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

Emerging Markets in the Balance

If not for a large-cap tech company (Amazon) in pursuit of a well-hyped and irrelevant $1 trillion market cap, stocks for the most part would have posted moderate losses for the week. Meanwhile, equitable conclusions to the NAFTA/China/WTO talks were deferred once again, while Canada remains undecided on the US/Mexico agreement and Trump is coaxing China to come to a speedy resolution by threatening to tax an additional $200 billion worth of the country’s goods.

In other areas, Turkey, Argentina, and now Brazil are caught in the throes of full-blown currency/inflation crises. Efforts to shore up each country’s currency have had little effect thus far. In Argentina’s case, the peso collapsed even as the central bank raised its key rate to 60%. I believe the last time Argentina had a crisis (2002-2003), one US dollar bought 3.9 pesos. Today the exchange rate is 36.9 (up from 10.0 in 2016). What US markets don’t seem to realize (yet) is that these problems are more intractable than they were a decade ago. Printing money, borrowing, and/or lowering rates are no longer adequate treatments for the disease. That won’t stop certain factions from trying, as I heard that the IMF was ready to come to Argentina’s rescue.

Shifting away from all that, US economic data was sparse and lacking in prognosticative worth. Pending Home Sales in July fell 0.7% and Mortgage Applications slipped 1.7%, week ending August 24. Fed National Activity surveys were mixed (though inflation expectations have been the key driver of late), while the Chicago Purchasing Managers Index slipped to 63.6 in August from 65.5 in July.

Turning back to the markets, the dollar was directionless and finished virtually unchanged on the week, which held most commodities to range-bound trade. Treasury rates were a bit higher across the curve, while the spread between the 2- and 10-year widened to 22.0 – up from 20 last week. Ford Motor Company and PG&E debt was rumored to be headed toward junk status.

I’ve been contemplating when we might see a big break in stocks, and given the events unfolding now we just might see something happen soon. Perhaps in September, but it feels like things could break sooner. The days of cheap leverage are coming to a head, and I don’t believe there’s much central banks can do about it – hence the crises spinning out of control overseas. What stock bulls don’t seem to understand or have chosen to ignore is that we are bound by the same economic laws as these other troubled countries. The only difference is the price level and/or threshold at which things begin to change. Because economies are so interconnected these days, it’s reasonable to conclude that the US will be among the debtor-nations soon facing collapse.

Best Regards,

David Burgess
VP Investment Management