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

U.S. Government: A Fading Source of Growth

Here at home, the markets have been tossed about by any news pertaining to the “fiscal cliff.” At the slightest hint of a Congressional accord, markets move up in violent order; rumors of an opposite nature cause them to move down to the same degree. Of course, a balanced budget would certainly be a good thing, surpluses and government thrift better still. No doubt, they are all necessary complements to a healthy economy. But getting there, as far as we can see, is an entirely different matter. Doing so entails courses of action that investors appear reluctant to accept – ones that necessitate employing the negative (but healthy) forces of capitalism, regardless of the multiple “quick fixes” that inveigle us to believe otherwise.

As you may recall, our government, in concert with the Fed, assumed the massive financial burden necessary to pull our economy and markets out of the grave aftermath of the crisis of ’08 – the “fiscal cliff” of today. Therefore, in laymen’s terms, it is essentially the government now throwing in the towel on that role. Since ’08, the Fed increased its balance sheet by approximately $1.9 trillion and the U.S. government expanded its debt load by $4.7 trillion – all in the hope of “stimulating” the economy back to surplus. Of course, that did not happen. Even though the economy improved since ’08, it came at a cost the government could not afford and at a high cost to consumers via the inflationary tax. Needless to say, the deficits didn’t shrink; instead, they grew substantially (now at $1.4 trillion).

That said, any attempt to reduce the deficit through spending cuts or higher taxes would be bearish for the economy. Complicating matters further, any action that stood to increase the deficit could be equally bearish, as it may serve to raise long term interest rates – hence the quandary/political mess in Washington. It’s clear which direction President Obama wishes to take us. His budget plan, released Thursday, embraces the status quo (borrowing and spending). Phased in over the next decade, the plan includes a $1.6 trillion increase in taxes, an unlimited debt ceiling privilege, $50 billion in stimulus, with an extremely under-matched $400 billion in spending cuts. Likely, if passed, higher interest rates would be expected to appear sooner rather than later – a dynamic the Fed will no doubt have the pressing need to control through additional QE.

As we see it, this is a situation that should be, and eventually will be, bullish for the metals and bearish for stocks and bonds. This has not been the case in recent weeks. Rather, the markets remain optimistic that a quick fix is still possible, despite the failing precedent set in Europe. So there continues to be some headline risk until it becomes clear that there is in fact “no way out.” We’re facing the consequences of a three-decade-long, debt-based spending binge that has reached a critical limit.

Next week, we’ll resume our normal analysis as we take a look at U.S. economic data (skewed by super-storm Sandy of late) – in particular the unemployment release due Friday and an up-to-date technical read on markets.

Best regards,

David Burgess
VP Investment Management