For Friday December 06, 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 for a few weeks.

Technical Comments:

The S&P 500 declined 0.43% on Thursday with volume below Wednesday but above the 30-day moving average.  Our pattern detection software classified Thursday a light-volume down-day.  If the S&P 500 were to decline about 22 points on Friday (-1.2%) our automated market forecast could change to an uncertain trend.

Subjective Comments:

After three consecutive strong-volume down-days, Thursday was a light-volume down-day.  However volume was still above average, so the decline in US markets this week has been on strong volume and that is a worrisome technical indicator.  This must be watched closely to see if the trend continues and if a predictive pattern develops.

US M2 money supply (not seasonally adjusted) has continued a trend of 0% growth for the past 6 weeks after a 2-week growth of 26% annualized.  Those 8 weeks combined average to an annualized growth rate of 6.5%, which is not that much different than the prior 22 weeks which grew at an annualized rate of 6%.  Over the past 88 weeks M2 has grown at an average of 6.4% annualized with periods of zigzag acceleration and drops.  The spurts of acceleration have caused start and stop bubble growth in the economy while sustaining a pretty consistent bubble-boom in US stock markets.

Austrian Business Cycle Theory (ABCT) explains that an accelerating growth rate is needed to keep a bubble-boom going.  The spurts of acceleration in M2 growth has kept the bubble-boom going, but these spurts have not been long lived.  Such spurts could reappear at any time as they are occurring from fractional reserve lending by commercial banks.  However, unless the growth rate accelerates and remains higher than 7% – 8% we could see the bubble collapse from a lack of accelerated money supply growth.  The recent acceleration spurt likely has delayed a collapse for at least a few more weeks.

What has us very concerned is the coincidence of two events.  For six weeks US M2 growth has been 0%, and in the past 4 days there have been 3 strong-volume down-days identified by our pattern detection software.  This could be coincidence, but ABCT explains how a bubble is created and how it ends.  Conditions suggest the bubble could be about to end based on the lack of sustained acceleration of M2 growth.  This suggests the appearance of the strong-volume down-days is not chance but the beginnings of a pattern predictive of a market decline.  This is further supported by similar events in early October.  Our technical analysis identified a pattern predictive of a market decline on October 3rd.  This happened after months of M2 growth that was not accelerating.  During the next 2 weeks US M2 accelerated to a 26% annualized growth rate and our market forecast changed back to a growth trend on October 16th.  We think this means US markets are extremely fragile and we are at the precipice of a classic ABCT crash.  The M2 acceleration in October shows the bubble can be extended if M2 growth accelerates, but it must remain at an accelerated growth.  After 6 weeks of ZERO GROWTH our technical analysis is again identifying signs of trouble.

We are worried, but we admit we do not know what will happen next.  M2 growth could accelerate and a bubble-boom could resume.  M2 growth might not accelerate which likely leads to a market decline and crash would in short order.  This is why we continue to recommend a risk-off position.  Until we see circumstances change we suggest price inflation hedges as good long-term investments for part of your portfolio.

2 Responses to For Friday December 06, 2013, We Recommend Against Investing

  1. jeff says:

    what types of price inflation hedges are recommended? Would gold be included. Also, isn’t the equity market a form of price inflation hedge?
    thanks.

    • Precious metals are inflation hedges, as are many other real assets (land, commodities). Equity markets are not good hedges against price inflation, although equities are better than cash under extreme inflation. Of course equities carry counterparty risk while real assets do not, and that can be significant. When we recommend inflation hedges, we hope readers will decide what types of real assets are best for their circumstances.