Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
ECB Failure to Launch
Despite the fact that the Fed is no longer printing, US equity markets found it within their means to march higher. A voter-led path to gridlock in Washington certainly was a contributor, as was the promise made by the Bank of Japan to essentially quantitatively ease to infinity. But the real concern is that creative financing has taken over from the Fed. If allowed to continue, it will accelerate market risk at an exponential rate. This does nothing to change the prognosis for stocks: More leverage to attain growth today amplifies the size and scope of a dislocation tomorrow. Still, stocks rose to new interim highs; Treasuries sank along with the safe-haven precious metals, and the dollar rallied to a new interim high.
That series of events was tempered by the ECB’s unanimous but legally hamstrung desire to expand QE of non-government securities in the eurozone. Adding insult to injury, legal authorities have taken offense at Draghi’s decision to bypass treaty law on his way to printing (negligible amounts) in the first place. In that environment, the ECB policy meeting turned out to be a complete non-event that had the dollar backing up a bit against the euro on Friday.
That development, along with the US non-farm payroll report that came in below expectations (214,000 vs. 240,000), exacerbated the dollar’s decline and breathed much-needed life back into the metals and miners. Up until this week, not much made sense when it came to movements in the metals and related markets. The metals seemed to be punished for otherwise bullish reasons.
I still believe that much of what the metals do from here depends more on sentiment in stocks (i.e., weaker stocks = firmer gold) than on technical aspects of the metals. That said, anything can happen with the stocks themselves. On the one hand, they appear to be gaming for a strong finish to the year. But on the other hand, the balance of risk has shifted. Earnings momentum, owing to a weak consumer that doesn’t share Wall Street’s seemingly limitless access to leverage, is fading. And if Wall Street continues to acquire and use so much leverage, it will do so without Fed complicity, and therefore at ever greater risk – a situation that could prove catastrophic if the Fed can’t or won’t bail it out. In any case, uncertainty abounds.
VP Investment Management