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

(F)alling (O)ver a (M)onetary (C)liff

In Wednesday’s FOMC meeting, policy was more about words than action. As expected, the Fed reduced (tapered) its asset purchases by a token $10 billion to $35 billion per month. However,Yellen tempered that decision by making it clear she was still “uncertain” about the economy. Her uncertainty was manifested when the Fed dramatically lowered its GDP (2014) forecasts into the range of 2.1 to 2.3% (prior estimates called for 2.8-3.0%) and raised its inflation forecast to 1.5-1.7% (from 1.5-1.6%). Stocks interpreted the forward revisions as bullish – since QE will surely follow a weakening economy. But the Treasury market kept the Fed honest, as rates edged up during the week in a no confidence vote for more inflation-producing QE. Indeed, interest rates remain the major obstacle for the Fed and the US economy, moving forward.

MWM 14, 6-20 Box ScoresCall it inexperience if you will, but Yellen blew it here (in my opinion) by being a little too transparent for the benefit of stock speculators instead of taking a hard line on tapering based on improving economic conditions – even if they are marginal at best. And to the point of “marginal at best” for those who say that higher rates are merely a sign that things are improving, housing starts fell 6.5% and permits 6.4% in May. These figures suggest that higher interest rates are trumping the dwindling bankrole of the “hedgies” (in a tapering scenario). They are actually causing the housing and other critical sectors in the economy to contract, not the other way around.

Gold may very well have turned the corner, thanks to the Fed’s prognostications. It seems to be feeding on the outlook for inflation and/or acting as a hedge against an overheating stock market. Gold broke through $1,300 quite easily on Thursday, topping out around $1,321 before falling back into a brief pre-weekend consolidation that may culminate (next week)in a test of 1,300 for support before advancing again.

For defensive assets such as the precious metals, much will depend on a change in attitude with respect to stocks. For now, stock bulls seem dead set on a solid finish to the second quarter in June. Beyond that, stocks will have to grapple with increasing inflation (think liquidity trap for the Fed) and insolvency risks, both here and abroad. In regard to inflation, US gas prices are now at pre-2008 crisis levels, as are several food items (meat, fish, eggs) and health care costs. And in the insolvency department, Argentina joined the list of debt-drowned countries, with a possible sovereign default on the horizon. With all of that in the mix, stocks have plenty to overcome, which the precious metal market should continue to discount favorably.

Best Regards,

David Burgess
VP Investment Management