For Friday August 9, 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 0.4% on Thursday with volume higher than Wednesday and above the 30 day moving average.  Thursday was a strong-volume up-day.  It is not uncommon for strong-volume up-days to occur when strong-volume down-days have been happening.  At market turning points there are often two different groups of investors; those who think the market will continue its prior trend and those who think the trend is changing.  What matters for predicting the future direction is the preponderance of the types of days within a short time period, and even with Thursday being strong-volume up, in the past 2 to 3 weeks there have been many more strong-volume down-days.  Our technical analysis continues to suggest a 50% chance US markets will grow or decline from here.  If the S&P 500 should decline about 13 points on Friday (-0.7%) our market forecast would likely change to an uncertain trend.

Subjective Comments:

The Hindenburg Omen (technical indicator) appeared Monday, Wednesday and again on Thursday marking 3 times it appeared in the past 4 days.  When technical indicators of a market trend change occur, it is common for them to cluster like this.  The recurrence of the Hindenburg Omen indicator along with our pattern detection software identifying the 50/50 growth/decline pattern is a collection of evidence suggesting US markets could decline in the future.

This week the Federal Reserve published both the weekly money supply data and the banking reserve data.  The overall trends are unchanged from prior weeks.  Money growth remains near zero compared to the strong growth in 2012.  The on-going low growth rate of the money supply after strong growth last year continues to setup the classic conditions for a market crash as described by Austrian Business Cycle Theory.  The remainder of this post will describe the specifics of the money supply and banking reserve trends.

US M2 money supply (not seasonally adjusted) fell from $10.624 Trillion the week ending 7/22 to 10.611 Trillion the week ending 7/29 (most current data available).  This marks the second consecutive below-trend data point observed in the 4-week sub-cycle.  The dip was not enough to suggest the 3-month zigzag pattern has reappeared.  Next week we will be able to tell if the zigzag pattern is happening or not, but the zigzag and 4-week sub-cycle observations are not really relevant in the big picture of the money supply growth.  Here are the big picture facts of US M2 money growth:

  • 2012 Annual Growth 9.2%
  • 2013 Year-to-Date Annualized Growth 0.7%

When we say the M2 money supply growth rate has collapsed, we’re referencing the 9.2% 2012 versus the current annualized 0.7% growth rates.  Switching to bank reserves it remains obvious that all the Fed’s money printing (al la Quantitative Easing) continues to accumulate as Excess Reserves.  Excess Reserves are almost $2.1 Trillion Dollars and up $100 Billion from 4-weeks ago.  With the Fed printing $85 Billion per month and Excess Reserves up $100 Billion in the past month, it is obvious banks are not lending but instead are accumulating the new money in their accounts.  Further confirmation of this fact is provided by Required Reserves which are little changed in the past 8 weeks and barely larger then where they were at the beginning of the year.  Required Reserves go up when banks are increasing their loans.  Since Required Reserves are unchanged this means US banks are making new loans at the same rate old loans are maturing.  This is what we mean by the short phrase “banks are not lending”.  Technically they are lending, they are just not lending faster than existing loans are being paid off.

We’re still confident a market crash is coming based on the economic reality described by Austrian Business Cycle Theory and the M2 money supply trends over the past 2 years.  We’re still estimating a crash between now and the end of this October.  Avoid all bonds and stay out of US equity markets for now.  Consider putting part of your portfolio into price inflation hedges and having some cash available to short US markets in the near future.

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