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

1. Treasuries: OPM Crowd Strikes Again. Treasuries rose this week in response to a decaying U.S. economy.  Yields on the 30 year bond have dropped nearly 100 basis points since the beginning of 2010.  We have been talking about the train wreck that is the bond market for some time now, given that the country and its people are spending beyond their means at a rapid pace. Eventually there will be heavy losses for those chasing bonds when the funding crisis hits, and those who were expecting the bond market to roll at the second failing of the economy (us) may have to exercise a little more patience.

Obviously the OPM (other people’s money) crowd doesn’t mind the deficit of $1.4T headed into another economic contraction, or that the trillions printed to stoke the economy had almost zero real effect to promote growth.  We surmise that the attitude of Wall Street is one of self preservation, as usual – “If you’re going to die, be caught dead in a risk-free asset.”

If we had to guess at the timing of the collapse, we would pinpoint its arrival somewhere beyond this “rotation” (or “risk off” trade) of the stock market, given that foreign capital flows into to U.S. securities turned negative by $6.7B in July.  As we have noted before, foreigners have been responsible for purchasing up to 60% of new U.S. debt.  Without this support, our own internal funding crisis will commence.  Stay tuned…

2. General Market Comments: For the week ending August 20th, economic indicators on average showed more weakness amid stronger inflationary pressures:

  • Empire Manufacturing index lower than expected
  • TIC Capital flows -$6.7B
  • Producer price index up 4.2% YoY (prior 2.8%)
  • Housing starts down month to month (549K to 546K) with negative revisions
  • Building permits down, as well (586K to 565K)
  • Initial jobless claims rose
  • Jobless claims rose to 500K from 484K
  • Continuing claims rose to 4,478K from 4,452K (with negative revisions)
  • ABC consumer confidence rose a smidge (3) to -45
  • Industrial production rose 1% in early August (up from .1% in the prior month)
  • Leading indicators rose .1% as expected.

Gold rose 1% during the week.  Stocks fell again, with the Dow off .87% and the S&P off .65% (breaking below their 200-day moving averages).  Oil fell 2.56% and the dollar rose .1% along with bonds (up 3.73% for the week).

MWM comments: Gold has been rising on low volumes and in a tight technical pattern, indicating that a short-term correction might be in order.  All in all, gold is showing remarkable strength on dips, perhaps due to foreigners who have too little of it suffering from a variety of economic ailments.

Inflation seems to be rising as the dammed-up money supply seeps its way into the cost of living, perhaps becoming the go-to excuse in the blame game for the economic sputtering now afoot.  With pressure to act (in a manner proven to fail) as inflation accelerates, it will be interesting to see how the Fed responds in coming weeks before the elections in November.

Have a great weekend!

David Burgess
VP Investment Management

David McAlvany
President and CEO