For Monday September 16, 2013, We Recommend Against Investing

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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 advanced 0.27% on Friday with volume below Thursday and below the 30 day moving average.  Friday was a light-volume down-day.  In the past 2 weeks there has been an accumulation of strong-volume up-days, but not yet enough to create a pattern that would predict market growth.  If the S&P 500 should decline about 43 points on Monday (-2.6%) our market forecast would likely change to an uncertain trend.

Subjective Comments:

It has been a year since the Federal Reserve increased Quantitative Easing to $85 Billion per month.  Next week the Fed meets on Tuesday and Wednesday where there is speculation they may slow the rate (taper) of the printing press.  For the record, printing money is always bad and we oppose it and the long-standing practice of fractional reserve lending.  Growing the money supply leads to price inflation.  Price inflation never occurs in a steady manner but in an unsteady, unpredictable way.  Some prices inflate rapidly while others inflate slowly, as it the case now.  The artificial increase of the money supply drives down interest rates which in turn encourages lending that would otherwise not occur.  This type of lending results in malinvestments and distorts the economy by causing the unprofitable production of capital goods that are unwanted by consumers.  When the money supply growth rate slows the damage done becomes apparent.  This is how the boom-bust business cycle happens.  Asset prices for capital goods, including stocks, boom in price with accelerated money supply growth, then crash when the growth slows.

There is a time lag between the cause (money supply growth acceleration) and effect (boom).  This time lag happens both with the boom and the bust (growth slows followed by bust).  Rising interest rates confirm money for lending is becoming scarce.  The US M2 money supply has continued to grow, but the growth rate has slowed.  Austrian Business Cycle Theory explains that money supply growth must continue to accelerate to keep a bubble-boom going.  The slowdown in growth will cause a bust, and this is why interest rates are going up even when M2 grows slower than it did last year.  Official government statistics show the Consumer Price Index measure of inflation as being very low.  If the official method to measure CPI in place back in 1980 were still used today, CPI would be near 10%.

We are concerned US stock markets could crash in the near future.  We have been writing about the possibility for months.  We still see a crash as very likely and our best guess on timing remains before the end of this October.  We are also a little concerned about the past two weeks of trading.  We have seen strong-volume up-days which typically indicate a growing market.  This is coming from our pattern detection software.  We have not seen a fully formed pattern, and number of stocks advancing has been declining.  Volumes remain low even though they have been above average lately.  The reason volumes have been above average is the 30 day average has declined.  Volumes might have bottomed out and could be climbing or could be experiencing normal variation at a new low level.  All of this means that there remains plenty of technical evidence that US markets are weak despite the recent strong-volume up-days.  If interest rates continue to rise, banks are likely to accelerate lending.  The question is if there will be anyone who desires to borrow?  If lending does not increase and the Fed slows the printing press, this will put further pressure on the money supply growth rate and the risk of a market crash will continue to grow.

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