Tags: McAlvany | Fed | asset | bubbles

David McAlvany to Moneynews: Only ‘Benefit’ of Fed Easing Is Asset Bubbles

Wednesday, 27 Feb 2013 08:18 AM

By Dan Weil and John Bachman

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The Federal Reserve’s massive easing campaign hasn’t done anything to boost the economy, says David McAlvany, CEO of the McAlvany Financial Group.

Indeed, all the Fed has accomplished is to ignite an asset bubble, as stocks and bonds have surged, he tells Newsmax TV in an exclusive interview.

“It’s reasonable for them [Fed officials] to look at the fact that there is nothing occurring in the real economy,” McAlvany says. “And really the only benefit from having printed the money that they have and bought the assets that they have is that you’re stoking asset bubbles elsewhere.”

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Stocks may have hit five-year highs, but that’s not the equivalent of economic activity, he explains. The only reason they reached that peak is because of the Fed’s easing, not because of economic growth.

“I would describe the economy as on life support,” McAlvany says.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Meanwhile, Fed officials are trying to figure out what to do next. “It remains to be seen whether or not they change course.” If they do decide to withdraw their easing, the Dow Jones Industrial Average could easily plunge 1,000 to 2,000 points, McAlvany notes.

The current environment is much like 2000 in that market participants are looking to see who is able to exit the stock bubble first, he says. For he who exits last shall fare worst.

In 2000, “there was sort of a first mover advantage — which Wall Street firm would be the first to make massive liquidations,” McAlvany says.

“It certainly feels that way today. . . . [We’re] looking for a trigger event. We may have it from the Fed. We may have it from one of the other central banks which decides inflation may be an issue, and we’ve got to change course.”

McAlvany maintains individual investors would do well to mimic central banks in buying gold. All the major currencies are unappealing, he adds. “This is why central bankers are choosing, and it would be wise for investors as well, to denominate a part of their savings in gold.”

While many commentators have been proclaiming strength in the housing market, McAlvany sees signs of weakness. The rise in long-term Treasury yields — 10, 20 and 30 years — is making mortgages more expensive, he notes.

“So you essentially have a pricing out of the market,” McAlvany explains. “You’re going to see a tapering of demand to the extent that you continue to see this trend of increasing interest rates.”

A blowout in the stock market could send investors back into bonds, pushing interest rates down and leading to a “resurgence” of real estate buying, he notes. “But to the degree that we continue to see those interest rates marginally creep up,” they will dampen home buying.

Regarding the sequester, McAlvany believes that it has to be taken in the right context. “Everyone would like to argue … that we are, in fact, recovering. And yet, we have deficit spending which is the equivalent of 6.25 percent of GDP [gross domestic product]. … Without that government contribution, $1 trillion in deficit spending, equivalent to 6.25 percent of GDP, we’d be in a depression now.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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