Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Markets Cheer for More “QE” – What Ever Happened to “Self-Sustaining”?!
Fed Chairwoman Janet Yellen’s dovish remarks, combined with the release of weaker US retail sales data this week, provided the one-two punch that seemed to eradicate tapering expectations and reinstate the use of monetary easing “on demand.” This doesn’t come as much of a surprise to anyone paying attention. Economic (and let’s not forget fiscal) conditions have been coaxing monetary authorities into this kind of action for quite some time now. Recent bad weather aside, growth in US retail sales (-0.4% in January; December revised to -0.1% from 0.2%) has been in decline since February of 2012. This is best explained by the lack of improvement in both the quantity and quality of jobs here in the US (aptly noted by Yellen). A recent statistic reveals that 91.0 million Americans, or a cool 37% of the U.S. population, should be looking for work, but aren’t. Out of the jobs created recently, most are within low-paying industries (i.e., retailing, food service, and hotels).
But without getting too far off track, it’s important to note that elements of stagnant economies are bringing increasing pressure on central banks, most notably those in developed nations (i.e., the ECB and BoJ), to place all their QE chips on the table and leave nothing further to the imagination. Doing so would endanger the art and effective use of “jawboning” as one of the Fed’s favorite policy tools. The Fed used this tactic to maintain support for the dollar and contain inflation by continuously threatening to taper from June through November of 2013 without actually doing so. But those days appear to have passed. Having fallen for two straight weeks, the dollar index is perched once again on the pivotal 80.0 mark, which has had the effect of stoking commodity prices meaningfully higher. Precious metals led, crude followed – creeping above $100/bbl for the first time this year.
In any case, stocks reverted to “melt-up mode,” especially after Yellen noted that stocks aren’t “at worrisome levels.” But the rally may be on running on fumes amid collapsing volumes, a rising put/call ratio, relatively firm defensive asset markets (such as bonds and the precious metals), and the declining effectiveness of QE altogether (per Fed governor Bullard). These developments suggest that a lack of conviction is lurking behind the rally in stocks. But as we saw in November and December of last year, low-volume rallies can linger. It may not be until first-quarter earnings season (mid-March) that stocks take pause. At that time, if the theory holds, gold and silver may get a second wind, testing the long awaited limits of $1,400.0 on the chart.
VP Investment Management