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

Just Keep Printing and Hope Nothing Bad Happens…

I am sure that many of you have read about and have watched with amazement the events now unfolding within the EU, specifically to that pertaining to the Cypriot banking crisis.  So I won’t spend a great deal of time here rehashing what the papers have already disclosed.  Though it appears that the EU, with support from the IMF, has mandated bailout terms to Cyprus which in part has included the confiscation of depositor assets in the form of a tax or levy against savings – a big chunk of which belongs to the Russians.  Overwhelming protest erupted in short order (derived from internal and external parties) which was effective in coercing the Cypriot parliament to reject the proposal by a sweeping majority.  Since then, there has been some political posturing and scapegoating, with Germany on one side, Russia on the other with Cypriot banks in the middle biding their time till they reopen – someday.

Meanwhile, US markets have been busy treating the entire Cypriot affair as a complete non-event.  The Dow scratched at a new high yet again this week.  Bernanke reiterated the “all is well” proclamation in the latest FOMC meeting.  But, just because, nothing significant has really happened as of yet, doesn’t imply that nothing will.  Cypriot banks are still closed through Monday (at least), and when they reopen, banking sector “trust” will be put to the test – and not just in Cyprus.  “Wealth taxes” are being discussed globally – in Italy, Spain and New Zealand to name a few.

Unlike the few however, the US has access to a printing press, which our foreign creditors have so far allowed us free license to use when either our banks and/or our economy is found faltering.  But make no mistake; printing money in gross excess is just as much of a tax on the people as a direct levy against your savings.  The tripling of gas prices, among other things, over the last decade, combined with lowering the interest earned on savings to near zero is a primary example of how folks in the US have been pinched – slowly but surely.

That said, whether it comes to money printing or confiscation of assets, the real question is whether the collection of wealth and its uses (to bail out the irresponsible) is in fact promoting stability and economic growth as we are told? In answer to that question, we humbly say…nope.

Outside of Russia’s distaste for easing and its subsequent fight against inflation we made mention of last week, “QE” may also be losing its effectiveness in other markets of slight importance.  In the U.S., earnings (4th quarter 2012) have now declined, although subtly, for the third consecutive quarter, despite the Fed’s billions ($89B so far in March) infused each month (through February of this year, things aren’t improving, according to Walmart, Caterpillar, Adobe, Fed Ex and Tiffany’s).   While in Japan, the results of massive printing efforts has produced an unwanted and dramatic rise in import prices (11.9%) relative to prices received on exports (-2.9%) according to recent trade reports.

It may therefore go without saying that while profits fade and stock prices soar, the probability of a dislocation in US markets is increasing exponentially.  Though the Street has shown little concern for such developments thus far, some are beginning to seek refuge, albeit slowly, either in bonds, the dollar or other such “safe-havens”.  The precious metals in particular have begun to show some promise, consolidating around recent lows but more importantly accelerating higher when fiscal and economic conditions (globally) are revealed as to just how “uncontained” they really are and continue to be.

Thank you,

David Burgess
VP Investment Management