For Monday December 02, 2013, We Recommend Against Investing

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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, although it is probably safe to hold any currently owned equities through the end of the year.

Technical Comments:

The S&P 500 declined 0.08% on the Friday following Thanksgiving with volume below the preceding Wednesday and far below the 30 day moving average.  The very low volume is actually quite typical of the week of Thanksgiving, especially since Friday was an abbreviated trading session for US markets.  The tiny decline for the S&P 500 with small volume was essentially an unchanged day for US markets.  There remain no significant patterns identified, although the past 3 weeks have seen more strong-volume up-days (bullish) than strong-volume down-days.  Should the S&P 500 decline about 50 points on Monday (-2.8%) our automated market forecast would likely change to an uncertain trend.

Subjective Comments:

The Federal Reserve continues to print money (AKA Quantitative Easing) at $85 Billion per month, which has been in progress since the start of 2013.  That is $935 Billion since the start of the year and on track to print just over $1 Trillion for the year.  Banks have responded by mostly accumulating the newly printed digits as excess reserves which have now swollen to almost $2.4 Trillion Dollars (not seasonally adjusted).  Right now with all those excess reserves it is the commercial banks and the demand for loans that is driving overall M2 money supply growth via the money multiplier effect created by fractional reserve lending.  This money multiplier effect can grow and shrink the overall money supply depending on the rate of new loans versus the rate of maturing loans.  If old loans mature faster than new loans are made, the M2 money supply will shrink.  This brings us to the following selected M2 money supply statistics:

  • 12/31/2012 à US M2 (NSA) was $10.575 Trillion
  • 11/18/2013 à US M2 (NSA) is now $10.942 Trillion (most current data available)
  • The difference, or growth in M2 year-to-date for 2013 has been $367 Billion
  • $367B / $10.575T = 3.5% growth year-to-date, or 3.9% annualized

The Fed has printed $935 Billion in the past 11 months, but M2 has only grown by $367 Billion.  The difference is $568 Billion, or just over a half trillion dollars!  This is the result of old loans maturing faster than banks are originating new loans, and the money multiplier effect working to shrink the money supply.  So the Fed has managed to grow the M2 money supply by $367 Billion in the past 11 months, and it only took printing $935 Billion to do it.  Those pesky banks are just not loaning as fast as the Fed would like.  This is what the Fed calls the “transmission mechanism”.

It is clear after the past several weeks that US M2 accelerated for the first half of October, but since then it has not grown at all.  This is a short time period for measuring M2 growth rates, but what is relevant is the extremely high growth in early October still has M2 above where it would have grown to by now had nothing changed.  This short burst of bank lending accelerated the M2 money supply growth and will probably keep US markets from crashing before the end of the year.  As we move into 2014 we will have to see what develops.  The Fed might announce an acceleration of their money printing at the coming FOMC meeting in December, or they may announce a delay of the “taper” where they have threatened to slow the printing presses.

While the M2 growth rate is what will drive the boom-bust cycle, the M2 money supply is indeed growing.  This is causing malinvestments across the economy and will lead to price inflation.  Just because price inflation might seem low right now, it’s not really and eventually price inflation will accelerate.  We continue to suggest price inflation hedges as a long term investment for part of your portfolio.  Regarding US equities, if you want to hold current positions through the end of the year, we see nothing wrong with that strategy.  If you don’t currently own US equities, we recommend staying out of US markets.  We know this has been our advice for a long time and US markets have been going up.  It is our goal to provide advice that both protects your wealth as well as grow it.  When we see a clear signal in our analytical process combined with money supply growth rates consistent with the signal, then we will make a recommendation.

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