“Free” Money – A Thing of the Past? – September 21, 2018

“Free” Money – A Thing of the Past? – September 21, 2018

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

“Free” Money – A Thing of the Past?

Stocks put on another show this week as both the Dow and S&P managed new highs led by a few industrial and financial stocks. The NASDAQ might have followed if not for the FANGs and a few chip companies (e.g., Micron Tech) raining on the parade. Prompting the bullish undertones were a series of headlines that said trade concerns had “abated,” which I find ludicrous given the fact that many of the tariffs haven’t even gone into effect yet. Anyway, the rally in stocks led to a rather sizeable sell-off across the entire curve in fixed income around Tuesday, which put the 2-year Treasury yield at another interim high of 2.80% and the 10-year at 3.06% – near its old interim high of 3.11%. Of course, soon after the rates popped, it was declared by many that the market was “pricing in” further Fed rate hikes down the road because the economy must be humming – etc., etc., etc. That’s not entirely true. Sure, Florence may give the economy an estimated $170 billion in relief spending, but this is much lower than last year’s post-hurricane total. And without it, the economy would most likely be in the middle of a rate-induced recession. In any case, if the financial system can’t produce lower rates as stocks rally, as has been the case over the past three decades, the bubble blowing that we’ve known for those many years may literally be operating on borrowed time.

As I said, Florence is going to provide some stimulus to the economy over the next few months, mainly due to the flood damage. Housing therefore will likely undergo a few upticks. As a result, I may not put great emphasis on the incoming data for a few weeks until this effect passes. That said, however, I think it’s important to note that the data released prior to Florence was pretty weak. As U.S. Existing Home Sales flatlined, Building Permits were down 5.7%, while Housing Starts climbed a questionable 9.2%, all in the month of August. Keep in mind, Housing Starts suffered a fairly cataclysmic drop a few months ago, so it’s not surprising to see a bounce, and I would also add that this week’s numbers may have benefitted from some prior-month negative revisions. Aside from this, the Empire Manufacturing Index slipped to 19.0 from 25.6 in early September.

Turning back to the action, the yield spread (or term premium) rose to 26. This is the difference between the 2- and 10-year treasury yields. The lowest it’s been so far is 20, and that may stand as the record unless the Fed unexpectedly turns more aggressive. The dollar fell in response to the further speculation in stocks. Though that may have helped oil rally above $70/bbl., it did not help the metals. Gold was essentially range-bound at the $1,200 level. I still believe the next move for gold is most likely to be higher rather than lower, as there are just too many positives building in its favor to ignore – not least of which is the debt crisis now spreading across most of the emerging markets.

Best Regards,

David Burgess
VP Investment Management


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