HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hi everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today my guest is David S. McAlvany, CEO of McAlvany Wealth Management. David, thanks very much for coming back on the show.

David McAlvany, CEO, McAlvany Wealth Management (McAlvany): Glad to be with you.

Norman: So it’s been awhile. I’d like to get your thoughts and impressions heading into the elections, and of course, the looming fiscal cliff. What do you see for the economy and financial markets in the coming year?

McAlvany: Constrained growth in the U.S. Of course, we still have problems in Europe, and China continues to slow. And I think those are issues that are very macro, and offer some drag. But what we do see is central banks all acting in unison to do something. Now, whether it’s effective or not is a secondary question. But the markets have become unhealthy in the sense that they’re reliant on central banks to say something.

Norman: That’s the "sugar high" they all talk about.

McAlvany: Yes. And so that’s the real question: Will they translate from just talking to more doing? At least in the United States, that’s the case in point presently. The Fed has said they’re going to do something. They haven’t done anything, even since the announcement of QE3; they have not expanded the balance sheet—I think in part because they know it’s not effective.

So now they’re caught on the horns of a dilemma. They’ve promised to do something. If they don’t do something, are they’re punished for it; does the market revolt, so to say? They’re in a real bind, I think.

Norman: Now, even if they did something, though, would that really make a difference? Because we discussed this the last time. The QE … forget about Operation Twist or doing it in a sterilized fashion—let’s just say an outright extension of the balance sheet—it’s just an asset swap, right? The Fed is removing some asset from the economy—a Treasury or mortgage-backed security—replacing it with reserved balances in the banking system that basically just sit there.

We know the Fed pays interest on reserves. But what we also know is that you’re removing a lot of interest income from the economy. And you could actually go and look at the data since 2008 or 2009, when they started all these extraordinary measures—something in the order of $400 billion out of personal income through that interest channel. So, the talk of stimulus; is it really? Because they’re taking a lot of income out.

McAlvany: I think to some degree it’s stimulative, but what you really have to connect is, is it actually creating jobs? Is there a connection between what they’re doing and the larger economy, the real economy? And that’s where I think there is a disconnect, where on the one hand, academics are approaching it from the standpoint of “they know what they know.” Unfortunately, they don’t know some things that they need to know, which is sort of how things work in the real world.

I’m not saying there’s not a bunch of very bright people at the Fed. But I think market practitioners would say, “Listen, this isn’t going to get you where you think it’s going to.”