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

Print now, ask forgiveness later?

US market action was rather listless this week, as most assets, with the exception perhaps of commodities, were range-bound ahead of Bernanke’s Jackson Hole speech Sept 1st. Actual Fed policy changes, if any, won’t be announced until the next FOMC meeting on September 13th. Volatility may increase between now and then, as a highly margined stock market sweats over the possible Fed outcomes.

During this week’s trade, stocks fell back after touching their May highs. Treasuries were flat. The dollar weakened against the Euro, and commodities managed a breakout above resistance levels (especially gold and silver). From the looks of it all, it appears that stocks have been drawn into a classic “buy first, ask questions later” scenario – preying upon the arrival of negative economic data to help justify the overpriced expectations for more QE.

US economic data released this week failed to persuade one way or the other. In July, Home data (existing and new) displayed some moderate improvement and Durable Goods Orders rose 4.2%. Ex Defense and Aircraft, orders fell 3.4%. And for the third week in August, jobless claims rose but stayed clear of the critical 400,000 mark. Further down the road, we’ll get the all-important jobs and inflation data just prior to the next FOMC meeting.

In Europe, we witness a similar theme: The most recent economic data was found to be, at a minimum, less gloomy – relieving some pressure on eurozone lawmakers to intervene. The eurozone manufacturing PMI rose 0.7, and was only partially offset by a 0.4 decline in the services PMI. German GDP came in as expected, rising 0.3% (2nd quarter) while U.K. GDP fell a less-than-expected 0.5%.

All in all, it’s senseless to us to argue over whether the Fed and or the ECB will print, or try to print. Eventually they must, or watch the markets implode. Massive bets have been made, leverage has been assumed, checks have been written, and cards have been maxed, all on the endless and careless promises made by the Fed to rescue the system “if need be.” Said a different way, they Fed is expected to cash everyone out. The question is, rather, what will happen when it does? Will stocks continue their ascent, or will crippling inflationary forces take over as they have in China?

In answer to that last question, gas prices (at the wholesale level) here in the US have soared nearly 30% since late last June, encroaching rapidly upon the old highs made in 2008. When combined with drought, spiking agricultural prices, the US may soon be joining our Asian counterparts in that epic struggle against the kind of inflation that cripples. Whatever the case, the Fed is caught in one of the most difficult situations seen in recent history – and that may be putting it mildly.

Best regards,

David Burgess
VP Investment Management