Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Yellen Puts Tapering Argument to Rest?
In yesterday’s conformation hearing in front of the Senate Banking Committee, Janet Yellen made it clear that she has no intention of tapering the Fed’s historic asset purchases program (QE) until the economy “improves.” Keep in mind, the Fed’s QE program has been active now for an unprecedented five years (since March, 2009), and has “printed” out of thin air nearly $2.9 trillion. Further, the US government has borrowed $6.0 trillion over the same time period.
This prompts a very important question: If after this record-breaking stimulus we still haven’t recovered, then when exactly will we? The answer to that seems plain to us: It’s possible, but only in a post-crisis environment. We have grown dependent on QE. Even though its benefits are failing us at an increasing rate, abandoning it partially or altogether would be even worse, bringing on immediate disaster. So despite the many calls for tapering, Yellen’s goals as Fed governor are bound to be very linear in scope – printing, perhaps in larger quantities than today, until such point as the financial system breaks.
Supporting that theory is a host of questionable economic data released this week. In the US, industrial production fell -0.1% in October, down from a 0.7% pace in September. The Empire State Manufacturing Index fell by 2.2 when a positive 5.0 was expected. In addition, retailer Walmart warned that its holiday sales would decrease on a year-over-year basis. Overseas, German (0.3% 3Q, vs. 0.7% 2Q), French (-0.1 vs. 0.5%), and Japanese (0.5 vs. 0.9%) GDP growth slowed, while the U.K. experienced a drop in October retail sales of -0.7%. Stock markets responded positively this week on the expectation that central bank stimulus will continue unabated (see box scores).
Nonetheless, building on our earlier comment, the benefits of QE are eroding faster than the stock market cares to admit. We believe Walmart’s warning is a reflection of that. Waning foreign creditor support for our ever increasing debt (for example, a record $1.0 trillion of corporate debt issued YTD) is forcing US interest rates higher at the expense of US consumers, hence the lower confidence levels. And despite the efforts of foreign central banks (i.e., the ECB, BoE, and the BoJ) to manipulate their currencies lower relative to the US dollar of late, the dollar kept sliding this week. US and European economic woes are more aligned than they have been in several years. Therefore, since money printing is not in the ECB’s current plans, currency traders are favoring the euro over the dollar. This is a trend we expect to continue in the near term.
That said, we expect gold to gradually pull away from the consolidative area of 1,285, working its way back above 1,300, for starters. That may be a bold statement given the negativity surrounding the metal, but, with the growing uncertainty in the economy and the official stamp of approval for QE by Yellen, a breakout is gaining in probability.
VP Investment Management