http://www.321gold.com/editorials/appel/appel073004.htmlAn increasing number of vocal onlookers believe that the Federal Reserve is determined to use any power within their means, to hold the system together until at least after the approaching presidential elections. Alan Greenspan and other Fed governors are talking up the economy, and are filling the airwaves with statements attesting to its increasing strength. Additionally, along with their likely market intervention, Fed and government officials are pulling all stops in their attempt to bolster the stock market with similar rosy forecasts. To this end, the Fed has flooded the banking system with liquidity. Witness the 11% increase in M3 alone during the past twelve weeks. Also, they grudgingly only raised the Federal Funds rate by 0.25% from its multi-decades low. If they truly believe their own indicators that inflation is beginning to appear, they should be aggressively increasing interest rates to ward off future price rises.
In contrast, there are others who feel that the Fed is acting in this fashion for another reason. They view the same data and opine that their true motive is to prevent a return to recession. The last thing that the Fed now needs is for stock prices to collapse! They fear that this would drive consumers into a state of withdrawal, and cause them to reduce their spending which is needed to sustain the economy. Further, the latter contingent points to something of which they believe the Fed is well aware. It is the lack of real, concrete data that the economy is indeed on the road to recovery. Yet, no matter what are the reasons for the Fed's present posture, and despite all of their efforts, it appears that recent evidence indicates that they are losing the battle to maintain a strong economy.
The past few months has seen an increasing flood of data that suggests that the economy is again slowing. Newly issued reports indicate that not only is the housing market beginning to weaken, with recent housing starts posting a year over year 8.5% decline, but retail sales are slowing, and capital spending is on the decline as companies instead repair their balance sheets by paying down their debt. Further, the stock market, which acts to foretell the future direction of our economy, is being inundated with negative data and signs indicating lower stock prices are potentially looming on the horizon.
All of the major stock market indices have now fallen below their respective 200 day moving averages! This has enormous significance because it forebodes the likely resumption of the full force of the Bear Market. Also, Lowry's buying power index completed and broke down from a head and shoulders top while their selling pressure index, after having posted a multi-year low, appears to have completed its bottom and has begun to move higher. A continued fall in buying power combined with what is likely the beginning of a sustained increase in selling pressure, has the potential to create havoc in the stock markets! To cap this off, following five consecutive weeks of decline, the Industrials again closed below the important psychological 10,000 level.
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