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

Fed Late To Its Own Party?

The meter is now running overtime on the Fed’s tab.  For the first time in several weeks, stocks have found it difficult to rally on either good news or bad.  NYSE average upside volume is evaporating, while short positions and the Put/Call ratio have collapsed.  Suffice it to say, bulls are in and bears are out.  Speculators and investors are very long this market, front-running Fed and ECB “QE” while disregarding, perhaps to their detriment, an accelerating economic downturn.  Stocks were firmer this week, though they lost some momentum by mid-week on renewed concerns over Europe.  Away from stocks, Treasuries weakened on the heels of a fairly poor 10 yr note auction, while commodities managed to finish above critical resistance at the 200 day moving average.

US economic data this week was rather sparse.  Jobs data continues to impress at least for those who take things at face value.  Since the non-farm payrolls last week were skewed by an unusually large number of fictitious jobs created (+52k, birth/death model), this week’s improvement in jobless claims shouldn’t be taken too seriously.  We’d rather they be neatly filed away under the title “politically motivated.”  More importantly, consumer credit (card usage) slipped a whopping 31% from this time last year.  Credit expanded by $6.46B, down from $9.42B in the month of June – and as the credit card goes, so goes consumer spending.

Overseas there has been more of the same.  Economies are contracting across the Euro-zone, government debt yields (of the PIIGS) are still too high for comfort and despite recent jawboning on both sides, the Germans and those backing ECB’s president Draghi still can’t agree to change treaty law to “print” (like the Fed) – even though they seem to be moving in that direction…all at a snail’s pace.

Of course, we can all remember a time when printing was fashionable no matter what the consequence – as it was in the late 90s.  Today, for the Fed, it’s a bit more challenging.  Whether Bernanke admits it or not, they must contend with the very real threat of inflation AND the political backlash that it causes.  We find it hard to believe that anyone is dying to pay higher prices at this time, especially when wages in the U.S. haven’t increased in real terms since last September.

Instead, we find it more probable that the Fed waits on some amount of de-leveraging (or “deflation”) to occur in the marketplace.  By this, they’ll receive the desired drop in inflation before firing up the presses again and avoid the political repercussions.  The Chinese were found wanting the same thing Thursday night upon the release of their CPI data.  It wasn’t low enough to justify additional action, according to some. Even at 1.8%, the CNB remains resistant to abject price increases.

On the other hand, it may be better for the markets if the central banks (Fed and ECB) would just pull the trigger, against better judgment.  Then perhaps markets might dislodge from the recent listless (or “melt-up”) trading patterns associated with Fed jawboning and instead return to discounting the aforementioned economic realities.

Best regards,

David Burgess
VP Investment Management