An Update on the Economy and Money Supply

By: Robert McHugh | Sat, Aug 13, 2005
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The Trade Gap widened again in June, according to the Commerce Department, hitting $58.8 billion for the month, the third largest figure since the founding Fathers shed their blood, sweat, and George for this nation. China's trade gap alone was $17.6 billion for just one month. It's as if we've negotiated an installment sale of the U.S. to the largest Communist nation on earth, sort of what the native Indian Manhatte Wappinger tribe did in parceling off Manhattan for twenty four bucks to Amsterdam's finest in the early 1,600s. Question is, in twenty years will we be saying, "They paid too much?"

Retail Sales rose 1.8 percent in July, according to the Commerce Department, but 83 percent of that increase was from auto dumping. Wholesale Inventories rose 0.7 percent in June according to Commerce. This can be seen as optimistic businesses loading up for an expected bang-up fall sales season, or an unwanted and unexpected slowdown in sales. With gasoline prices setting records, we believe the latter. Mortgage Applications fell for the third week in a row according to the Mortgage Bankers Association in what looks to be a slowing of the real estate boom.

The Federal Reserve raised short-term interest rates another quarter percent, the tenth such increase in a row, and now the Federal Funds rate sits at 3.5 percent. This impacts commercial prime rate lending and consumer home equity financing. It takes cashflow out of consumers' pockets as everybody's home equity payment has now risen fifty percent from when the tightening began. For those tapped out, this forces a cut in spending. Not to worry, we got another "measured" statement from the sacrosanct halls of the temple this week, and that seems to be all the market wanted to hear, as equities responded to the beating by happily rising, the DJIA up a hundred points right after the news. The Master Planners have so inebriated the markets with liquidity, that Wall Street can't seem to tell when a punch to the gut hurts.

Oil hit $66 bucks a barrel on Thursday, but the market shrugged it off as if more profit for Exxon/ Mobil is a good thing. Hey Alan, pass the punch. Friday's sell-off may be telling us the bowl has lost its fizz.

Jobless Claims were reported to be 308,000 last week, according to the Labor Department. Meanwhile we watch 10 million illegal immigrants work for peanuts, eliminating decent-paying skilled labor positions, many in the construction industry. The Master Planners' justification is that it keeps product costs down. The result: Housing prices soar beyond the debt servicing capacity of most Americans (good folks don't know that yet), home builders' profits soar, and the lower middle income class disintegrates before our very eyes.

M-3, the Master Planners drug of choice, rose another 12.0 billion this past week, is up 55.1 billion over the past three weeks, and is up 145.0 billion over the past twelve. Those are annual rates of growth of 6.3 percent, 9.8 percent, and 6.5 percent, twice the GDP growth rate, and about five times reported inflation. Its doing its job, keeping all markets buoyed - the Greenspan put - but for a fleeting moment in time.

Bonds surged nearly 2 points this week, correcting the 5.72 point decline since the June 3rd intraday high. It is likely the high that the Broadening Top, Megaphone pattern is calling for is in. Prices hesitated this week at the 200 day moving average, after blowing through the 50 day two weeks ago.

Because the direction of prices preceding this pattern was up, a Megaphone is considered a top formation. Prices never exceeded Primary wave (5)'s top, so the Elliott Wave count as presented remains valid. Intermediate degree wave 3 lower appears underway. There's a ton of money being created out of thin air right now, and that should push Bonds lower. Too much money is inflationary, so Bond owners are going to need higher yields to continue to accept the risk that over 30 years, interest rates will not exceed 4.00 percent.

But rising rates are taking their toll on Housing stocks, and that could signal an end to the brick and mortar ATM, putting a crimp in consumer spending.

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"I love the Lord because He hears
My voice and my supplications.
Because He has inclined His ear to me,
Therefore I shall call upon Him as long as I live."

Psalms 116: 1, 2


Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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