For Friday November 15, 2013, We Recommend Against Investing


Investment Recommendations:

Avoid US markets and watch closely to see what trend develops.  Cash positions (including currency) and price inflation hedges are still recommended.  There is too much uncertainty in US markets right now to make an investment recommendation, but things are turning bearish again after having been bullish for most of October.

Technical Comments:

The S&P 500 advanced 0.48% on Thursday with volume below Wednesday and lighter than the 30 day moving average.  Thursday was a light-volume up-day and the development of a bearish pattern has been disrupted a bit.  More strong-volume days are needed to form another pattern.  If the S&P 500 were to decline about 58 points on Friday (-3.3%) the stop loss algorithm would likely trigger a change to an uncertain trend for our market forecast.

Subjective Comments:

The soon to be Fed Head Janet Yellen gave testimony to the Senate Banking Committee on Thursday as part of her confirmation process.  Her comments (hat tip P.C.) clearly indicate she intends to keep the printing presses rolling.  Some speculate she’ll probably accelerate the monthly printing beyond the current $85 Billion per month, earning her the title “Queen of QE”.  This is insanity.  Every historic episode of money printing shows it does not work, unless your intention is to enrich the tiny elite at the expense of everyone else.  A big clue Vice Head Yellen is likely to keep printing is she said she does not believe “bubble-like conditions” exist!

Our concern is if the Fed’s money printing will continue to accumulate in excess reserves or if it will enter the economy via accelerated lending by banks?  The biweekly banking reserve data shows excess reserves continue their steady climb.  Since the beginning of the year the average increase in excess reserves is $90.1 Billion per month, which is effectively all of the $85 Billion of the Fed’s money printing.  This grows the M2 (not seasonally adjusted) money supply, but only by the amount of the printing.  The money multiplier effect caused by fractional reserve lending is not contributing to M2 money supply growth.  This is further confirmed by the change in required reserves which are up $3.92 Billion since the beginning of the year.  Look at these numbers again:

  • QE Money Printing in 2013 Year To Date: Over $900 Billion
  • Change in Banking Excess Reserves, 2013 YTD: $915 Billion
  • Change in Banking Required Reserves, 2013 YTD: $4 Billion

If you follow the money, it gets printed by the Fed, about half goes into US Treasury Bonds and the other half into Mortgage Backed Securities, with banks taking a nice cut along the way, and then it winds up sitting as excess reserves.  The Fed is paying interest to banks on excess reserves.  They started doing this in late 2008, and excess reserves have been growing ever since.

Without accelerated bank lending, M2 growth rates are likely to remain subdued.  We’ve plotted the M2 (not seasonally adjusted) money supply and analyzed the growth rates.  October saw an acceleration that now appears to have slowed.  The average growth in October was 13% annualized, but it appears to have been 26% for the first 2 weeks followed by 0% growth since.  In reality M2 will likely continue to grow around 6% going forward, but this assumes QE continues unchanged and banks remain stingy with net new lending.  It will take several weeks to confirm this guess.

The brief acceleration of money supply growth in October appears to be sufficient to delay the market crash we have been expecting.  It is a guess how long the bubble-boom will continue without further acceleration in the M2 money supply.  Another interpretation of the banking reserves and money supply growth is possible.  It could be that banks have accelerated lending and random noise in the M2 and required reserves is masking a new growth rate in M2, and that rate could be high enough to keep the bubble boom going.

The accumulation of strong-volume down-days in the past 2 weeks created a 50/50 pattern in our proprietary system.  Our system is designed to find patterns that identify market turning points.  The roller coaster in the money supply growth rate and our system producing a 50/50 pattern leave us unsure the direction US markets will take from here.  We guess the market will likely move sideways or perhaps upward for the next few weeks or even through the end of the year.  If the Fed were to announce an acceleration of QE we think markets would advance strongly as a result.  We humbly suggest avoiding US stock markets but remaining prepared to invest, long or short, once the M2 growth rate becomes clear.  If this recommendation is frustrating, we apologize and share your frustration.

We strive to provide our readers analysis to help make investing decisions.  When we see conditions that are clear, we make investment recommendations accordingly.  When we see uncertainty using our techniques, the best we can offer is a full explanation which is what we hope this post has accomplished.  Price inflation hedges remain good long term investments for amounts you can leave invested for the very long term.

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