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

Tapering the Taper Talk

In overnight markets on Wednesday, central banks including the Bank of Japan, Bank of England, and the ECB made clear that walking away from stimulus (QE) will just have to wait. Growth and employment have not yet met desired objectives – or some such nonsense. Ironically, the BoJ and the ECB revised their growth forecasts to the upside, even though recent policy has produced mixed results at best. Nevertheless, stocks overseas (including Asian markets) caught a healthy bid at the expense of most major currencies. This translated into a stronger greenback, weaker gold, a sharp rise in Treasury rates, and a small gain for stocks in trade Thursday – all based on the widely held view that the Fed will be acting more responsibly than the rest of the developed world, and taper its bond buying program sometime soon.

13-9-6BoxScoresThat notion held for one whole day.  On Friday, a dismal US jobs report was released: 169,000 non-farm jobs were created versus 180,000 expected. The labor participation rate fell to a 35-year low of 63.2%, which allowed for a 0.1% drop in the unemployment rate to 7.3% for the month of August. But the real zinger came in the revisions for July, where 162,000 jobs created melted away to only 104,000. This may reflect the disposable nature of a very large and growing part-time job base.  Of the jobs created year-to-date, as many as 97% of them have been part-time, helping employers evade the burdensome costs associated with Obamacare. This piece of news saw the precious metals reverse previous setbacks, while stocks exchanged early losses for decent-sized gains by the afternoon Friday. Clearly, the bad news in the jobs report increased the expectation of further QE.

It’s anyone’s guess as to whether the jobs report was completely legitimate or if it served the purpose of stabilizing perceptions in the marketplace. Interest rates have not relented, traveling higher – contrary to Fed intentions of late and in the face of positive economic releases. So it may be that throwing a bad data point such as the jobs report into the mix actually helped cauterize the recent wounds inflicted upon bonds – in which case it succeeded. At any rate, that possible attempt to sway markets may have inadvertently given us a glimpse of truth regarding the current state of employment here in the US.

Next week is likely to be another non-event in the realm of economic information, except perhaps the PPI (inflation) data due Friday. The US House will vote on Monday with respect to military action in Syria. It’s unlikely that the house will deviate from popular opinion, which suggests that the House will cast a sweeping “no” vote. Of course, Obama can override the decision if he deems it necessary. Also, we are approaching a time when traders turn their focus to 3rd-quarter corporate pre-announcements. Results this quarter may determine the outcome of QE. We suspect earnings will favor the softer side of expectations.

As an aside, the US mint’s sale of silver coins is running at record pace. Year to date, 33,000 ounces have been sold, which equals the total sold in 2012. Also, for those wondering where Goldman Sachs is on the subject of gold these days, the company has reportedly purchased a record 3.7 million shares of the GLD, making it the 7th-largest holder of the fund. Given the eroding love affair with tapering, the metals and the dollar have every excuse to make a run at objectives mentioned previously in this forum.

Best regards,

David Burgess
VP Investment Management