Blowing Credit Bubbles – Mar 16, 2012

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

1. Blowing Credit Bubbles: Markets continued to “melt up” following upbeat forecasts about the economy from Bernanke, decent jobs numbers (on the surface), and the continued expectation of additional quantitative easing (QE) once “Operation Twist” reaches its conclusion in Q2.  Contributing factors such as Thursday’s options and futures expiration and rumors regarding Obama’s desire to release the Strategic Petroleum Reserve (which helped the transportation index spike 3.2% on Thursday), kept stocks moving higher until weeks’ end – see the box scores at right.

Timing is everything, especially when investing in the short run.  Betting against stocks has been a challenging process, to the say the least. For now, the bulls and/or those capable of rigging the markets are still in control of the mood.  For the last eight months, vastly lower interest rates have provided debtors (most of America) another chance to refinance and spend their way to prosperity (in addition to carry-trade dynamics) – giving way to the semi-decent economic news we have enjoyed lately.  However, if one weighs the lower cost of debt against rising oil prices (inflation), the result eventually is a zero sum game for consumers.

Furthermore, now that interest rates are beginning to rise on the heels of an “improved” economy, the consumer has no choice but to turn to the last and most desperate source of funds – revolving credit (see chart below).  Suggested here is that the economic “recovery” now in place is on shaky ground, unfortunately building on the worst kind of debt.  Incidentally, JP Morgan, the largest credit card bank in the country, reported a potentially disturbing uptick in delinquent credit card accounts this week.

 

2. Precious Metals: Right Action, Wrong Pretense: It’s both encouraging and discouraging to see the metals get slammed – ironically within the context of monetary developments that are decidedly bullish for gold and silver in the long run.  On the one hand, metals fell while stocks rose, once again disproving the notion that these two markets are positively correlated. This is good, as gold is viewed properly as a hedge against stocks.  On the other hand, gold bulls will need to exercise patience and resolve concerning their convictions. For the moment, a foolishly bold crowd of debtors has taken control of the asylum, but without commensurate wage (jobs) and earnings growth. Personal bankruptcy looms, and with it a rekindling of demand for safe havens.

Best regards,

David Burgess
VP Investment Management
MWM LLLP

2014-10-06T20:22:52+00:00