For Friday August 16, 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 1.4% Thursday with volume above Wednesday and above the 30 day moving average volume.  Thursday was a strong-volume down-day.  Major media outlets like CNBC suggested Thursday’s volume was weak.  Their comments were carefully worded to talk about “August volume” being weak, but they let that commentary imply Thursday was experiencing weak volume.  Quite to the contrary data is available that shows daily volumes.  Thursday was not the strongest volume in August, but it was above average and above Thursday.  The drop on Thursday was enough to trigger our stop loss algorithm and change our market forecast to an uncertain trend.  If the S&P 500 advances about 1% on Friday our forecast could return to a growth trend.

Subjective Comments:

Thursday was a pretty large drop in US markets along with a host of bad economic news, including poor earnings from Wal-Mart, lackluster industrial production statistics and the largest drop in 9 months for the Philly Fed survey.  The bad economic data is happening because of the slow-down in money supply growth.  The weekly money supply data was published on Thursday and it shows continued weak growth in the US M2 (not seasonally adjusted) money supply.  We’ve written about a zigzag pattern in M2 since the beginning of the year.  This pattern did not reappear and the current growth rate is 6.3% annualized over the past 3 months.  This 3-month annualized growth has barely overcome the two sharp and sudden money supply declines since the start of the year.  As such the overall change in the money supply since the start of 2013 is 2.5% annualized.  2.5% is much less than the 9.2% annual M2 growth that occurred in 2012.  It was the 9.2% growth last year that caused the recent bubble-boom that is now ending.  Austrian Business Cycle Theory (ABCT) provides the detailed explanation of why a crash is the inevitable outcome of these trends in the M2 money supply.

To identify changes in the money supply growth rate we use a residual control chart.  This methodology tracks the variability in the growth trend about the straight-line curve fit.  The weekly data appears to be exceptionally common with the 4-week sub-cycle asserting itself again.  At the current M2 growth rate it is very unlikely the current capital structure of the US economy can hold up and avoid a crash.  ABCT explains that to sustain a bubble-boom the growth of the money supply must continue to accelerate.  If the money supply grows at a constant rate, the bubble-boom will eventually pop.  Our present circumstances show a slowing growth rate.  Even though M2 is growing, it is not growing fast enough.  The economy is an incredibly complex multitude of transactions and human action.  Precise predictions are impossible.  We have guessed US markets will crash before the end of October this year.  This is a guess, and the timing of this guess is impacted by the M2 growth rate.  When we guessed by the end of October it included the assumption the quarterly M2 zigzag would appear again.  Since the zigzag did not appear, the odds of the coming crash happening by the end of October have diminished a bit.  That said, we remain very confidant US markets will crash in the near future and we’re sticking with our guess that it happens by the end of this October.  We will continue to watch the money supply every week and update our prediction accordingly.

Nothing that we have seen changes our investment recommendation.  Continue to avoid all bonds and stay out of US stock market investments right now.  Price inflation hedges remain a very good investment for part of your portfolio.  Cash positions should still have an opportunity to short US markets with the crash we are expecting.  If markets bounce up on Friday our recommendation and opinion will not change, even though our automated forecast could bounce back to growth.

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