For Friday September 13, 2013, We Recommend Against Investing


Investment Recommendations:

No Change: 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 0.34% on Thursday with volume below Wednesday but above the 30 day moving average.  Thursday was a light-volume down-day.  Volume continues to be above average but not by very much.  The light-volume down-day does not disrupt the bullish pattern that has been forming, but no patterns are fully formed.  If the S&P 500 were to decline about 41 points on Friday (-2.5%) our market forecast could change to an uncertain trend.

Subjective Comments:

The US M2 (not seasonally adjusted) money supply has grown at an annualized 6.1% over the past 18 weeks.  This 18-week trend is for data through 9/2/13 (most current available).  Since the beginning of the year M2 has grown 2.5% annualized.  Both of these numbers are weak compared to the 9.2% annual growth in 2012.  This slow growth after strong growth last year is setting up a market crash as explained by Austrian Business Cycle Theory.  The recent acceleration in the M2 growth rate could delay the coming crash, but we still think a crash is highly likely before the end of this October.  If M2 growth continues to accelerate and we see many more strong-volume up-days on the S&P 500 we will be forced to reevaluate our guess about the timing of the coming crash, but so far we are holding firm to our guess that the timing of the coming crash is within the next several weeks.

Austrian Business Cycle Theory (ABCT) explains how the boom-bust cycle is created by a growing money supply followed by slower money supply growth.  This economic description does not offer a means to predict when a crash will occur.  The M2 growth trends show the conditions for a crash, per ABCT, are present.  The timing is our guess based on the historic propensity of market crisis in the month of September and October.  One possible reason for the frequent occurrence of crashes during this time of year is provided by and is consistent with ABCT.  There are other opinion pieces available that are consistent with our forecast of a coming market crash.  If the Federal Reserve slows its rate of money printing (taper), that could slow the M2 growth rate.  The size of the Federal Deficit suggests less monetization is needed by the Fed, so a “taper” could in fact occur soon.  While Fed Money Printing clearly influences the overall M2 growth rate, it must be remembered that over $2.1 Trillion Dollars of excess reserves is sitting in banks.  This gives banks the power to increase lending if they choose, and such fractional reserve lending, if strong enough, could spike the M2 growth rate and overwhelm the slowing effect of a Fed taper.

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