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

Doubling Down on QE…

The ADP and US jobs reports, along with other economic data released this week, failed to inspire stock bulls. ADP private sector jobs (158,000) were a bit lower than the expected 192,000, while the US jobs report showed a disappointing non-farm payroll rise of only 88,000 (200,000 were expected). Incidentally, the labor participation rate fell to 63.3 from 63.5, even as the stated unemployment rate showed an improvement, falling 0.1% to 7.6%. Overseas, EU unemployment was soft yet again, increasing to 12%, while Japan’s industrial output shrank 0.1% and its vehicle sales fell 16% on a year-over-year basis. US and EU indexes fell (on higher volumes), while bonds and the dollar rose. Japanese stocks fought the global undertow, buoyed by the Bank of Japan’s promise to double its QE efforts in coming months.
Whether stocks began to sink in response to the lackluster economic data, or whether the well-connected “players” in financial markets are simply deciding to take profits after what has been a sizeable run-up is difficult to determine at this point. Slowly but surely, however, it may be dawning on stock operators that the economic viability of QE is perhaps running up against the laws of diminishing returns – in real time. This is not to say that we won’t see an occasional positive economic report, but, for the most part, we should see contracting or stagnating economic data in the US, the EU, and Japan, where QE and/or credit “fixes” have been warmly embraced.

As for precious metals, there seemed to be a group of investors and traders who were ready to sell the metals at the first sign of weakness in stocks. This caused damage that could be regarded as punitive in nature, forcing prices to longstanding support levels. Though they recouped a fair bit of those declines by Friday, the price action is reflective of the irrational psychology that persists within the metals markets. For some time now, since ’08, investors have feared a deflationary collapse in stocks that would take the metals down in sympathy. We think it’s safe to say that this fear has been factored into prices, which would mean it no longer carries significant weight. That doesn’t mean the markets can’t do what they want for a time. Markets can often remain irrational for longer than one typically expects.

It may also be worth noting that, in addition to the BoJ’s insane proposals, the Fed monetized nearly $110 billion (mostly mortgages) in March, $25 billion more than it pledged to do a few months ago. The increase was likely due to the ongoing ripple effects caused by the Cyprus banking crisis, though the consensus view is increasingly that our economy may require yet further boosting. In either case, contrary to the price action as of late, these are incredibly bullish developments for the defensive areas of the market – something we believe the smart, or big, money is soon to recognize.

Best regards,

David Burgess
VP Investment Management