Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
- A Matter of Trust
- Jobs vs. the Fed
A Matter of Trust: This week we observe the continued rise in the Euribor (the European inter bank lending rate) from .63 to above .90, and wonder whether the strain on trust between banks in Europe will stifle or subvert a recovery there. As the subcutaneous issues (balance sheet instability) in the European banking arena reemerge, and the long-term viability of a non-political monetary union stays in focus, will the euro head higher or lower? Not everyone agrees, but we see a course lower, much lower. If the euro is heading lower, does that make us dollar bulls? No. We are decidedly bearish on the dollar (short term rallies excepted).
The sub-level issues that cause bankers to second guess sending money to similar institutions in Europe are the same sub-level issues prevalent on the Fed’s balance sheet at present. Probabilities are that these issues won’t stay below the surface, and as they emerge in the U.S., will morph into a currency crash.
On an absolute basis, gold is our currency of choice. Dollars, euros, or British pounds (or a host of other fiat paper) do not suffice as a “store of value.” Floating currencies are not measured against a fixed standard, and should not imply real strength or weakness. The only way you can gauge strength or weakness is to compare them to some other currency, which may be weak as well, but “strong” by the thinnest of margins. On a relative basis, it’s probable that the dollar will find its feet and move higher – for a short while. That is, before a concerted move lower by all currencies relative to our most favored form of money (and a true measure of wealth)! What is missing in the credit markets? Trust is the missing ingredient in the lending (Euribor) cake – as it will be when the currencies are cooked too.
Jobs vs. the Fed: We would argue that the Fed would like to stand pat on August 10th with respect to quantitative easing, as the marginal benefit of a dollar created wouldn’t produce much bang for the buck at these relatively lofty levels in the market. On the other hand, the underlying economy is also on the skids, which puts the Fed in an awkward position – especially since it was just a few months ago that they were in talks to unwind stimulus, not add to it.
Investors considered today’s jobs report to be the deciding factor in whether Fed QE II would commence or not – and the results weren’t anything to write home about. Total net job creation was a negative 131K, manufacturing created a solid 36K and the private sector created 71K (all lower than expected, with nasty revisions to the prior month of June – charts below). The jobs scene hasn’t been pretty in this proclaimed recovery, losing nearly 7.6M jobs since the beginning of 2008. But along the lines of keeping things “contained” today, the headlines, along with President Obama, gave praise to the private sector job creation number as evidence that we are on the right track. (Never mind that, to us, the real point to the jobs number is in the manufacturing figures, as these are the jobs pulling the country back into balance! – chart below.)
Bernanke was also heard cheerleading this week, stating that consumer spending would accelerate because wages were on the rise! How wages can be rising without job creation is beyond us, but it will soon be an economic fact taught in all the schools, we feel sure. Anyway, it would seem that the Fed and other powers are trying everything possible to avoid admitting defeat. But their denial may not be strong enough in this case, as the markets and the real economy will have the final word. So if the economic powers-that-be don’t panic next Tuesday, they will sometime in the not-so-distant future. How the bond market reacts to the Fed’s ultimate capitulation will be interesting to see.
Have a great weekend.
VP Investment Management
President and CEO