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

1. Financial Reform: We had a chance to review, in part, the new financial overhaul bill that was approved today, and we are left feeling a little cold.  The bill addresses quite a few issues – from the banking sector’s involvement with speculative investing (and derivatives) to protecting consumers from those nasty card companies.  If you’d like to view a summary of the bill, you can click here.

We noticed, however, that some major components – causes in part of our current crisis – were left exempt.  Two in particular: the Fed and the mortgage giants Fannie Mae and Freddie Mac.

These entities, with some new but mild oversight, are left with power intact to set interest rates (Fed) and lend (Fannie/Freddie) at will.  This bill may go down in history as yet further legislation that adds bureaucratic inertia to the system at the expense of the taxpayers, while leaving monetary power within the corrupt financial system untouched.  Obama could learn something from recent German austerity measures in this case: Act responsibly (stop accumulating debt, cut spending, lower taxes).  The German markets have been the strongest in the world lately.  The U.S. markets, on the other hand….

2. China: Be careful what you wish for, Tim. China de-pegged its currency on Monday in an effort to let the Yuan “float” against other major currencies.  This began as a jobs issue and may end as a U.S. interest-rate issue.

A strengthening of the Yuan would bring some jobs back to the U.S. over time, but in the short run U.S. interest rates may rise as a result – causing unintended economic consequences.

Part of the reason our rates remain low is China’s appetite for U.S. Treasuries ($2 trillion-worth, cumulatively, to date). In our opinion, eliminating this relationship would be a long-term net positive for the U.S. (driving us closer to a cash-driven society), but would hurt industry and housing further in the short run.  We doubt the Chinese are serious, though (they can still choose to intervene in currency markets), as slight disruptions in their currency translate to massive swings in their balance of trade.

3. MWM housekeeping: We have been getting several questions regarding portfolios, some of which have been similar in nature.  For efficiency’s sake, we thought we might answer a few in this commentary on a more regular basis, beginning next week.  Look for them then.

Have a great weekend!

David Burgess
VP Investment Management

David McAlvany
President and CEO