Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Fed Looks to Exit from the Inferno…
San Francisco Fed head John Williams stepped up to the microphone Thursday to deliver a well-timed message stating that the Fed was ready to phase out its bond purchasing program in a few months (which we doubt will last long, if it happens at all). We say well-timed because his statement appeared on a day when stocks were a bit weak in the knees, having taken it on the chin from some fairly dismal and unanticipated economic data. Housing starts fell 16.5% from March, jobless claims rose 9.75% from the previous week, and the Philadelphia Fed Business Outlook fell into negative territory (-5.2 for May). Yet following the news, stocks managed to scrape by with only minor losses – which they erased by the following morning. This leads us to believe that Mr. Williams’ comment wasn’t necessarily intended to scare stock bulls, but rather to support the dollar, thereby validating the rally in stocks and simultaneously suspending the forces of inflation. If so, he succeeded. To finish the week, stocks held to modest gains; the dollar spiked to an interim high, sending gold to within striking distance of previously set lows; while Treasuries were flat (see scores).
On balance, the bulls seem to have the upper hand in the battle over the dollar. Our view, though contrary to consensus, is that the dollar’s strength has less to do with the US economy, as the bulls contend, and more to do with the extreme biases of foreign central banks – presently those of the Bank of Japan. Considering that bank’s unprecedented commitment to $1.4 trillion in monetary injections over the next two years, combined with a well-established, overly confident, and levered yen carry-trade investor base, the resultant debasement of the yen has made most currencies shine bright – if only by comparison. In short, the BoJ is better at debasing its currency than the Fed, and until Japan’s now rapidly accelerating inflation rate derails the bank’s plans entirely, yen subservience and dollar supremacy may continue for the time being. Of course, that derailment might not take long. With Japan’s utility and oil prices rising as much as 20% every six months, citizens and businesses alike will soon be devoted to protest.
In any case, this is an aggravating time for precious metals investors. Prices for the metals continue to sag in the face of unprecedented monetary injections by the Fed and a debt-driven economy that can’t gain any noticeable momentum – an environment that should be unqualifiedly bullish for the PMs. We submit that, in the near future, this relative game between the euro, the yen, the dollar, and any other currency will evolve to a point where each is graded on an absolute basis against a basket of goods – as was the case just a few years ago. To get back to that point, the money printers will need to be discredited. For that to happen, both the US and Japanese economies will need to slip even further, and at a quicker pace than they already have.
VP Investment Management