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

Waiting on the Fed – but Will More QE Actually Help?

Stock operators were hoping for some dovish comments to materialize out of the FOMC minutes (released Wednesday) and from the economic symposium in Jackson Hole today. But aside from some expressed concern over an “underutilized US labor force,” remarks were surprisingly hawkish. Among the topics discussed: a speedy close to bond purchases (or QE) by October, rate hikes as early as springtime next year, and reductions to the Fed’s balance sheet – albeit someday. Stocks were up initially on Wednesday, probably in reaction to the labor issues mentioned, but by the end of the week that rally was fading – perhaps on the possibility the Fed is serious and will actually follow through with hawkish intentions. We doubt it can do so for very long. Keep in mind, a reversion to zero in Fed bond purchases, let alone rates hikes, etc., would undo the leveraged behemoth that is the stock market today.

MWM 14, 8-22 Box ScoresQuite apart from all that, there is still the growing fundamental problem with QE – which is its inability to stimulate growth. In the absence of significant foreign creditor support for US assets, which has waned for obvious reasons, escalating Fed intervention runs the risk of producing more negative results than in years past. It is driving interest rates higher and/or the dollar lower (in other words, inflation, and not the productive kind). To a small degree, this has already transpired. When foreign purchases collapsed in May of last year, long-term rates began to rise – so much so that middle America was cut off from favorable home buying and refinancing opportunities, while prices for the essentials (food and energy) crept higher – squeezing consumers. As testament to that last point, Target stores lowered their full-year profit guidance by 15.4% on flat sales year-to-date, which echoes what Walmart had to say the week before.

In that context, the 15.7% rise in US housing starts should be assessed carefully. For starters, the boost did not come from single family homes. That’s not to say that it couldn’t have, but the increase was attributable to large investments in multi-family units (apartment complexes). The important element to note here is that there was no commensurate change in the mortgage purchase or refinance indexes, so the investment was assumed to have come from the cash-rich hedge fund community (or similar entities), which is to say that the activity was driven by Fed-derived funds. What that in turn suggests is that the Fed, directly or indirectly, is the active buyer holding up critical areas of the economy – which adds irony to their promises of hasty departure from QE. They are in sad fact the sole entity maintaining the US economic façade at this point, which explains the tireless resolve on display by leveraged stock operators – who know the Fed must continue the game or else…

Why gold investors appear to be incapable of reaching that same conclusion is a mystery. It borders on the pathetic. But that will change. COMEX gold inventories, by the way, suffered a miniscule setback only to rebound to a new record (of 9.86 million ounces) as gold dipped back to support levels around $1,285. I make mention of this because physical gold movements are more indicative of overall trends.

Best Regards,

David Burgess
VP Investment Management