9,200 Target Reached

The Dow Jones Industrial Average has now cleanly reached my July upper target of 9,200. The catalyst for the latest rally was a cluster of positive earnings reports from key financial and technology stocks. However, what is really fueling the market rally is the unprecedented growth of the money supply.

There is more money sloshing around in the economy than ever before- enough to launch the stock market to the moon. Throughout history extremes in monetary growth have always led to stock market rallies. Added to that is the trillion dollar fiscal stimulus package that the Federal Government has enacted.

For proof that money always leads the way one simply has to read two books: Milton Friedman's Monetary History of the United States shows the money supply plotted on a 200 year graph leading GDP by 3 to 9 months on average. Beryl Sprinkle's Money and Markets plots the same lead correlation between the money supply and the stock market.


All one has to do is look at the unprecedented growth of the money supply - presented by economist Arthur Laffer in the chart to the right - to see the extraordinary amount of monetary stimulus that is in the system.

The recent earnings reports by Goldman Sachs, JP Morgan Chase, IBM, Google, etc. attest to the fact that some of this money is getting through. This gives us hope.

Unfortunately not enough of that money is getting through to where it matters most in the economy. Rather, than being spent across the board, the money is still being held up due to the failure of the banking system to invest the money where it is most needed. In addition, the $1 trillion TARP spending has proven so far to be a poor allocation of fiscal stimulus.


From Wall Street's perspective, the money is being allocated in all the wrong places to no avail. Some examples include:

1 - Money thrown at the banking system that is not being spent on the economy.

2 - Vast pools of bailout money going to keep AIG and the Auto industry floating.

3 - An unnecessary health care package that will bankrupt our troubled economy.

In short, the Obama administration appears to be losing its grip on spending. The President is biting off more than he can chew - and the public knows it - to wit the President's sliding approval ratings.

Fortunately the Congress is starting to notice the inflationary implications too. With the dollar weakening and the long term price of gold hovering around all time highs, it does not take a rocket scientist to see that we are on the verge of screwing up our financial house. Thus, Congressional gridlock may rescue the economy and the stock market from the President's reckless socialist spending agenda.

The stock market as measured by the S&P 500 and the NASDAQ has actually made much more progress than the Dow Jones Industrial Average.

Both of those indices have broken through resistance levels and are now getting a bit short term extended. I would not be surprised to see the S&P 500 have a battle at the 1000 level. That would be a perfect excuse for the rally to pause and regroup during the dog days of August. Then again, there is enough momentum in this market to keep the animal spirits of this rally going

So my guess is that the lion's share of profits have been made in this phase of the stock market's rally. I would not be surprised if the Dow reached the 9700-9800 area. However, absurd headlines by Newsweek declaring that the recession is over are a contrarian's dream. Whenever the major periodicals put there stamp on the economy and the stock market watch your back!

My hope is that after the summer ends, the President puts the radical components of the health care issue on the shelf and gets more focused about fixing the economy. I think that he is very bright and for the most part is flexible in his thinking. If he is able to follow his political instincts and discard his Captain Ahab like quest of the health care white whale, the stock market should be fine. President Obama's job is Sun Su 101: fall back and regroup.