Here’s the news of the week – and how we see it here at Mcalvany Wealth Management:
Taking Cues from the BoJ …
In overnight trade on Thursday, the BoJ raised its inflation target for the next year to 1.4% from 0.9%, and determined not to increase its bond purchase program. The softening policy response comes at a time when Japan’s economy still has yet to get off the ground, despite record amounts of stimulus over the last six months. In that time, the Yen has fallen nearly 19% against the euro, 17% against the US dollar, and equally as much against the currencies of resource-producing nations. The effect this is having on Japan’s economy as it pertains to the balance in prices is not the one desired (or least the one expected by Keynesian theorists). On various merchandise, Japanese import prices have risen 16.3%, significantly outpacing export prices, which have risen only 10.25% over the six months the BoJ has been “stimulating.” Essentially, this means Japan has to pay higher prices than it can charge for its goods. Consequently, this is putting the squeeze on Japan’s profitability as a whole (restraining needed wage increases) and explains why the BoJ is cooling its jets on monetary policy.
We make mention of this anecdote because we believe it to be a predictor of what the US will experience (as will the ECB, if it intends to adopt Drahgi’s bond purchase plan in June) sometime in the near future. At last read, the Fed has added $105 billion of mortgages and Treasuries to its coffers in the month of April. This brings the sum total of its purchases since last November to $485 billion, and the total on its balance sheet to $3.36 trillion (on course for more than a 30% increase to the balance sheet this year). Despite this massive level of money creation, however, the dollar has yet to come under any real pressure. We believe that situation is about to change. With the BoJ pulling back, the ECB in bond-buying abstention until at least June, and the FOMC reaffirming its commitment to QE in comments earlier this week, the dollar may begin to come under the kind of pressure it can’t handle – and relatively soon. Below is a chart of the dollar, currently hanging on the 50-day moving average after a failed attempt at a rally, and still clinging to a longer-term downward trend (lower tops).
If – or when – the dollar falls, as we believe it should, gold and other commodities will receive greater support. As we have seen with Japan, this development won’t bode well for economic progress in the long run. That said, it may be safe to say that stocks find themselves in the process of topping out, while the metals have more than likely bottomed out. As for gold, it rebounded nicely from erroneous support levels ($1330) established last week to what appeared to be a temporary resistance or profit-taking level of $1485 – on its way, we believe, back to $1550 in coming weeks – dollar permitting, of course.
VP Investment Management