For Friday December 20, 2013, We Recommend Against Investing


Investment Recommendations:

Be prepared to invest in US markets soon because bullish trends are developing.  Cash positions (including some currency outside of bank accounts) and price inflation hedges are still recommended.  We are likely to recommend investing very soon.

Technical Comments:

The S&P 500 declined 0.06% on Thursday with volume below Wednesday but above the 30-day moving average.  Thursday was a light-volume down-day.  If the S&P 500 were to decline about 17 points on Friday (-1%) our automated market forecast would likely change to an uncertain trend based on the current status of our stop loss algorithm.

Subjective Comments:

We continue to become more bullish on US markets based on economic indicators and the accelerating growth rate of the US M2 (not seasonally adjusted) money supply.  Austrian Business Cycle Theory (ABCT) explains how accelerated money growth causes the boom of the business cycle, and how a decelerated growth rate results in the business cycle bust.  The most current US M2 data shows a 6.5% annualized growth rate for the past 8 weeks.  It appears for the past 7 months the M2 growth rate has been 6.1% with the exception of a 26% growth rate during the first 2 weeks in October.  The 4-week sub-cycle is still present in the M2 growth and the drop is not due until the week after next.  Given the zigzag growth during the first several months of 2013 the most recent growth rate is accelerated.  Over a longer horizon the average growth rate has remain around 6.8%, so the most current 6.5% for the past 8 weeks appears to be an unchanged growth rate.  ABCT explains that accelerated growth is needed to cause and sustain a bubble boom.  An unchanged growth rate will eventually lead to the bust following the boom.  Based on M2 growth alone we are likely to see no crash for the near future.  Continued acceleration will cause a resumption of the bubble-boom.

There was no update to the banking reserves data.  This series will be updated next week.  We want to remind readers that required reserves have been growing for the past 8 weeks.  This is consistent with the time frame of the recent M2 acceleration.  Required reserves have been unchanged for most of the year, and during the past 8 weeks they have been growing at an annualized rate of 57%.  In the past there have been short bursts of rapid growth similar to the past 8 weeks.  Growing required reserves indicated banks are originating new loans faster than old loans are maturing.  We don’t know why banks have recently accelerated their lending, but if they continue this will overwhelm the Fed’s “taper” and the US M2 money supply will continue to grow, very likely at an accelerated rate.  Per ABCT, this suggests a bubble-boom will resume.  This is the biggest reason we are becoming more bullish on US markets.  We are also worried about price inflation.  Accelerated growth in the money supply can cause asset price booms as well as price inflation.  Price inflation hedges are still good investments for the long term.

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