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

For the Present, the Past May Matter Most to the Greenback

For those paying attention, the Fed did not initiate plans to “taper.” It cited a weaker-than-desired US economy at present. In particular, unemployment remains “far from levels everyone would like,” while both interest rates (of the higher sort) and fiscal policy are restraining growth. Tightening of financial conditions at this time, as Bernanke stated, could stunt growth even further. Therefore, the Fed concluded that the $85 billion/month bond buying program will continue without “preset course” until more evidence of growth can be realized.

MWM-13,-9-20-Box-ScoresThe decision caught several observers off guard and perhaps unnerved a few others. Prominent in the latter group is Fed president James Bullard, who insists that tapering will/should/may commence as early as next month – citing the usual refrains. As to that, we are not entirely sure; over the course of recent history, crazier things have happened. But what should be understood about QE within the context of one of the most leveraged societies in history ($56.0 trillion in 2013, up from 18.6 trillion in 1995) is this: Without QE, financial turmoil of the worst order would not be further delayed. It would commence post haste, so we find it a bit cavalier or naïve to argue for QE’s removal.

Gold spiked over 55 points on Wednesday in response to the Fed’s remarks, taking silver and the mining shares with it. Fair economic data, with Bullard’s reviving of the grossly negligible ($10 billion) tapering debate, sent gold off once again (along with stocks), shedding a bit more than half of Wednesday’s gains by the close on Friday. As for the economic data, August existing home sales (up 1.7% from July) were a bit stronger than expected, but this was largely due to folks trying to front-run the higher rates Fed tapering was expected to cause. August housing starts (up 0.9%) and permit data (down 3.8%), were released Tuesday prior to the Fed comments. Starts were up only on favorable revisions to July. Both developments were treated as a non-event.

Away from all the noise surrounding the Fed, the US dollar continued to slip beneath everyone’s radar. As seen in the chart below, the year began with the dollar index at roughly 79.80. Today the index sits at 80.44, still higher than where it started despite the $793 billion added to the Fed’s balance sheet year-to-date.

Screen Shot 2013-09-20 at 3.47.39 PM
The upshot of that fact is that gold bears can argue about future Fed tapering all they want. It may come down to what the dollar hasn’t done versus what it could do if the Fed were to engage in even a small amount of tapering. Said simply, the dollar may have some ground to make up – to the downside. Below 80.0, technical traders should begin to take dollar weakness and gold as a hedge a bit more seriously.

Early indications of 3rd quarter earnings results are beginning to show. It appears that the financial sector may cause a bit of turbulence this time around. Jefferies & Co., a US-based securities and investment firm, reported an 82.0% drop in earnings for the quarter, citing weak fixed-income markets worldwide as the primary cause. Deutsche Bank AG followed up with a warning along similar lines in overnight trade Thursday. Deutsche Bank reports results on October 29th.

Best regards,

David Burgess
VP Investment Management