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

When Breaking Bad Slowly Constitutes Doing Well

Stocks worldwide continued their advance this week on the erroneous premise that all of our problems have been solved, disavowing any sign to the contrary. The age-old phrase “don’t fight the Fed” seems to have some relevance, as the Fed’s significant monetizing as of late has translated into a small dose of bullish hysteria across both bond and stock markets (see box scores). How long markets will remain in their current state is unknown, as manias, even in miniature form, will continue until they are “done,” or until bad news matters.

Along those lines, the chasm between stocks and the economy continues to show indications of widening. U.S. GDP contracted (by 0.1%) in the 4th quarter of last year due to reductions in defense spending and costs associated with hurricane Sandy. Though the media applied emphasis to the effects of Sandy, we find it more important to note that the “fiscal cliff” issues are working themselves out with some degree of force, without mandates from Congress. In this particular instance, the Pentagon had to cut back by 22% YoY, but it’s likely that austerity will spread to other areas of government – and soon. The impact this will ultimately have on consumer spending and stock and bond markets will no doubt be a negative one, yet it’s another data point that Wall Street and the MSM have conveniently chosen to overlook, at least for the moment.

As for the remaining U.S. data points this week, there wasn’t much to write home about. The U.S. jobs report, though hyped by the media (as always), showed no meaningful signs of improvement across the board. Non-farm payrolls expanded at a 157,000 clip in January, while the unemployment rate increased to 7.9% from 7.8%. Other data for the week was also mixed (consumer spending, incomes, and consumer confidence, which fell 8 points), but served only to alleviate concern that the Fed might pull back from printing later this year.

The same mixed bag of economic information was seen in overseas markets. Moreover, tensions seem to be building once again in the areas of Egypt and Turkey. Economic troubles first materialized there before spilling over into Greece, whose ministers ironically have made the claim that the “worst is over.”

That said, we think it’s safe to say that the world’s financial markets, especially those here in the States, are still headed for some major, needed adjustments. We are especially thinking of world bond markets, which remain in bubble-like status in spite of our recurring ills. That doesn’t mean that the current craze in stocks can’t continue a while longer. It may do so until such time as inflation and/or fiscal issues peak. In the meantime, there seems to be little need for the defensive nature of the metals and/or mining shares, as they do not “go up well.” Yet, while the Fed is actively printing, we find it hard to see the metals going down meaningfully anytime soon.

Best regards,

David Burgess
VP Investment Management