Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Are You in the Right Boat?
We enjoyed the Christmas holidays this past week, and assumed you wouldn’t mind us missing a weekly comment. If you were looking for last Friday’s missive, it was neither written nor posted. The week since then was mild, with holiday absenteeism in NYC and Washington D.C at a peak. For the latter, we are always grateful.
As we come to the end of 2010, we find the most important economic theme still in effect – that of systematic reflation directed by the world’s leading central banks. The solvency (or insolvency) issues remain, with misdirected opinions still fixated on liquidity. It reminds us that, “to a hammer, everything looks like a nail.” Such is the professional bias (blindness) of the Fed and other money-creating comrades across the globe. We are concerned with the consequences, but more on that in a moment.
For the past seven years, growth in tangibles has beat the price performance of paper assets. Gold has led the pack in consistent outperformance, with silver doing even better recently, but moving in fits and spurts – as you’d expect from a schizophrenic metal (Is it precious? Is it industrial? Will it be seen as real money, the stepsister to gold – or as an asset tied to innovation and economic growth?)
Our emphasis has been and will continue to be on strategies that support wealth preservation. The dollar debasement effort is likely to accelerate over the next 24-36 months, with radical implications for all asset classes. What might the divergences be?
Can you imagine a world in which we see simultaneous asset deflation and asset inflation? Well, we have it now, and it will worsen as we go forward. That might seem impossible, so let’s take a moment to explain.
I’ll start by recalling an unusual but personally familiar event. The landing strip at the Telluride airport, just north of our office, sits atop a small mesa that is just large enough for landing small commercial jets or a private Citation V or Gulf Stream IV (no, I don’t own either of them).
Should you fly in, it is not uncommon for the wind sock at one end of the runway to be flying full tilt in one direction, while at the opposite end of the runway the second sock is also flying full tilt – but in the opposite direction. Is it a vortex? Some other phenomenon? It’s a complex, confusing situation. Such is our modern monetary backdrop; the asset deflation and inflation socks are both flying.
Asset deflation is affecting and will continue to affect any asset tied to the boom in credit over the last 30 years. Some assets are subject to greater vulnerability in this context, and the downside you might anticipate is directly proportional to the industry average debt set against the asset in question. Commercial and residential real estate are good examples, as to a lesser extent are stocks and bonds (driven not so much by leverage to the asset as much as leverage to an entity’s balance sheet).
Asset inflation enters the picture a bit differently. You might have heard it said that the tide of monetary inflation floats all boats. However, consider the boats with holes in them. When the tide comes in, these vessels do not buoy, but remain fixed and eventually submerged.
Debt is the critical factor – it acts like the hole in the boat. The assets that have done and will continue to do well are those that are not debt-laden and can’t be substantively diluted. If dilution is possible or debt looms large in the background, expect to see the asset sleeping with the fishes.
Thus far, the assets reflecting monetary inflation have been select commodities. As the proverbial printing presses are used to fund deficits and support the debt markets, this theme will continue with greater volatility.
On a different subject, we note the numerous economic statistics out in recent weeks. Without belaboring each and every one, we would remind you of the Department of Labor’s common seasonal adjustments, which positively shift numbers at year-end, but are offset in subsequent reporting periods (payrolls in February, industrial production in March, GDP in July).
In other words, try to ignore the hype on these numbers as you get to year-end; they are notoriously unreliable. Do listen to the recent MWC interview with John Williams. He sheds light on (questions) the relevance of any government produced statistic, given the greatest data distortions ever in the Post World War II era.
Clients should expect a full performance report and review in January. Suffice it say, you will be pleased. If you have questions after you review the report, please schedule a call with Dave Burgess or myself.
Lastly, please welcome a new member to the team. You’ll get to know Nancy Harrington as she assists Ben Frihauf and Dave Burgess in scheduling client calls and directly addressing your account needs. We will announce a number of new hires later in 2011 as we expand our research and analysis team.
Happy New Year!
President and CEO
VP Investment Management