For Wednesday January 22, 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 0.28% Tuesday with volume above last Friday and higher than the 30-day moving average.  Daily volume above the moving average continues as it has for the past two weeks.  Tuesday was a strong-volume up-day.  Overall the upward movement in the market continues to be more dominate in pattern formation than the occasional down-day.  If the S&P 500 should decline about 22 points on Wednesday (-1.2%) our stop loss algorithm could trigger a change in our market forecast to an uncertain trend.

Subjective Comments:

In the past two weeks US markets have moved up and down making little progress, but all of this up and down action has been on increasingly stronger volume compared to the 30-day moving average.   Also during this time our pattern detection software identified a fully-formed pattern that predicts future market growth.  These technical indicators appear to be a period of market consolidation where some participants are selling to lock in their profits while at the same time a slightly larger number of new participants are entering the market.  While the actual number of participants is unknown to us, the money flows inferred from these technical patterns point to future growth.

In addition to these technical indicators the US is experiencing acceleration in the money supply growth rate.  According to Austrian Business Cycle Theory (ABCT) this accelerated growth will create a bubble-boom in asset prices, including stocks.  It will also create price inflation at some point, so leveraged investing and price inflation hedges are recommended for your portfolio.  We remain bullish on US markets and fearful of the accompanying price inflation that will eventually come.  ABCT also explains that these manipulated bubble-booms eventually end in a crash.  There is no telling how long the boom will last, but it will continue as long as the money supply growth remains accelerated.  This depends on the Fed and the new loan origination rate of the banks.  There is speculation at the January FOMC meeting the Fed might taper and thus slow the printing presses a bit.  This will not matter if banks continue to lend aggressively.  Fed money printing and fractional reserve lending are the two mechanisms that cause the money supply to grow.  Per ABCT it does not matter how the money supply grows, only that its growth accelerates.  Should the growth rate slow there will be time to exit the market before a crash occurs.  Don’t wait.  Invest now.

One final thought: China.  The People’s Bank of China (PBOC) has printed massive amounts of money over the past several years, creating perhaps the largest bubble-boom in human history.  The associated price inflation has spooked the political leadership of China and additional money printing by the PBOC is unlikely to be accelerated enough to sustain the ABCT bubble-boom.  Eventually China is going to experience a massive economic crash.  The consequences are very difficult to predict.  Keep your eye on China and watch the US money supply carefully.  If things start getting bad in China it would make sense for some spillover effects to occur.  If such an event happens at the same time as weaker US money growth, that would be a reason to quickly exit the market.

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