A Few “Defectors” in the Crowd – March 15, 2013

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

A Few “Defectors” in the Crowd…

For those paying attention, emerging market indices fell again this week, retracing their lows of the year. Meanwhile, U.S. markets, swelled with Fed-provided bravado, charged on to new highs. But in the race to debase, weaker runners often fall out first, and this may be happening with some countries trying to deal with excessive American and Japanese money printing. Bloomberg ran an article Friday morning titled “Russia Central Bank’s GDP View Dims as Rates Kept on Hold,” which stated that Russia Central Bank Chairman Sergey Ignatiev has declared war on inflation. The article goes on to say that inflation in the country has risen at the fastest pace in 18 months, creating resistance to all government attempts to revive the economy and causing the central bank to change its wording on policy. It now says that the risks posed by a tighter monetary policy would be “insignificant.” In any case, the takeaway from the market behavior and the article is that the benefits to QE may be rapidly diminishing in world markets – i.e., those of China and the U.K. – where we are finding it causing more harm than good.

3-15-13Judging by the boldness on display at home in U.S. markets, QE still dominates investor thinking – impervious, it seems, to concerns regarding inflation or any other consequences. Though a few chinks in that armor appeared this week, it seems to us that they have gone largely unnoticed or ignored – for now. U.S. CPI figures for February rose 0.7%, the fastest pace in four years. We wonder if the BLS really meant to let that figure slip out. But the report showed gas prices rising 9.1% month-over-month, which also contributed to most of the 1.1% rise in retail sales reported earlier in the week. Combine these inflationary pressures with the higher interest rates seen recently in mortgages, and you’ve got a one-two punch for consumers to deal with in coming quarters.

That said, it will be difficult for stocks to maintain the lofty valuations achieved recently – and perhaps equally difficult for the metals to ignore inflationary pressures now stampeding onto the scene. On a personal note, I would urge everyone to take notice of the trends that are emerging away from our shores, away from our headlines (as noted above), and prepare accordingly. The size and scope of the QE in progress is mind-boggling, and with it will come massive adjustments to our standard of living, our markets, and eventually our currency. Riding and/or joining the consensus wave in U.S. stocks – enticing as that may be – while simultaneously ignoring the insurance policies (inflation hedges) available to you, could prove costly, to say the least. This is now the third time U.S. markets have found themselves in this “manic” position since the dot-com bubble of 2000. We would be hard pressed to conceive of a way a fourth could occur. Food for thought.

Best regards,

David Burgess
VP Investment Management