For Friday January 17, 2014, We Recommend Investing in US Markets

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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 declined 0.13% on Thursday with volume below Wednesday but above the 30-day moving average, resulting in a light-volume down-day classification by our pattern recognition software.  The above-average volume trend continues as January progresses.  This is why our pattern detection software places more emphasis on day-to-day volume than the average volume.  When volume trends up or down as it is now, the relative volume strength can appear skewed by the trend comparison.  The day-to-day does introduce variability, but we compensate by looking at pattern development over several days.  The negative pattern that was developing is fading as the previous strong-volume down-days move further into the past.  Our technical analysis points to market growth.  Should the S&P 500 decline about 28 points on Friday (-1.5%) our stop loss could trigger a change of our market forecast to an uncertain trend.

Subjective Comments:

The weekly US M2 money supply (not seasonally adjusted) statistics were published today.  The growth rate of the money supply continues to accelerate with the annualized rate for the past 12 weeks at 9.8%.  In early October M2 accelerated for 2 weeks at 26% annualized.  Two weeks is much too short to annualize for meaningful comparisons, but if those 2 weeks are included with the most recent data the past 14 week annualized rate of growth is 12.2%!  That’s more than double the 6% annualized rate that existed for the 22 weeks prior to last October.

Austrian Business Cycle Theory (ABCT) and the associated structure of production describe what happens when the growth rate of the money supply accelerates following a period of low or no growth.  The accelerating growth expands the money supply faster than expected, resulting in business profits in excess of expectations.  This is seen by business leaders as a new trend and an up-tick in economic activity.  The growing money supply also leads to price inflation, including increasing asset prices such as stocks.  With more money bidding up stocks and business results apparently improving, stocks will go up.  This is the bubble-boom effect of the expanding money supply.  Eventually business leaders and entrepreneurs come to expect the new level of profits and plan accordingly.  For this reason the money supply growth must continue to accelerate.  Only by continued acceleration does the “surprise” of profits in excess of forecasts cause the boom to continue.  Eventually price inflation increases costs and lowers profits.  This is another reason money supply growth must accelerate; to keep revenues ahead of rising costs.

Our technical analysis and our interpretation of the M2 growth rate via ABCT point to a bubble-boom.  The downside will be accelerating price inflation which erodes the purchasing power of all US Dollars.  To stay ahead of price inflation and capital gain taxes we recommend leveraged investments in US markets.  Leveraged index ETFs are one way to do this.  Margin investing is another.  Leverage adds risk, but this risk is mitigated if you know when to get out of the market.  Our technical analysis and tracking of the M2 growth rate will tell you when to get out of the market, so invest with confidence and continue to follow our blog.  Tell your friends and family to invest now.  Also consider putting part of your portfolio into price inflation hedges, but only that portion you can leave invested for the very long term.  We noticed the official CPI published today shows an overall index increase of 0.3% for December.  This is acceleration in price inflation.  PriceStats Index, based on MIT’s billion prices project, also shows a slight uptick in price inflation.  Of course there is also Shadowstat.com’s CPI measured the same way official CPI was measured back in 1980, and it shows CPI near 9%!  Eventually all the mad money printing by the Fed and accelerated fractional reserve lending by the banks will result in higher price inflation.  This is why we encourage price inflation hedges.

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