Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Putting on the “Fix” – Again?
Each time the U.S. economy has faltered, gullible investors have been led to believe there is a solution to the problem – and there have been many so-called solutions. From the manipulation of the Fed funds rate to outright monetizing to leadership change and budget balancing, we have seen them all – in textbook fashion. The fact of the matter is that this country and its people have borrowed more than they can ever hope to pay back. The fiscal cliff at the government level is just one example; the same situation can be found at corporate, municipal, and consumer levels as well.
In that light, when we hear that Congress has reached a budget compromise that includes higher taxes and spending cuts, we have to ask the question: Tax whom and cut what, when solvency issues abound? Cutting jobs or entitlements at the government level shifts the burden to the private sector, where, last time we checked, jobs were scarce. Raise taxes? Large portions of the middle class are on the government payroll already – which includes as much as 70% of the population. Tax the rich? Well, that might produce revenues for the government, but there’s not enough there ($850 billion) to cure a $1.3 trillion deficit, and we suspect it won’t help the jobs situation to tax job creators out of existence.
All of this is to say that, when you’ve borrowed beyond your means at all levels, you really have only two choices: find a way to earn more or submit to bankruptcy restructuring. Given that many attempts to accomplish the former have failed, the latter is the last man standing.
Aside from an anemic rally in stocks on Friday in reaction to Boehner’s accord with Obama, the overall market seemed heavy. Lackluster corporate earnings reports and, to some degree, economic uncertainty post-hurricane Sandy may have contributed. Both the Dow and the S&P 500 broke below their 200-day moving averages, and have yet to stage meaningful attempts to rally back into bullish territory. Treasuries were surprisingly flat, and the dollar managed to rally above its 100-day moving average – but without any meaningful conviction (see box scores).
The ongoing dollar rally is nothing new. Its origins date to May of 2011, when Europe with all its troubles considered the US a safe place to put its money – a trend, by the way, that is losing considerable steam on two fronts. First, the U.S. is now experiencing economic problems of its own. Whether they rival those of Europe can be argued. What is important to note is that, according to the latest Fed meeting minutes, the Fed sees the need to escalate its stimulus plan (beyond Operation Twist) next year – most likely in the direction of outright bond buying. Second, judging by the latest TIC report (which measures foreign capital flows into the US), the world is souring on the US and its currency as a safety net. Net long-term purchases fell far short of expectations in September, totaling $3.3 billion vs. expectations of $50.0 billion. Net purchases have been in steady decline on a year-over-year basis for most of 2012. The September data was simply icing on the cake.
When such fundamentals will trump the technical dollar rally now in play is difficult to project. What can be said, however, is that the ground is eroding beneath its feet faster than ever. What perplexes us is why metals investors are selling at a time when the aforementioned fundamental backdrop is screaming to do just the opposite. As we said last week, both the euro and the dollar are set to be abused in tandem in the coming year. The dollar index will have a difficult time expressing this dynamic, so metals investors may do well to find a better indicator with which to measure gold’s progress.
VP Investment Management