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

Central Bank Barn Dance…

Fiscal solutions, not monetary ones, need to be pursued.  Throwing money at problems has become the cure du jour, but this solution has brought only temporary reprieve to the crisis pressures over the last three to four years.  The latest wave of central bank efforts will prove to be no different.  Chairman Ben’s comments this week were as committal as the average twenty something.  “We stand ready,” translates to “nothing unless we have to,” at which point “we can’t be blamed for trying.”  President Obama (as well as Chairman Bernanke) continues to point to European issues as the source of concern – an extremely convenient distraction to our brewing troubles here at home.  As to that, we do believe that action will eventually be taken by the Fed at a juncture when political and economic circumstances permit, contrary to Bernanke’s testimony earlier this week.

For now, Ben has what he wants: rates that are low and going lower, feeding a credit-hungry consumer while nurturing the misguided notion among our creditors that we are still a AAA nation.  That said, anything that would raise rates would compromise Ben’s present calm and might precipitate the loss of what hair remains on his scholarly head.  As evidence to that effect, we reference the 2009 QE efforts that led to a swoon in 10-year Treasury rates.  Therefore, it is our opinion that any Fed initiative, however slight, toward QE could upset the delicate balance between the cheap credit and the economic stability that it yields.

Instead, we surmise that the Fed will amplify its advantage by doing nothing (for now), letting other central bankers panic first with the reinstatement of interventionist policies (i.e. China and Australia).  Such (in)action buttresses the case made silently by the Fed that the dollar, and by extension our bonds, are worthy among “safe haven” investments.  In contrast, let us remember that money has no memory – and no loyalty – and that the same illogical and or irrational judgments that have benefited us today can go just as quickly in the other direction, as we believe they will. . . taking the dollar and interest rates to unbearable levels.

We began with a simple truth and end there as well. Fiscal, not monetary measures need to be employed NOW so that when our rate structures change and the cost of capital is again on the rise, we can shoulder the burden with reasonable expenditures and with tolerable short and long term liabilities.  Easing tomorrow’s burden begins today – by addressing the budget, however painful that may be, before a state of insolvency visits our shores from the Mediterranean.


David McAlvany
President and CEO

David Burgess
VP Investment Management