Notes for the week – Sep 28th, 2012

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

Notes for the week . . .

Benevolent Mr. Geithner has suggested we reform how money market funds (MMF) are regulated. Proposals include no withdrawal rights under times of stress (I thought times of stress were behind us, and we were in a recovery?), and a floating share price versus the classic “buck” a share. If prices do float, each fund will be marked to market on the basis of the underlying investments – but the real shift in market appraisal comes from the definition of “liquid” as “liquid under certain circumstances.”

There are more than trivial consequences to this. We would assume that 1/3 of the assets in MMF (2.56 trillion total x .33, or 844 billion) would be driven to short-term T-bills for the liquidity guarantee – why take the added risks in money market? What Mr. Geithner presents as sensible is in fact quite sneaky. The Treasury would gain a new source of T-bill and note demand. That’s clever. The consequences of a shift in rules play directly to the benefit of the Treasury, which says something about how the Treasury views future funding requirements – desperate is one word that comes to mind.


In Paris, we suspect Luis Vuitton travel luggage will be selling like hotcakes through year-end – F. Hollande is solidifying the 75% tax rate for earners of €1 million or more – “Honey, let’s pack those bags.”

Spain, unable to quell street violence this week, seems to have reached out to the US for fiscal advice: €3 billion was moved from the pension reserve to the Spanish treasury. We did the same thing, raiding the Social Security trust fund here in the US a number of years ago. Egan Jones announced good news, however. This week, the Spanish downgrade was from CC+ to CC. It could have been worse.

U.S. Economic Data

On a positive note, consumer confidence rose 9 points to 70.3 in September, and initial jobless claims fell to 359,000, below the expected 375,000. This is merely to say that the bloodletting has slowed – this is not a recovery story yet. We’ll get excited when food program dependence begins to decline and the duration of unemployment recedes. Both of these numbers remain tragically high, with the latter remaining around 40 weeks (see the St. Louis Fed chart below).

On a less positive note, US GDP was revised lower to 1.3% for the second quarter, from 1.7%. Personal consumption was also lowered from 1.7% to 1.5%. Both reductions reinforce the assertion by the Economic Cycles Research Institute that we entered recession territory sometime in June. Durable goods orders collapsed -13.2%, with -5% expected. Ex transports, the decline was 1.6%, with Boeing 787 cancellations playing a major role. Nonetheless, these numbers compare with the ’08-’09 timeframe.


The Dow, S&P, and Nasdaq edged lower for the week (see the box scores). Merger and Acquisition activity YTD is the slowest since the third quarter 2009. Think about this: Companies don’t view other companies as cheap and are holding on to cash – yet Wall Street shills advise buying stocks. Who is right? The country’s CFOs or the news networks driven by advertising dollars and the necessary positive spin? Consider the money market comments above and see the similarities between Ben and Tim. Ben Bernanke, via his money printing schemes, will make it awkward for corporations to hold cash by raising the tax on savings (via higher rates of inflation): “If you won’t spend it, we’ll burn it.” This is vindictively Keynesian, and of course wickedly clever. Inflation of 2-3% is tolerable – but higher rates than that force a decision: Buy something!

P.S. keep an eye on Chinese equities – $58 billon went into the banking system this week. If this is the first round of many, the Shanghai exchange may yet be revived (at the high cost of food inflation and social disintegration).


From the lows in May, central banks have reported purchases of 156 tons, and ETFs in the same timeframe have added 90 tons. Gold ETFs have hit a record level of holdings at 85.66 million ounces. Considering sentiment for gold through this period, you can hardly call this type of gold buying frenzied or speculative. Buying near the lows from May to present, investors and central bankers face the FED and ECB liquidity deluge and know they must protect against monetary mismanagement. It seems like the late ’60s all over again. Foreign central banks are aware of our issues either more than we are or more than we are wiling to admit publicly. It’s also worth mentioning that ETF holdings of silver are now at 18,525 tons. They are nearly equal to the previous peak in holdings, without a massive spike in prices – so far! Looking forward to October and November, the election outcome will either stall progress temporarily (to the first quarter) or massively accelerate progress in pricing into year-end. In either case, the bull market continues.

Best regards,

David McAlvany
President and CEO


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