Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Jawboning Increases to Ludicrous Speed
As we have noted in recaps past, stocks, bonds, real estate, and now commodities (in relative moderation) have responded quite favorably to an escalation in Fed and ECB jawboning. Bernanke voiced his obligatory concerns regarding the “grave” condition of the US labor market, implying to some that QE3 will be necessary. Draghi trumped Ben’s remark’s with the use of the word unlimited when referring to his (still un-ratified) plan to purchase one- to three-year PIIGS debt. Although not a concern thus far, neither Bank has committed to actual QE, yet the markets continued to surge – drawn like a greyhound to a mechanical rabbit. As with the rabbit, we wonder if QE won’t also disappoint if caught. (See the box scores.)
Along those lines, it’s critically important to keep in mind that while the much-weaker-than-expected jobs report (96,000 vs. 130,000) practically guaranteed QE in the thinking of today’s market makers, inflation may pose an equal threat to the economy. Last week, we called attention to the alarming pace at which US gas prices had been rising. This week, the ECB held its benchmark rate steady as eurozone inflation accelerated to 2.6% in August from 2.4% in July. The Australian central bank acted similarly when its retail sales fell 0.8% as inflation remained firm at 2.2%, YoY. Incidentally, FedEx Corporation was also found raising prices for its services by as much as 4%, even as its business contracts. Couple all of this with the fact that real wages for the US middle class haven’t increased in over two years, and one could conclude that global inflation is beginning to outpace the growth that QE is intended to create.
This doesn’t mean that the Fed and other central banks won’t pull the trigger, as political pressure may outweigh the economic consequences of stifling inflation. However, it does suggest that further QE of any kind may be completely ineffective and could cause more harm than good – which could very well be the reason why the Fed has rolled its promises into the future (December?). The metals have enjoyed a decent run, perhaps sensing the Fed’s dilemma. Stocks, on the other hand, have stalled out, in some cases at new highs. Perhaps they are worried that, with inflation lurking in the background, the expectation of “necessary,” or better yet “unlimited,” QE, however probable, could produce unwanted results.
Best regards,
David Burgess
VP Investment Management
MWM LLLP
