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

The Last Item to Cut is the Printer

Kicking the can down the road just became a little more difficult for those on Capitol Hill. The resulting gridlock over sequestration issues has allowed $85 billion in automatic spending cuts (job losses of 750,000) to take effect without any “offsets” in place to support the economy. Obama called it a “slow grind” on the economy, and conveniently placed the blame squarely on the shoulders of Republicans who were just so uncooperative during the negotiations. For the record, those who think there’s a viable solution to our fiscal issues other than budget cuts is deceiving themselves. Placing blame on either side is simply political scapegoating, nothing more. As we have said here before, in the absence of a non-credit-induced “recovery” worldwide, there can be no “growing” out of our fiscal problems. In fact, they can only worsen.

U.S. stocks, however, took news of the cuts rather lightly. After all, when you have a printing press, as Bernanke made clear Tuesday, who needs to worry about spending cuts? Bernanke monetizes $85 billion in a month’s time, let alone a year. So, for the week, stocks maintained their ground, finishing with modest gains. The defensive areas (utilities and staples) did most of the heavy lifting, alongside of what seems to be a growing yet gradual shift into “safe-haven” assets, namely Treasuries and the dollar (see the box scores).

3-1-13 Box Scores“Cuts,” by the way, have already been in effect for some time (i.e., at the Pentagon and the post office). Whether mandated by gridlocked politicians or natural market forces, they are extant nonetheless. What is important to note is that the task of saving the economy is shifting at light speed in the direction of the Fed, which will most likely take on the lonely task of paying back our debts, national and private, in the form of printed (monetized) dollars.

What is not clear at the moment is when the precious metals will begin to discount the obvious and growing dependency on QE, and the resultant inflation or devaluation of the currency it causes. No doubt, efforts will be made to convince metals investors that no such developments will occur. It was just last week that the Fed was discussing possible reductions to QE – until attempts to prevent sequestration failed. As for the inflation gauges, hedonic adjustments are likely to be amplified in full force. A perfect example of this is found in Japan, where the nation’s CPI supposedly fell 0.9% YoY into February, even as its currency collapsed nearly 16% over the same period of time.

What can be said is that the “cover-up,” if we can call it that, will at some point end – most likely with a revolt in the credit markets of the world. Precious metals investors, at least in the physical market, understand this better than anyone else. Coin sales at the U.S. mint have risen sharply – 283% for gold and 126% for silver on a YoY basis ending February. That increase in physical demand has been offset by “players” in the paper markets, who have dominated the price action of the metals (speculators in these markets have unloaded nearly 40% of their net long positions, WoW into February 19th). Even so, an exhaustion of sellers and a Fed ready to debase the currency further fuels our optimism with respect to the metals.

Best regards,

David Burgess
VP Investment Management