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

Abbreviated Market Recap: The markets were a bit of a snooze this week as most assets remained in a trading range, possibly in anticipation of Chinese inflation data to be released this weekend. With property values surging again, and some homebuilders showing growth of 140% year over year, China’s CPI data is expected to come in at the high end of expectations. The markets were mixed ahead of the release, indicating a split decision on possible central bank reactions.

On the home front, Treasuries were mixed as the yield curve began to flatten this week (short end rising faster). Overall, yields rose along the entire curve as supplies increased and demand, especially from foreign creditors, softened. Stocks, oil, and gold remained somewhat strong, following the usual economic weakness (Fed beige book) and the coinciding promise of increased Fed easing. We would emphasis the word “increased” here, as the Fed continued to expand its balance sheet aggressively (by $3.753B) due to the monetization of Treasury notes. Did Fed QE 1.0 ever end?

In Europe, renewed solvency issues in Greece (not having disclosed prior bookkeeping practices) and in Ireland have the markets questioning “stress test” veracity. Prudent banking seems as novel as a four-leaf clover. Anglo-Irish was split in two, with one entity taking on the bad loans (80% of the total). Fear of an economic slowdown in Germany also hit the tape as new orders (durable goods) slumped by an unexpected 2.2% in July after surging by 3.6% the previous month.

MWM remarks: Tension is definitely building, which will favor the safe havens. Markets (including gold) have experienced a fair bit of short covering and perhaps renewed speculative buying in areas that would benefit from further central bank easing. This, combined with the current and publicly hidden Fed monetization, has seemed to create an endless bid in the markets across the board, with the exception of the company-specific (National Semiconductor) issues that come and go. Whether the expectation of ballooning Fed easing is baked into the market or not at this point may prove to be irrelevant. The combination of a contracting economy, critical debt loads, and weakening support from our creditors poses a tough, “no win” situation for the Fed, whether easy or tight. At some point, and we believe it will be soon, there will be only a few places left to run for investors – recent strength in defensive areas such as gold may be suggesting just that.

Have a great weekend.

David Burgess
VP Investment Management

David McAlvany
President and CEO