Bernanke Veil Lifted – July 12, 2013

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

Bernanke Veil Lifted

While attending the NBER conference in Boston on Wednesday, Bernanke took the opportunity to conduct some damage control by offering a few clarifying remarks regarding monetary policy. A “highly accommodative policy for the foreseeable future is what’s needed in the US” was the conclusion rendered – negating previous misconceptions about “tapering” engendered by the last FOMC meeting.

Markets worldwide took the news well. US stocks scratched at new highs, Treasuries managed a small bounce, the dollar tanked, and gold spiked, while world markets (both bonds and stocks) simply gained back some lost ground. US stock prices settled down a bit the next day, however. United Parcel Service took away the punch bowl when it cut its earnings forecast for all of 2013 – citing a slowing economy in the second quarter. Shares of UPS lost about 6.0%, and the news was seen as a negative for the industry. Fed-Ex shares fell 2.0% in sympathy on Friday.

wrapIf one can put a summation sign under all of this, it’s quite possible now that we’ve got Fed stimulus (which never halted) combined with a weakening economy. It’s a problem, albeit in its early stages, that the Fed must find a way to navigate – if it can, of course.

Bernanke’s recantation followed, perhaps predictably, the approval for stricter reserve requirements for banks. A 5.0% proprietary capital-to-leverage ratio will be imposed on the eight largest banks, with a 6% minimum enforced on their subsidiaries. All but Bank of America and Wells Fargo fail to meet the new standards, with most banking officials objecting on the grounds that the new laws will unduly impair lending efforts. We wonder: If banks don’t deem it necessary to support a low-rate environment, what will lending will look like if rates continue to spike?

It seems noteworthy that, while the US remains obsessed about producing low or negative real rates, the rest of the world is gradually moving in the opposite direction. Many countries are periodically strengthening their currencies to reduce discomfiting levels of inflation. Taiwan, Vietnam, Indonesia, Philippines, Thailand, South Africa, Poland, Turkey, and Argentina have moved this direction, to name just a few. This week, we saw Brazil raise its benchmark rate by 0.5% to 8.5%, while India moved to reduce bearish speculation in its currency and restrict the sale of gold during peak season. Keep in mind that this is occurring while their economies are slowing, suggesting that inflation is becoming the target of policy, not growth, per se. This stands in sharp contrast to the last several decades, when a weaker home currency and a stronger US dollar were desired to spur growth in exports to the US.

That said, the dollar came under considerable pressure this week. With the ECB and BoJ relatively quiet for the time being, the dollar may come under additional pressure in the near term. Breaking 80.0 on the dollar index would likely draw greater amounts of attention to the precious metals, which have suffered an identity crisis up until this week’s convalescent bounce. And gold’s breaking above 1300 would suggest 1370 is next in line as a price target.

Best regards,

David Burgess
VP Investment Management