Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
1. Will European Storm Clouds Bring Rain? The IMF, the World Bank, and a growing number of central bankers (present and former) from around the world are gravely concerned about 2012, and have been adjusting growth expectations down yet again. We wonder if these groups aren’t trying to influence the ECB, the BOE, the FED, and the BOJ, along with the PBOC, to liquefy the markets ahead of any crisis rather than in response to it.
Mixed signals in the market leave observers upbeat, but cautious. Take Germany as an example of confused currents. The DAX has seen a 12% recovery off its January 1 levels, but, interestingly, a tremendous amount of money still favors the German bond market instead. Thirty-year Bunds have traded in recent weeks with yields less than 2.5%, impressively low compared to US treasuries of similar maturity that yield an extra 40-50bps (UST30YR right around 3%). Purchases of long bonds at these historically low rates indicate real concern over eurozone stability.
For comparison, shares of industrial giant Siemens yield more than 3.1% and trade at a P/E of 11. Frankly, it’s easier for us to imagine the healthy state of Siemens 11years from now, still paying its relatively healthy dividend, than it is to see either the US or German fiscal situations faring quite so well. Our bias is for competent management, and we remain bearish on bureaucratic ability, even of the German variety.
In spite of this, we find eurozone consumer confidence improved alongside the German Purchasing Managers Index, which climbed to 50.4 from 48.3. Measures of German business confidence improved by a whole point in December. German officials renounced any larger EU bailouts early in the week as Christine Lagarde was seeking to boost the IMF “guardian angel” fund to 1 trillion dollars. By the end of the week, however, Germany made clear that money in support of the market wasn’t its concern (latent monetary conservatism?), rather it balked at control in someone else’s hands. Germany approved its own €400 billion bank bailout fund. Does it see solvency issues lingering due to Greek paper write-downs and potential Italian issues later in the year? Merkel “generously” suggested that fiscal decision-making be moved from Athens to the EU (not a Dale Carnegie technique, that I recall). There will be trouble; it’s just a question of when.
Likewise in the US we saw a few positive signs. Durable goods orders increased by 3% in December, which was lower than November’s 4.3% gain but better than the expected 2%. (Pundits like the “better than expected” interpretation rather than the month-on-month decline). Q4 GDP come in at 2.8%, and the full-year number was positive by 1.7% Truth be told, if inflation were counted properly (the deflator) in the GDP statistic, the year would have been negative – not to mention deficit spending, which helped prop up the economy. So, in our view, it is a bit of a mixed bag here as well.
2. On Gold and Silver (Every Cloud has a Lining): The move higher for metals since the beginning of the year has signaled the end of the major decline in gold, with limited downside still ahead. It would not surprise us to see gold revisit an 1850-1920 interim high before correcting back to the 1750 range. We are not inclined to trade this volatility, with stakes being incredibly high. Following several months of consolidation at prices under the recent highs, we see gold moving even higher by 25-35%.
The lesson of this bull market, or any other, for that matter, is that foresight (vision coupled with the mettle to take action), and patience (staying power through the many vicissitudes caused by short-term volatility) is rewarded. These are qualities rarely possessed by individual investors, and we feel disproportionately blessed to partner with families and individuals that have cultivated these along with other virtues.
Short-termism is a state of mind that radically alters outcomes for the worse. The average investor, corrupted by modernity’s shrunken time frames, is always seeking to make changes in a portfolio that are not warranted in the long run. It is particularly difficult to avoid this blight of the brain if your data inputs are received in nanoseconds, like the algorithm trading models in vogue with quants, or perpetuated by the news media’s truncated focus on micro issues (a news outlet explained to me that five minutes is considered a long programming segment, with an allowance being made for celebrities like Buffet, Gates, or the Queen Mother of up to six minutes). In fact, it was explained to me by a television executive many years ago that soccer was not allowed to develop a real presence in U.S. markets by the networks because the format of the game was not conducive to commercials – each period of play was too long. No wonder “Fast Money” and “Madman” Cramer are so popular. We suggest you stick with the major trends that are deeply supported by fundamentals still in place, and not be distracted by the flavor-of-the-week market prediction or stock pick.
We belabor the point as both a reminder and an encouragement. The cyclical volatility experienced coming into the end of the year has not altered the secular/long-term trends, which are being driven by a combination of positive market dynamics and policy blunders. Unpleasant as the last four weeks were for us in 2011, our proverbial step back has been taken in advance of the next two steps forward. It is highly probable that, leaving $50 silver and $2,000 gold prices behind, it may be years, decades, or perhaps never again that we revisit those prices.
The period of 2012-2014 will be an expanse of time where major transitions occur. These will encompass economic and financial shifts, along with political and social change. Living through this era of high risk and low reward, we continue to see great opportunity in our approach to the markets, with much lower absolute risk, and must higher absolute reward. 2012 represents a year of transition, not unlike shifting into a higher gear.
Best regards,
David McAlvany
President and CEO
MWM LLLP
