Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
1. No Big Deal – Reflecting on the Paranormal: Announced this week: France lost its AAA status. Austria was downgraded. Italian debt was taken down two notches to BBB+. Of 17 EU nations, 15 were put on negative watch. German GDP regressed .25% in the fourth quarter, raising the question of recession. Spain and Italy took ECB loans like they were going out of style. In fact, Spanish banks took nearly $170 billion from the ECB in December, following the November rush for $134 billion. Yet, all things considered, it was still a quiet week in the world of European finance. Yes, that registers as strange. Bill Gross of Pimco fame describes the present not as normal, nor a new iteration of normal, but as paranormal. We see his point.
More from the European front: When does free volition end and coercion begin? We can certainly tell you where! Holders of Greek debt, with a gun to their head, will now be asked to “voluntarily” take a 60-75% haircut. We thought that issue had already been concluded at the 50% mark. Many Hedge funds have loaded up with European paper, including Greek paper, believing that the worst had already been discounted. Not so.
All bad news, you say? No, Mr. Draghi has declared the “unlimited” loan facility to European banks to be a success. Not only can you access oodles of money, but ECB-acceptable loan collateral has been broadened to include over 10,599 different debt instruments, to the great relief of French banks that couldn’t find a trash receptacle large enough to take all their waste paper. We should have guessed that this MIT/Goldman alum-led institution would prefer quantity to quality. That’s the central bankers’ credo isn’t it? Really, handing out money to domestic bankers is a little like passing pints at an AA meeting and deeming the deed’s warm acceptance evidence of virtue. We’ll hold the applause.
The ECB and BOE did show restraint in leaving rates unchanged at 1% and .5% respectively, disappointing speculators hoping for an even cheaper buzz (I mean money). The ECB did not, however, show restraint in monetization. Lessons learned from the Fed, it seems: the ECB does its routine clean-up operations by taking scraps of excess supply off the market (only €462 million of late – if it’s not billions, trillions, or quadrillions, you needn’t be concerned), reinforcing the belief that the credit markets are healed and auctions are going off without a hitch. If true stability had returned to the European debt markets, we wouldn’t still be witnessing negative rates on offer in the German T-bill market. That’s right, investors Monday paid the German government to hold 6-month government paper (yields of negative .0122%). That still indicates concerns about viability in the European financial system, with investors flocking to a safe haven.
Shall we cross the pond?
Nothing new happened this week. I take that back, we did see a new low in mortgage rates at 3.89% on the 30-year fixed. In spite of this action, rumors abound of another trillion-dollar program for housing to keep the “housing recovery” going. These rumors considerably boosted homebuilder stocks this week (the voter-seduction season has commenced – Washington will be whoring from now till the election to get votes – nothing new there). It’s reasonable to assume there will be other spending programs announced to stimulate one privileged segment of the economy or another before votes are cast.
Also this week, Obama noted the need to raise the debt ceiling another 1.2 trillion dollars. Nothing new there, either. The only surprise is that we are here again already. Will this new money take us through the election, meeting current budget obligations, or will this process be repeated again before November? For convenience, politicians might consider eliminating the debt ceiling altogether, since it appears to be only a formality that is never treated as an actual cap.
As we mentioned last week, there is data out suggesting improvement in the economy (the Fed Beige Book sees modest, but challenged, growth). The difficulty will be in sustaining that economic activity. It’s taking an inordinate amount of new debt to create economic statistics that show positive signs. These dynamics will eventually be self defeating, even if they’re enticing at the moment. We are seeing the results of easy money/credit in the economy, which are not all bad. As noted repeatedly, the lowering of rates, QE1 & 2, Twist, and other Fed operations in recent months have created some buzz, with good refinance activity and even a boost in consumer credit (by $20.37 billion in November). In the end, though, we find the practice of layering new debt on top of old to be ineffectual. For the time being, only appearances matter, and the powers that be would have us believe it’s no big deal.
2. Dollar/Gold Watch: Some say that the primary goal of a bull market is to throw you off before you can finish the ride. Said another way, volatility can leave you second guessing. In recent months, this has been the case with the metals, having withstood sharp corrections in the face of an ongoing dollar/Treasury rally. Last week, we made mention of the technical advantages the recent selloff had produced, but as the weeks and months progress, we will be shifting our focus to fundamental factors to justify further appreciation in the metals. For anyone paying attention, gold demand has been increasing worldwide, and in many cases at the expense of the dollar (in the case of record gold purchases from China) and the euro – suggesting that the dollar rally has been running on fumes (i.e., short covering). That said, more accurate data will be available to us in the weeks and months ahead. Stay tuned…
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