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

See? We Tapered – Let the Speculation Continue

The Fed announced Wednesday its intention to reduce its bond buying program by $10 billion a month from the current $85 billion. I must admit, I didn’t think the Fed would take such action – but that’s what it said it would do. As we stated last week, any Fed comments or action were largely discounted by the markets in advance of this meeting – a sentiment that was confirmed by the monster rally in stocks following the Fed’s remarks. By its very existence, that rally demonstrates the fact that Wall Street considers tapering to be a joke. Unless of course the Fed and Wall Street actually believe the economy is on solid ground and can be “self-sustained” – i.e., without trillions of dollars’ worth of QE. That is a view we do not share, given that the Fed hasn’t been able to stop monetizing for more than a month since QE2 began in November 2010.

MWM 13, 12-20 Box ScoresThe Fed’s actions at this particular meeting reek of ceremony, as Ben puts a period at the end of his career. He prefers to “go out on top,” as the official narrative would have it, having resuscitated the U.S. economy from the throes of moribundity, now riding into the sunset – or something along those lines. In any case, the Fed has added $4.05 trillion to its balance sheet since 2009. It’s on track, even at the reduced rate of $75 billion per month, to add another $900 billion (or $5.0 billion total) to its balance sheet by year-end 2014. As we have stated here many times before, despite the growing negatives attached to QE (i.e., rising rates!), the Fed simply cannot withdraw its unprecedented support without accelerating those negatives. This is something we believe the stock operators know all too well. It’s a weakness they seem more than willing to exploit – while they still can.

Following the Fed meeting, stocks rallied to new highs, bonds saw modest losses, and a fading rally in the dollar helped gold maintain its ground above the 1,200 mark. Moving forward, in the wake of diminishing foreign creditor support, the bond market continues to be the crucial point of interest for the markets and, more importantly, for the Fed. So far, enhancements to bank reserve standards and Fed interventions have failed to produce a low(er) rate environment. Incidentally, the Fed purchased $53 billion worth of bonds this week, to no avail – rates still rose. The effects of these actions have been seen in housing, where existing home sales in November fell 4.3% month over month, and on the automotive side of things, where Ford Motor lowered its entire 2014 profit forecast.

With all of that said, gold may not immediately regain its footing. We may first need to see U.S. corporate earnings reflect the weaknesses caused by tightening credit markets here and abroad, or by a falling dollar, as gold has been tied to stocks in an inversely correlated fashion for some time now. On the flip side of that argument, markets are quite capable of discounting such events ahead of time, as we believe was the case when gold staged a relentless advance to 1,262 just a few short weeks ago. The price action was improving then, and it stands an even better chance of improving now, though what is apparent is the search for traction as we finish the fourth quarter and head into the first quarter of next year.

As a follow-up to our recap posted two weeks ago, we’d like to share a video that Bloomberg ran this morning about ongoing hedge-fund activity in the housing market. Click here to view the video.

Best regards,

David Burgess
VP Investment Management