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

To Taper or Not To Taper – It’s Still the Question

With a resurgence of Fed tapering speculation and a commitment by the ECB to promote growth by lending in the eurozone, the US dollar witnessed a sharp two-day gain. Stocks, bonds, the euro, and precious metals were simultaneously discounted. US stocks proved to be the more resilient of the group, but then again it’s month end, a time at which Wall Street performance gaming takes precedence. As for the tapering talk, the Fed made no reference to it in their official statement released Wednesday. In fact, the Fed merely stated that the “downside risk to the economy has diminished” – a comment that for all its restraint was enough to get the tapering fanatics excited.

MWM 13, 11-1 Box ScoresAs for the ECB’s decision on lending, recall that last week Draghi was ballyhooing his intention to adhere to the Basel III banking standards as a means to maintain the ongoing “recovery” in the region. Yet, with eurozone unemployment at record levels (12.2%), slumping retail sales (-0.4% in Germany) and consumer spending (-0.1% in France), and benign inflation (of the economic variety), the ECB performed a policy about-face and favored the very thing that has plagued the eurozone for the last several years – additional bank leverage.

The U.S. position, policy-wise, is and will be no different. Those who think that tapering is just around the corner should consider that long-term interest rates, though having improved somewhat, are still a long way from helping stimulate the economy – a notion reinforced by the spate of U.S. economic data that continues to disappoint. U.S. durable goods orders (-0.1% for September, excluding transportation goods), pending home sales (-5.6%, September), retail sales (-0.1%, September), and the ADP employment change (130,000, October) all failed to impress. Though the government shutdown (which never posed a financial threat) has been tossed around as the reason why, we find that the Fed’s monetizing of $100 billion during the month of October more than likely offset any setbacks the shutdown may have caused.

Nevertheless, the precious metals and the dollar have been thrust in opposite directions by the very loose and unfounded notion that Europe is in far worse condition than the U.S. True or not, that notion could cause gold to test the familiar $1,285 level and the dollar index 81.40 over the next few days. If that occurs, metal bulls and dollar bears would still retain a slight edge, both technically and, more importantly, fundamentally.

The Fed’s decision to extend bond purchases will be driven by the direction of interest rates and the impact they have on the real economy and jobs, not by the stock market. Rising rates are poison to an indebted U.S. economy, period. That said, if tapering talk continues to damage the bond market as it has, the Fed will need to put the tapering issue to rest – and fast, since interest rates at current levels have already begun to take a toll on the economy (i.e., slowing home and auto purchases). If the ECB serves as proxy with regard to the timing of such an event, it could be only a matter of weeks before the Fed “officially” (pertaining to perceptions only) joins the race to debase. Gold’s rebound from the intra-day lows on Friday may be reflecting that thinking.

Best regards,

David Burgess
VP Investment Management