Dave McAlvany and I are both away from the office this week, visiting with clients at Freedom Fest in Las Vegas. For that reason, we offer a brief commentary of this week’s events.

1. Boiling Point? Bernanke spoke on Wednesday, indicating he was “prepared to respond” if further stimulus is needed to aid the failing U.S. economy. After witnessing the negative impact this choice of words had on the dollar (and other markets) he recanted his statements the very next day – but to no avail.

The market, in our opinion, may have made up its mind this week with respect to three things. First, that the economy is not sound, contrary to what the press and the diehard bulls may believe. Second, that monetary stimulus, although a necessary evil, produces inflation of the crippling kind. And third, that commodities, the metals in particular, offer the best place to hide.

So what was once bullish for stocks (liquidity), may be no longer. Referring to this week’s market action, stocks hit the skids. The Dow, S&P 500, and Nasdaq 100 were all clipped for 1.4%, 2.06%, and 2.05% respectively. Bonds saw some meager gains (more on that below), with the 30-year Treasury shedding only 3 basis points to yield 4.25%. Away from these markets, the dollar was off 0.07%, commodities were up 1.20%, and the metals out-shined other options once again, with gold up 3.2% and silver 7.07%.

2. Little Cause for Cheer. Economic data barely made a dent in sentiment this week. Retail sales stumbled along at a 0.1% rate in June and Michigan confidence figures showed a fairly large drop to 63.8 from 71.5 in April. A weak job market outlook and softer home values were said to be the cause.

Google shocked the street with a surprisingly good earnings report. The advertiser saw its shares pop for 12%, but the event was largely treated as a company-specific event, failing to inspire the broader market higher. JP Morgan and Citigroup beat estimates, boasting solid growth – but beneath the surface accounting gimmicks ruled the day. Citigroup’s earnings in particular would have been cut by two thirds if not for drawing on loan loss reserves ($2B worth).

Bank stress tests in Europe, where only 8 banks failed, was a non-event relative to downgrades issued by the rating agencies. Debt of the PIIGS fell for most of the week, while investors fled to the German, French, and U.K. debt markets for safe-haven.

On that note, the “risk-off” trade and the Eurozone crisis has usually benefitted the U.S. Treasury market overall – but the outperformance in German, French, and U.K. debt this week may be suggesting that U.S. solvency issues are the bigger elephant in the room. Stay tuned…

Have a wonderful weekend.

David Burgess
VP Investment Management

David McAlvany
President and CEO