Caught Between a Printing Press and a Hard Place – May 11, 2012

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

Caught Between a Printing Press and a Hard Place

It’s fairly clear from the events of this last week that the world economic issues are far from “contained.” They are in fact getting worse.

Spain has partially nationalized one of its banks. Greece is voting for a moratorium on ECB bailout funds, with an impending and probable “no” vote to austerity. The UK has entered another recession, demanding more BoE intervention. China is monetizing ($10.32 billion), reducing reserve requirements and cutting fuel prices in response to a contraction in export growth. France has turned to the dark side under Hollande, who promises less austerity and taxes for the rich that may extend to 75% of income. Italy’s borrowings from the ECB are still soaring, reaching record highs in April. The German Bundesbank is beginning to warm up to the idea of more inflation (money printing) to ameliorate the succession of its members – beginning but not ending with Greece. And last but not least is the issue of US jobs, where those employed full-time (-812,000) went seeking part-time work (+596,000) at an alarming rate in April. But what – me worry?

US markets hardly flinched this week, in what by rights should have been a healthy clip to the stock market. However, in a world of funny money, or at least a hint thereof, we finished the week with only modest losses in equities. Bonds and the dollar rose. The metals, along with most commodities, were smoked once again – perhaps disappointed with the Fed, which remains content to abstain from any significant plans to ease – so far (see the box scores).

Economic data here in the US was rather sparse during the week. Consumer credit ($21.4 billion) in March would have come in below expectations if not for a spike in student loans ($16.0 billion of the total). Demand for the loans rose when it was revealed that Congress (beset with deficits) may set the rates it charges for said loans a bit higher in the near future. Ex the student loans, borrowing could be described as anemic, suggesting the consumer may be running out of steam. Aside from this, the Producer Price Index fell year-over-year in April and consumer confidence (U. Michigan) rose to a four-year high.

Cisco missed at “beat the number,” citing – lo and behold – a slowdown in Europe. Its shares sank nearly 10% on the news. Meanwhile, both IBM and Intel went unscathed, making the rather audacious claim that it was “business as usual” across Europe. JPMorgan Chase disclosed a loss of $2 billion in its securities trading unit. The loss came as a result of failed investments (derivatives) in the speculative (small-cap) corporate debt markets. The investments were definitely one-sided, betting on what was hoped for – a more substantial economic rebound – that has yet to materialize.

As for the metals, sentiment indicators suggest that the prevailing attitude has tumbled to the cellar beneath the basement. It has been this low only once since 2004, according to the Daily Sentiment Index. This is not to suggest that a price low for the metals has been reached, but that we may be close to an end to the consolidation. At least some think so.

China’s imports of gold through Hong Kong surged more than six-fold in Q1, to 13.5 metric tons. European markets are also holding tight to supplies, where export markets of coinage have been reduced to a trickle. Swiss suppliers are reporting record sales internally. With that in mind, we maintain that the rejection of the metals (in a time of continued crisis) remains largely a US issue. Here, selling has prompted more selling – ironically, if we may use the rest of the world as precedent, in the face of assured quantitative easing as the economy weakens.

Have a great weekend.

David Burgess
VP Investment Management
MWM LLLP

2014-10-06T20:13:24+00:00