Since April the market as measured by the Standard & Poor’s stock index is off about 18% and momentum has fallen 40%. The recent catalyst for lower prices has been the drop in the debt rating by S&P of US Treasuries. In addition the economy is showing a pronounced slow down, as are many other countries. There is liquidity at major banks and corporations, but it has yet to be employed into the economy. Consumer spending is falling, as are savings and the use of credit has jumped again. Monetary surplus normally is put to work not only in the economy, but also in financial sectors, such as the stock market. This absent normal reaction presently is not present. If the banks and corporations won’t lend or invest then it is the function of the Federal Reserve to do so. That means QE 3 is needed not only to provide funds for purchases of Treasury, Agency and toxic debt, but also to spark and maintain a growing economy.
Personal consumption has fallen close to 2% and it continues under pressure. As we moved into the summer the manufacturing activity fell as well. Money supply has been increasing via QE 2 and stimulus 2 for 15 months, but has only been able to produce 1.3% GDP growth and the outlook for the second half of the year looks lower, as we predicted it would late last year. The rate of money and credit creation is close to 8% and has officially risen, which means we are still well into the system. Using 1980s formula inflation is 10.6% and climbing toward 14% by yearend. Deflationary bias has been overcome as it has been for the past 11 years. The flipside of this rescue plan is consumers are losing purchasing power and most all currencies continue to fall in excess of 20% versus gold and silver annually.