For Friday October 25, 2013, We Recommend Against Investing

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Investment Recommendations:

Avoid US markets and watching closely to see if an up-trend develops before investing.  Cash positions (including currency) and price inflation hedges are recommended right now.  Our subjective opinion remains unchanged, but we’re moving away from our prior bearish position on US markets and now hold a neutral opinion.

Technical Comments:

The S&P 500 advanced 0.33% on Thursday with volume below Wednesday but above the 30 day moving average.  Our system classified Thursday a light-volume up-day although it is notable the volume was above average.  Should the S&P 500 decline about 42 points on Friday (-2.4%) our stop loss algorithm could trigger a change in our market forecast to an uncertain trend.

Subjective Comments:

There is evidence in the US M2 (not seasonally adjusted) money supply data that a new growth rate has begun!  The 4-week sub-cycle pattern has been disturbed and the residual control chart has almost gone above the upper control limit.  This is enough, in our judgment, to state US M2 growth has accelerated.  It is much too early to make any estimate regarding the new growth rate, but the sudden acceleration is consistent with the recent reversal of our technical forecast.  For the past several months we’ve been speculating a market crash could occur by the end of October, and a few weeks ago our automated forecast identified a pattern predicting a market decline.  Throughout all of our predictions we said if the US M2 growth rate accelerated a bubble boom could resume.  We’re now seeing direct evidence that M2 acceleration is occurring.  The graphic below shows the break in the recent trend and residual control chart.

US-M2-NSA-Growth-24OCT2013

This acceleration in the US M2 money supply has delayed (not prevented) the market crash we were expecting.  Austrian Business Cycle Theory explains how market (and economic) booms and crashes occur as a result of money supply growth rates.  It is much too soon to begin investing for growth.  Additional data is needed to confirm this will become a sustained up-trend.  This evidence does change our subjective outlook from negative to neutral for US stocks.  We still recommend avoiding investments in US stock markets for the time being until it becomes clear what will develop.  However, as additional trends develop we want you to know from here we could become bullish or bearish from here.

Subjectively there is a lot of information still pointing to a pending crash, such as a drop in the Baltic Dry Index and a contraction in the October US Manufacturing PMI.  These are lagging indicators and reflect the weakening that has been driven by the slow US M2 money supply growth rate prior to a few weeks ago.  There are reports that could indicate US banks might slow lending because the Federal Reserve published their concerns that US banks could have roughly $200 Billion of insufficient liquidity.  This is astonishing because US banks have over $2 Trillion of excess reserves!  This “concern” is only valid if the Fed thinks a massive bank run is about to occur and depositors are about to demand currency and cash withdraws in excess of $2 Trillion dollars.  Wow!  Are they serious?!  We don’t know how likely this is to happen, but it is extraordinary to think $200 Billion of insufficient reserves are in place as this is less than 10% of current Excess Reserves.  It is also extraordinary to think a $2 Trillion Bank Run could occur.  We don’t know what the Fed is thinking to publish such a concern.  We shudder to think how fragile US banks must really be.  Also on the bearish side internationally is the fact that for the past 3 days the Peoples Bank of China (PBOC) has suspended liquidity injections.  In other words the PBOC suddenly stopped printing money, likely from fear of rising price inflation in China.  This could easily hasten the coming crash in the Chinese property markets, stock market and overall economy.  (Google “China Ghost Cities” for more info.)  On the bullish side it appears Central Banks have stopped talking about “tapering” and SocGen published an opinion that the Fed may actually accelerate Quantitative Easing!  We could easily see such a move by the Fed.  The recent “Government Shutdown” could be used as an excuse.  The Fed could claim it weakened the economy and now they need to accelerate money printing, temporarily of course, just to be cautious that the US economy does not “slide back into a recession”.  If the insiders know the Fed is about to do this, it could explain margin lending to get ahead of the expected growth that would occur from such an announcement following next week’s FOMC meeting.

Good Grief!  It is not at all clear what US markets will do in the near future.  What will happen eventually is acceleration in price inflation as a result of the growing US money supply.  The growth rate of the money supply dictates the boom-bust cycle, but even the recent slow money growth has still been GROWTH.  When the money supply grows, price inflation eventually follows.  We continue to recommend investments in price inflation hedges.  Consider increasing your currency holdings and be ready to invest for growth in US markets if the money supply continues to show accelerated growth.

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