For Thursday January 16, 2014, We Recommend Investing in US Markets


Investment Recommendations:

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 expect price inflation to accelerate in 2014.  Avoid all bonds.

Technical Comments:

The S&P 500 advanced 0.52% on Wednesday with volume above Tuesday and higher than the 30-day moving average, making Wednesday a strong-volume up-day.  The market advance on Tuesday and Wednesday was the strongest 2-day advance for the S&P 500 in the past 3 months and completely recovered the index decline that occurred Monday.  A predictive pattern of growth appeared yesterday but negative patterns could still develop.  If the S&P 500 were to decline about 30 points on Thursday (-1.6%) our market forecast could change to an uncertain trend.

Subjective Comments:

The accelerating growth of the US money supply is driving another bubble-boom as predicted by Austrian Business Cycle Theory (ABCT).  The Empire Fed survey spiked to its highest reading since May 2012.  This is an indication of expanding manufacturing activity in the New York area.  As described by the capital structure aspects of ABCT, an inflationary bubble-boom occurs first in the sectors of the economy most sensitive to lower interest rates, such as manufacturing.  The growing money supply will also result in price inflation eventually, and the Producer Price Index jumped the most since last June.  The recent acceleration of the US M2 money supply occurred in October, so it’s not unusual to see producer prices start to accelerate now.  Again, this is consistent with ABCT’s economic cause and effect expectations.  Indications are the US economy and stock markets are going to keep booming as long as the money supply keeps growing.

International markets can affect US markets.  The European Central Bank (ECB) suggested stress tests for Eurozone banks should look for a 6% capital reserve requirement, which is below the 8% requirement they previously discussed.  If the ECB were to reduce the fractional reserve requirement, that would be very inflationary and could cause an ABCT bubble-boom in the Eurozone.  The ECB did not do this today, but the stress test comments suggest it could be under consideration.  Should the ECB move to a more inflationary position the bubble-boom there could have some spillover in the US.

Continue to avoid all bonds.  As price inflation accelerates bond prices will fall.  Additionally there are many municipalities and States that are deeply in debt and are likely to default.  Puerto Rico will eventually default on their bonds and this appears increasingly likely to happen sooner than later.  If you own any bonds or bond funds, sell now!  Price inflation hedges remain a good long-term investment.  We still recommend leveraged investments that grow with US markets.  Price inflation will erode the purchasing power of nominal gains, so leverage is an unfortunate but necessary risk to stay ahead of inflation.

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