For Friday December 27, 2013, We Recommend Investing in US Markets

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Investment Recommendations:

We recently changed our investment recommendation.  It is time to invest in US stock markets.  Price inflation hedges should be held for the long term and remain a good idea as we see price inflation heating up in 2014.

Technical Comments:

The S&P 500 advanced 0.47% on Thursday with volume above Tuesday but below the 30-day moving average.  Our pattern recognition software classified Thursday a strong-volume up-day, but volume remained very light as expected for the week of Christmas.  Our pattern recognition looks for multiple days in a short period for identification of predictive patterns, and this normalizes for very low volume days that occur near holidays.  There has been no formation of a predictive pattern and none appear to be developing.  If the S&P 500 were to drop about 45 points on Friday (-2.4%) our automated market forecast would likely change to an uncertain trend.

Subjective Comments:

US money supply weekly statistics and US banking reserve biweekly statistics were published on Thursday.  US M2 (not seasonally adjusted) has been growing at an 8.1% annualized rate for the past 9 weeks after the 2-week acceleration in early October.  The 4-week sub-cycle remains present in M2 and suggests the growth rate will slow a bit next week.  M2 growth rate appears to be accelerating above the 6% annualized rate that had been present from May through September.  According to Austrian Business Cycle Theory (ABCT), an accelerating growth rate of the money supply will cause a bubble-boom in asset prices, including stocks.  It also creates the business cycle.  This appears to be happening.  As long as US money supply continues to grow at an accelerated rate we expect US markets to grow.  We also expect price inflation to start accelerating as well.  A growing money supply occurs from the Federal Reserve printing money (which they are) and from fractional reserve lending by banks.

Turning to banking reserves we see the growth of required reserves continuing, although the growth of required reserves might have slowed.  This is a very noisy data series so it can take 6 to 8 weeks before a growth trend becomes obvious.  The growth of required reserves is a direct measure of the net origination of new loans.  If old loans mature faster than new loans are made, required reserves decline.  When old loans mature at the same rate new loans are made, then required reserves remains steady.  When new loan originations occur faster than old loans mature, required reserves grows.  For most of 2013 required reserves were essentially unchanged.  Since mid-October they have started growing.  This strongly implies the recent money supply growth acceleration is coming from accelerated bank lending.  The Fed announced the “taper”, so they are going to scale back monthly money printing from $85 billion to $75 billion.  This taper is easily overcome by bank lending if banks decide to accelerate loan originations.  The data today on required reserves is either a noisy dip, or a slowdown in bank lending.  As long as M2 is growing we are inclined to think required reserves are growing too.  If circumstances change the data will become clear with sufficient time to exit US markets before a crash comes.

We are describing the money supply growth rates and what happens according to ABCT.  Please do not infer from our description that we support money supply growth (aka inflation).  Money inflation leads to price inflation, bubble-booms and a distorted economy with hidden redistributions of wealth from the unfortunate many to the wealthy few.  Until these circumstances change, we track the money supply growth rates and recommend leveraged investing accordingly.

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