David McAlvany to Moneynews: Market Hooked on Fed's 'Illicit Drug' of QE

Friday, 26 Jul 2013 07:10 AM

By Glenn J. Kalinoski and John Bachman

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The Federal Reserve's program of quantitative easing is akin to drugs being used to prop up the market, says David McAlvany, CEO of the McAlvany Financial Group.

"It's not surprising to see the market sensitivity, but it's a little like a crack addict waiting for news from his source," McAlvany said in an exclusive interview with Newsmax TV.

"What is going to be the supply of illicit drugs being supplied? That sensitivity speaks to a real dependency. We have that dependency in the marketplace today."

Watch highlights of our exclusive video. Story continues below.



Editor's Note: A full, unedited version of this interview is available exclusively to Financial Braintrust Alliance subscribers. Visit www.fbtalliance.com for more information and to sign up.

McAlvany added that the stock market would be 30 percent to 40 percent lower without quantitative easing.

"For the equity investor that's great," he said. "You're now above breakeven and probably a few percentage points to the good for the last decade. We had $9 trillion of market cap erased in 2008 and 2009 and we've had to increase our debt by close to $8 trillion and then add another $2 trillion to the Fed balance sheet in the interim," he said.

"We're talking about a massive liability that we pass on to the future just to get equity investors back to break even. This is actually a very sad tale at the end of a long-term credit growth environment, which again has come to an end," he said.

"We have to deal with the comeuppance at some point in the marketplace. Equity values are stretched. We're beginning to see that."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

In a wide-ranging interview, McAlvany also discussed:

The Fed

It's not a surprise that financial stocks are doing well because they're really "at the feeding trough" of the Fed.

"When the Fed is monetizing debt, creating stability in the securities market and allowing for cheap credit to flow, [the] prime [beneficiaries are the] banks and financials," he said.

"Essentially Fed liquidity is rebuilding bank balance sheets at the expense of the general public and the taxpayer. That, ultimately, is not going to be a popular project, particularly as you begin to see the inflationary impacts with rising fuel and food costs," he said. "As we see inflation become more of an issue, [in] 2014, 2015, [it] is going to be sort of the bite back for the loose monetary policies of the last two to five years."

Oil, Middle East

McAlvany cited a "fear bid" relating to Middle East politics and geopolitics, including uprisings in Turkey, Syria going "from bad to worse" and continuing violence in Egypt.

"There is a fear bid in the oil market," he said. "Supply-and-demand dynamics would argue for lower prices. We are very well supplied. Arguably, we should be sub [$100 per barrel]."

Detroit's Bankruptcy

McAlvany said the largest part of the overhang of debt and long-term liabilities relates to medical care and pension benefits for retirees in the Motor City. The statistics he cited include: 40 percent of the street lamps don’t work; it takes at least an hour for 911 calls to be responded to by police; 217 out of about 300 parks have been shut down; and one-third of the city is vacant.

"And yet we're still questioning … Stand Your Ground rules," he said. "You're absolutely on your own in Detroit. You really don’t have much in terms of tax revenues both from sales tax and property tax. It's a disaster and the best progress they could make is to wipe the slate clean."

He compared the situation in Detroit to Latin America.

"The countries that, on the other side of a debt crisis, rebounded very quickly were the ones that negotiated the lowest possible numbers and walked away from as much debt as possible," he said.

"That means investors took it on the chin and that's OK. That's the nature of investment. You pay your money, you take your chances, and for creditors to be howling at this point, where did you think you were investing? This is not your top-quality credit, even if you were in your general obligation bonds. If you're forced to take an 80 percent haircut and get 20 cents on the dollar, you're going to realize that being on the top of the food chain means absolutely nothing."

Gold's Rebound

McAlvany's question regarding the precious metal: Have we put in a bottom?

"We'll know that probably two, three months out," he said.

Something to consider is that he has seen little to no weakness in the physical market during the last 90 to 120 days.

"We've seen … massive demand in Turkey, massive demand in India, massive demand in Hong Kong, and we can say the mainland in China via Hong Kong. It's not going to surprise us to see gold trade at $2,400 [an ounce] within a 16- to 18-month timeframe just on the basis of short covering, let alone the momentum traders who add a tremendous amount of pressure to the market."

Silver, he said, will accompany gold on its trajectory.

"Wherever gold goes, silver will go," he said. "The current 65-to-1 ratio between gold and silver, it will contract back to about 30-, 35-to-1, making gold and silver both attractive, but silver as a growth play."

Editor’s Note: Put the World’s Top Financial Minds to Work for You


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