Money printing (“QE”) on hold – Mar 2, 2012

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

1. Money printing (“QE”) on hold.

As we surmised, there were no hints or calls for additional “QE” in Ben’s two-day semi-annual monetary report presented to U.S. lawmakers this week. Ben’s rational, of course, is that the U.S. economy is in the midst of an inflation-free recovery where “elevated” unemployment is considered temporary. This seemed to completely overshadow the additional €529.53 (3yr, 1% loans) the ECB injected into European banks the very same day the presentation began. Stocks in both the U.S. and Europe tried to shrug off the news with several attempts at a rally before “bleeding” by week’s end. By Friday the “tone” of the markets had changed, with cash and treasuries rebounding off recent lows (see box scores). We continue to believe Ben will not come to aid until markets (stocks) “cool off” and reflect to some degree the economic contraction that we believe is now gaining momentum.

The buzz word that has been “manufacturing” in the U.S. began to falter in February. The ISM index fell to 52.4 from 54.1 in January, while the prices paid component soared to 61.5 from 55.5. Total Vehicle Sales, also part of recent hype, rose again to 15.03M for the month of February, but the data doesn’t distinguish between “sales” and “deliveries”. GM dealership inventories (unsold cars and trucks) rose to another record of 667,096 vehicles, a 6.9% increase over the previous record set in November of last year. The only bright spot that helped markets for the week was U.S. Consumer Confidence data that rose to 70.8 in February from 61.1 last month – the consumer expectations component was off the charts (88 vs. 76.7 in January). Looking back on January and December data, things weren’t that much better. Durable goods order fell 4.0% (the biggest decline in three years), personal income and spending growth fell (in fact, they were negative in real terms), while U.S. home prices fell once again (in December) according to Case Shiller Composites.

In Europe, the LTRO’s (Long Term Refinancing Operations) have been great for the banks and sovereign debt markets (French, Italian and Spanish), but the net monetary benefit may be failing as a stimulus package for the Euro-zone (for several reasons). Germany’s retail sales fell 1.6% in January, while overall Euro-zone manufacturing and employment slipped in February. Manufacturing in the region contracted (with a reading below 50) for a seventh month in a row, while joblessness rose 185,000 to 16.93 million. Inflation also quickened (the by-product of the LTROs) to 2.7% in February from 2.6% in January. Oddly enough, even while inflation continues to rise, lending remains bottlenecked in the region. Out of the €1,175B in LTROs, €776.9B of the funds remains on deposit with the ECB. Pleased by this last fact, to be sure, would be the 62% of Germans who opposed the bailouts in the first place.

Asian stock markets are said to be embarking on a new “bull” trend. This was before the CNB hinted that further stimulus may be on hold, perhaps to mimic U.S. policy measures. All we can say is, if the rallies are legitimate in Asia, they will continue organically without CNB intervention. This we doubt.

Gold took it on the chin following Ben’s remarks on Wednesday. We had some notion that this could happen. As it turns out, it did. Gold fell some 90 points in total, breaking a few one-day records in the process, which the MSM took pride in reporting. Rumor has it that some 31 tons of gold were sold on the Chicago Mercantile exchange. Shortly thereafter, debates over why gold fell and not stocks or bonds became the topic du jour on most financial talk shows. To that, we would suggest that in the absence of additional money printing AND a rotational benefit from stock/bond markets, a funding deficit was, by default, produced in the metals. That is to say, once again Bernanke was successful in convincing the markets that the U.S. is recovering nicely without inflation – essentially praising themselves for a job well done. However, taking into account the aforementioned economic issues at hand, we suspect Bernanke and the MSM will not be bragging for much longer.

We also might add that as Americans continue to find reasons to sell gold, others continue to accumulate it at their expense. ETF holdings (globally) increased by 32 tonnes (or 70.6 million ounces) in February, while on Thursday (following the 90 point drop), India saw physical gold inflows three times the normal average (and the strongest volume since September) – according to UBS sources. That said, a psychological beating has been taken in the metals which can take some time to repair. The silver lining in these recent consolidations (selling sprees) is that they serve as a “coiled spring” when future catalysts for advancement re-emerge.

Thank you,

David McAlvany
President and CEO

David Burgess
VP Investment Management