the 2012 money supply growth.  The fault lies with the Federal Reserve and the centuries old practice of fractional reserve banking.  We’re guessing the timing is prior to the end of this October.  If the money supply should begin very rapid growth the timing of the crash could be delayed.  We will report if this happens.

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