For Friday September 27, 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 0.35% on Thursday with volume below Wednesday and below the 30 day moving average, resulting in Thursday being classified a weak-volume up-day by our pattern detection software.  The recent strong-volume down-days have been developing a pattern that is not disturbed by Thursday’s weak-volume up-day, but the pattern is not fully formed.  Should the S&P 500 decline about 29 points on Friday (-1.7%) our stop loss algorithm could trigger and change our forecast to an uncertain trend.

Subjective Comments:

The faux-drama surrounding Washington D.C. politics continues.  Both political parties will posture and a government shutdown will frighten some market participants.  Eventually the D.C. circus will move on to the next act, but before the continuing resolution / debt ceiling “crisis” is “resolved” the market could react.  After the strong US M2 (not seasonally adjusted) money supply growth of 9.2% in 2012, the current money supply growth remains weak.  This weak money supply growth, following the strong growth last year, is setting up the market for a crash as explained by Austrian Business Cycle Theory (ABCT).  Any spook factor incident could trigger a market decline anytime.  We think the market crash is getting closer and we’re still predicting a crash by the end of October.  We’re watching the daily market data and US M2 money supply data very closely to see if our guess on the timing of the crash will hold or if we need to modify our estimate.  We know a crash is coming; it is the timing that is difficult to estimate.

The weekly US M2 money supply data was published and we’ve looked at the trends.  Here are the key numbers:

  • 2012 US M2 growth was 9.2%
  • 2013 Annualized growth since the start of the year is 3.0%
  • For the past 20 weeks (almost 5 months) the annualized straight-line growth is 6.6%

US M2 (NSA) continues a 6.6% annualized growth trend with the typical 4-week sub-cycle present.  If the sub-cycle persists we expect US M2 to dip a bit next week and the straight-line growth could slow a little.  Over the past 2 years the M2 growth has been about 7.6% annualized.  This 2-year trend has seen accelerated growth and slower growth above and below the 7.6% average.  It’s interesting to note the past 20 weeks has had a growth rate close to this 7.6% average.  However, ABCT explains that an ever accelerating money supply growth rate is needed to initiate and sustain a bubble-boom.  The current 6.6% rate is near but below the 2-year 7.6% average.  This means US M2 is NOT ACCELERATING in its growth rate.  A constant growth rate will eventually lead to a crash.  Every accelerated growth in the money supply eventually results in one of two outcomes.  The most common outcome is the popping of the bubble followed by a market crash and recession as a result of the money supply growth rate slowing.  The much less common outcome is hyperinflation.  Since the money supply growth has been present for years, there is no way for the US to avoid a market crash.  All the hype about an economy capable of self-sustained growth without the Fed’s money printing is Keynesian wishful thinking.  A market crash is coming.  The 6.6% growth compared to the 7.6% 2-year trend does imply the crash might be a bit further in the future than we’re currently guessing.  However, we are approaching the end of a fiscal quarter.  Quarter points are where most companies evaluate their financial performance and make decisions about the future of their business prospects.  The recent weakness in consumer demand combined with weak demand for capital goods is all traced to the slowdown in the money supply growth.  Business leaders might not understand ABCT and money supply growth implications, but they do understand their income statements and balance sheets.  Hiring could slow down.  Layoffs could increase.  Orders and purchases are likely to slow.  Walmart recently announced an inventory glut and has stopped new orders.  That’s pretty significant by itself, but even more so given the US is headed into the holiday season.  For these reasons we’re sticking to our estimate that US markets are very likely to crash before the end of this October.

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