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

Special note: This week’s report will be somewhat abbreviated as the McAlvany family is expecting a new addition (a baby girl!) to the family, sometime within the next 24 hours – So for obvious reasons, Dave McAlvany will not be contributing to today’s comments.

Along those lines – your prayers would be greatly appreciated.


Policy changes on the horizon?

The “economic recovery” may have reached an inflection point this week, shifting from perceptions rooted in fantasy to those more starkly aligned with reality.  Despite positive banter about the 1st quarter earnings season, stocks were flat and commodities were up (1.3%) yet again, fueled by rapidly increasing inflation expectations.  The U.S. dollar fell almost to a new low while gold and silver finished the week with gains of 3.17% and 6.95% respectively, both setting new highs since this bull market began in 2001.

Economic data continued to be of no help but was spun once again to be “bullish”.  The ISM Non-Manufacturing Composite fell to 57.3 from 59.7. Mortgage Applications fell again, this time by a more modest 2%.  Initial Jobless Claims came in lower than expected (382K vs. 385K) only by a touch, while previous numbers were revised higher.  Continuing Claims were higher than expected (3723K vs. 3700K), also with prior figures revised higher.  Wholesale Inventory Growth remained flat at 1.0% for February.  Chain Store Sales YoY were up 2% in March vs. prior month’s 4.2% increase.   (Sales data tends to be skewed toward nominal price increases in addition to “survivor” dynamics.  Stores that have been shut down due to insolvency have been removed from the index, making the stores that remain look much better than they really are.)  Consumer credit data for the month of February implied that consumers are becoming more desperate.   Credit card usage rose to $7.617B up from $4.446B in January, as inflation is making it harder to “keep up with the Jones’s”.

Portugal finally capitulated and has asked to be bailed out.  The ECB raised rates a quarter point to 1.25%, as did the Chinese for a sixth time (to a little over 6%).  The BOE kept rates unchanged, as expected, even though they were rather critical this week about U.S. monetary policy remaining easy.  Spain unemployment continued to rise, as the number of people claiming jobless benefits rose by 34,406 or 0.8% month on month to 4.33 million in March (the U.S. has still some 7 million in the unemployed bin). Also of note, are the upcoming elections in Peru; Ollanta Humala, a former colonel and supporter of Hugo Chavez is leading in the opinion polls for upcoming elections this Sunday.  We think this added to the upward bias in the metals on Friday, as Peru is the largest producer of silver.

We certainly know how to blow bubbles here in the States.  Commodities now seem to be the target in an ever increasing sea of dollars.  Gold and silver, to a large degree are leading that charge.  And although we are of the mind that the charts of these two metals and other darlings like oil are looking a bit toppy in the short run, this bull market, as it pertains to dollar holders, is far from over.

In the near-term though, guessing as to Bernanke’s next move is the game at hand.  A hint at higher rates here in the U.S. could be the proverbial “pin prick” needed to bring silver and other commodities back into trend, while a lack thereof could increase the existent momentum.  Keeping the rates unchanged seems to be the presiding consensus view, but we would not be surprised to see the Fed respond with a rate hike of its own – and soon.  With the rate of inflation outpacing the Fed by a healthy margin, firm monetary policy is becoming a necessity not an option.   As we have stated in earlier commentaries, inflation was due to become the excuse for being more responsible on behalf of the masses (taxpayers) to the detriment of the banks.

Whether monetary “tightening” is fast or slow, it is doubtful that it will “contain” ongoing adjustments to the dollar and commodities.  These adjustments would have happened sooner, starting in 2008, if it weren’t for the easy-money experiment now approaching pinnacle status. Instead, central bank actions, if any, will provide only a temporary “governor” to the natural corrective forces now underway. One thing that can be said about a higher interest rate environment is that savers may begin to be compensated for their troubles. Stay tuned.

Have a great weekend.

David McAlvany
President and CEO

David Burgess
VP Investment Management