Lessons from Greece (Ancient and Modern) – Dec 23, 2011

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

1. Lessons from Greece (Ancient and Modern): Earlier this week, I strolled past Rockefeller center before arriving at the Newscorp building for an interview with Fox business (you can tune into the Money and Power segment with David Asman on January 2nd if you are curious). This time of year is festive in New York City, with colorful lights and the hustle and bustle of shoppers picking up last-minute gifts the week of Christmas.

Regardless of the season, I usually go by and look at the Art Deco statue of Atlas holding the world (the heavens) on his shoulders. The story line from that Greek tale is one of punishment following the conflict between the Titans and Olympians. Atlas was not on the winning side, and was not there voluntarily propping things up. The Greek myth explains that the Atlas Mountains, stretching across North Africa, are what remain after this “god” was turned to stone, otherwise unable to hold things together.

Today we see the Fed attempting a similar feat, propping up the universe, but on a voluntary basis instead. Foreign Central bank loans from the NY Fed reached nearly 10 billion dollars this week, with many tens of billions already made available via swap lines earlier in the month. Activities at the Fed have created a strange and unhealthy global dependence on a variety of their liquidity schemes. As the Fed continues to liquefy the financial markets both here and abroad, we see 2012 as a year when perhaps Atlas, indefatigably balancing the sun, moon, and stars, might just drop something.

Entering the Fox Studio after walking up and back 10-12 blocks, I had the sense that everyone around me believed that our modern day “gods” (Ben B., Mario D., and the other members of the global banking elite) were achieving success stabilizing the world, and holding the planets aloft. Can you imagine the discovery by the general public that these “gods” are only men? How will markets react when they discover that Ph.D. degrees do not endow the holder with supernatural characteristics, but are rather, like fiat currencies, worth only the paper they are printed on?

As a preview for the January 2nd interview, you’ll find us rather bearish on European and US banks. Over the next few weeks, we’ll explore the challenges likely to come to the forefront next year, spanning both the economic and political. While some may find present economic and political trends disconcerting, we leave you with an encouraging paraphrase from Helen of Troy: Often out of dire necessity comes the greatest strength.

2. Dollar Consequences: Liquidity is back, and with it another wave of artificial market stability. The question is: Where did the money come from? In this instance, we surmise that all funding roads lead to the Fed. Over the past two weeks, the Fed has monetized (directly or indirectly) nearly $95 billion worth of assets – $60 billion of which ended up in European markets (mostly to stabilize the Italian bond market), and approximately $30 billion of which was applied to US asset-backed securities. The €489 billion EFSF loan package and the IMF pledge of $150 billion also played their part. Put a summation sign under it all, and you have the kind of liquidity that “floats all boats” and helps to explain the rebound in corresponding stock and commodity markets (see the box scores for results). What concerns us is the effect this will have on the dollar, as dependency on the Fed increases, if not this year, then next. More on this below…

To be sure, the Fed would be happy if this crisis would confine itself to the borders of Europe. And given the amount of misplaced euphoria the media have with respect to the imminent US “recovery,” they probably share the sentiment. In both cases, the respective parties are likely to be disappointed.

US Housing Starts were the highlight of the week, posting a better than expected 685,000 for the month of November, which came to a 9.3% increase MoM. Building Permits also followed suit, producing a market-pleasing 681,000. This great news didn’t carry past the next trading day, when Existing Home Sales reportedly fell to 4.42 million from 4.97 million in October. We have said this before, but bursts in housing starts exacerbate issues extant in the housing market – adversely affecting prices on existing homes (the US House Price Index fell 0.2% MoM in Oct).

US New Home Sales are also running at all-time lows. GDP was revised lower, to 1.8% from the previous 2%. Consumption also was revised lower, to 1.72% from 2.3%. Durable Goods Orders rose 3.8%, but non-defense/airline contract orders fell 1.2% in November. Personal spending and incomes rose much less than expected, while inflation gauges remain “untamed,” contrary to Fed communiqué.

In Europe, central banks are responding in classic style to the funding crisis. In addition to Fed capital infusions, Sweden cut its benchmark interest rate for the first time since 2009 by 25 basis points to 1.75%. Norway made a 50 basis point cut last week and Russia cut its refinancing rate by 25 basis points to 8%. Bucking that trend was the Turkish central bank, which reportedly raised its gold reserves by 30% (to 5.76 million oz.), while Russia added 81,000 ounces in the month of November. Incidentally, Russia has added to its gold holdings every month in 2011, up 11% from the beginning of the year. At least a few countries are getting it right, in our opinion – we will have more to report on central bank acquisitions of the metals in January 2012.

We mentioned a while back that the “beggar thy neighbor” principal would at some point play an important role in accelerating the funding crisis now underway. Inflation has permeated the earnings power of our foreign creditors (starting in the Middle East and Europe), to an extent that jeopardizes the longstanding support we as Americans have enjoyed for our dollar (as well as our securities). Treasury reports (or TIC reports) now indicate that the US is barely covering its current account deficit with foreign investment offsets. In laymen’s terms, if we print (without external support) from here on out, inflation is due to rise at an accelerated pace. Said yet another way, the dollar may experience its worst year yet, especially if the Fed dedicates itself to saving both continents.

We have advised holding on to the metals, which work as a hedge against the dollar. Given the trends just discussed, we haven’t change our minds.

In the midst of such trying world events, we pray that the peace that passes understanding will be yours this Christmas and throughout 2012. May your time with friends, food, and family be joyous and memorable, and may such blessings make us mindful of their Author, and keep us truly thankful.

Best regards,

David McAlvany
President and CEO
MWM LLLP

David Burgess
VP Investment Management
MWM LLLP

2014-10-06T20:52:44+00:00