A Policy Inflection Point? – Sep 19, 2014

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

A Policy Inflection Point?

Most of what transpired at this week’s FOMC policy meeting came as no surprise, and was of very little consequence to traders. The Fed cut its asset purchases by $10.0 billion to $15.0 billion, and indicated that policy would remain “accommodative” until the “moderately” growing US economy cures the slack in what they call an “underutilized labor force.” That was the expected part. What came as a surprise was the Fed’s subtle back-peddling on interest rate hikes. Up until Wednesday, it was extensively rumored that the Fed would commence hiking rates as soon as spring of next year. Those expectations were dispelled when the Fed linked its future rate increases to an inflation target of 2.0%. That target, according to Fed research, won’t be reached until 2017. That news, combined with China’s $80.0 billion stimulus package and Scotland’s “no” vote, had stocks – mostly large caps both here and abroad – heading back toward new highs. As for the tech-heavy NASDAQ, the absorption of Alibaba’s massive $200+ billion IPO held the index to modest gains. Away from stocks, Treasuries managed to stay in the black for the first time in weeks, while the dollar rose (as the euro fell) and gold slipped to familiar support levels.

MWM 14, 9-19 Box ScoresA few economic indicators seemed to reinforce the Fed’s apparent shift to a more dovish stance: Industrial production for August showed no improvement year over year, and dropped by 0.1% month over month. This was the first decline since the impairment of January’s winter chill. In addition, housing starts fell 14.4% and the CPI fell 0.2% in the same month. The Fed’s own Financial Stress Index has jumped since July of this year, from -1.4 to -1.2 in September. Of course, financial stress is exactly what a country going off stimulus begins to experience, as we’ve seen in China, South America, and to a small degree Europe. Without the Fed’s printing schemes to bail out excessive risk taking (leverage), banking/debt failures could get out of hand – fast.

Though gold was tripped up and sent into a technical down spiral by last week’s twice-baked Fed rate hike speculation, the gold price and physical gold inventories at the COMEX should stabilize after technical milestones have been satisfied (i.e., $1,185 on the charts). Beyond a testing in this area, the precious metals have much in the way of fundamentals to build on as the risks to the financial sector and subsequently the economy begin to heat up in the absence of QE.

Best Regards,

David Burgess
VP Investment Management
MWM LLLP

2014-10-02T19:21:11+00:00