For Monday October 28, 2013, We Recommend Against Investing


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 0.44% on Friday with volume below Thursday and lighter than the 30 day moving average, making Friday a light-volume up-day.  The past week saw US markets advance on a combination of strong-volume and light-volume days.  There are no patterns developing suggesting US markets will decline.  If the S&P 500 were to drop about 49 points on Monday (-2.8%) our stop loss algorithm would likely change our market forecast to an uncertain trend.

Subjective Comments:

This coming week the Federal Reserve’s FOMC (Federal Open Market Committee) will meet and decide upon any changes to monetary policy.  In the past there were hints the Fed might “taper” back the printing press and slow how much money they print per month.  No there are suggestions the Fed might accelerate and print more money per month.  The FOMC meets October 29 and 30 with their announcement coming Wednesday the 30th.

As we discussed in our prior post, the US M2 money supply appears to be growing faster.  The first evidence of accelerated growth was two weeks ago, and this past week showed additional evidence of acceleration.  Since the acceleration we’ve just noted has occurred prior to the Fed changing the amount of money they create per month (currently $85 Billion/month), this means net bank lending accelerated.  What is not clear is if this effective acceleration was the result of more lending, or fewer loans maturing.  What is an interesting coincidence is the timing of the acceleration two weeks ago.  It occurred as the “government shutdown” ended, which coincided with predictions the Fed would increase the monthly money printing (AKA Quantitative Easing).  We think it is much more likely the coincidental occurrence just mentioned are actually causal relationships and banks have accelerated lending, likely in anticipation of accelerated money printing by the Fed.

Do not listen to what the Fed says.  Only react to what the Fed does.  Follow the money supply data and understand the implications as described by Austrian Business Cycle Theory (ABCT).  Ignore the confused Keynesian economists and listen instead to economists from the Austrian school.  The Fed publishes propaganda and deception regarding what it might do and the reasons for what it does.  Watching what it does and investing with ABCT knowledge is a much better approach.  What becomes exceptionally challenging using ABCT as a guide is guessing what will happen when the money supply growth rate changes frequently.  The Fed controls the printing press, but banks decide if they are going to lend.  Bank lending and the factional reserve money multiplier is the currently the dominate force in the M2 growth rate.  This coming week we will watch the daily market data carefully as well as the FOMC announcement Wednesday and the data published Thursday.  If a bubble boom is resuming, there is no telling how long it might last.  The US economy and stock market remains fragile from the many months of slow money growth following the 9.2% growth back in 2012.  If the data is sufficiently strong this week, we could become bullish and change our investment recommendation as soon as this Friday.  Until then our advice will be to say out of US markets and put some of your portfolio into price inflation hedges.

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