For Monday December 09, 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, although it is probably safe to hold any currently owned equities for a few weeks.

Technical Comments:

The S&P 500 advanced 1.12% on Friday on volume below Thursday and lighter than the 30-day moving average.  Friday was a light-volume up-day.  The past week had 3 consecutive strong-volume down-days followed by 2 light-volume up-days with the S&P 500 index finishing the week essentially unchanged.  The rapid accumulation of strong-volume down-days did not form a predictive pattern, but they have contributed to the initial formation of a pattern that needs to be watched carefully to see what develops.  If the S&P 500 were to decline about 40 points on Monday (-2.2%) our automated market forecast would likely change to an uncertain trend.

Subjective Comments:

Markets go up and down, and thanks to the business cycle they bounce around and occasionally crash dramatically.  The business cycle is NOT a normal part of free market capitalism.  Austrian Business Cycle Theory (ABCT) clearly explains how the business cycle comes about from the fraudulent (but legal) practice of fractional reserve banking and by good old fashion money printing.  Once money supply expansion has started a bubble-boom will occur and there is not avoiding the crash.  Since last crashing in late 2008 and bottoming in early March 2009, US markets have been growing thanks to another bubble boom fueled by the Federal Reserve’s “Quantitative Easing” program.  No matter what they choose to call it, the Fed has been printing money like mad for 5 years.

Our analytical process has not identified much evidence the current bubble-boom will continue from here, and we are concerned the US money supply growth rate will not be sufficient to keep the current bubble going.  However, historically crashes are preceded by mild declines and technical patterns that predict the crash is coming.  These patterns appeared in early October but then subsided and US markets have continued to grow.  Our technical analysis and subjective interpretation using ABCT and money supply growth rates leave us unable to predict what is likely to happen from here.  We recommend against investing in US markets, but for anyone currently holding US equities we think you’re unlikely to suffer serious losses for the remainder of December.

We recognize our readers expect a forecast for US markets.  This is the only thing we write about and our entire purpose.  We hope we are a valued source of information but not the sole data upon which investment decisions are made.  For this reason we will continue to limit our recommendations to the techniques we have always used.  In this way we strive to add value even during times of uncertainty.  We do feel certain about a few things.  We think the Fed will continue to print money like mad and may even accelerate the amount they print every month.  If US markets were to crash we are sure the Fed would most certainly respond with accelerated money printing.  For these reasons we do recommend a portion of your portfolio be invested in price inflation hedges.  Which hedges and how much of your portfolio to invest we leave to your discretion, but we do recommend against the TIPS bonds.

The major source of uncertainty for us is the ongoing decisions of commercial banks with respect to excess reserves.  As the Fed prints the money is winging up in commercial bank coffers as nearly $2.4 Trillion in excess reserves.  The Fed has had to print over $1 Trillion dollars in 2013 yet the M2 money supply has risen by roughly half that amount.  This means US banks are not originating new loans as fast as old loans are maturing.  When old loans are paid off the money supply shrinks.  This is the result of fractional reserve lending.  Lending money in a fractional reserve system creates money, so paying off those loans shrinks the money supply.  When it becomes clear what banks will do with these reserves, then we will have investment recommendations for US stock markets.  Anything that could cause banks to lend the excess reserves must be watched for very carefully.  Not only would aggressive bank lending ignite a strong market bubble-boom, but it would cause price inflation to accelerate as well.

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