By Michael Pento | June 02, 2010 | 12:50 PM | 0 CommentsTweet This
The U.S. dollar has been viewed since The Bretton Woods Agreement in 1944 as the undisputed world's reserve currency. Unfortunately, however, investors the world over are now asking themselves if that should continue to be the case. They are instead on an ever increasing basis seeking to rely on a more stable form of money (gold) in which to park their global savings.
Having a currency in which the entire planet views as a safe haven has remarkable benefits. Our "king dollar" status allows the U.S. to consume much more than it produces without having our currency collapse. It also keeps interest rates unnaturally low, which provides a tremendous boost to economic growth. Our nation's debt has now eclipsed $13 trillion dollars and the monetary base has skyrocketed to over $2 trillion. If the dollar did not enjoy such a lofty position in the opinion of global currency investors, U.S. interest rates would soar as foreign central banks sold off their U.S. debt holdings and the dollar's value would plummet. Therefore, one of the most important factors for the future stability of our economy is that traders and investors across the globe consistently regard the U.S. dollar and our bond market as a safe harbor-and one without peer.
However, foreign governments and central banks have recently displayed a significantly greater predilection to boost the value of their currency as compared to the United States. Unlike our recalcitrant Federal Reserve, the Bank of Canada yesterday raised its target rate on overnight loans between commercial banks to .50 percent from .25 percent. Indeed, there is a growing list of countries that have recently sought to protect the value of their currency by raising interest rates. Brazil, Malaysia and Peru have already raised rates this year. And even though the Reserve Bank of Australia opted out of boosting rates this last go-around, they still have a comparatively very high rate of 4.5%, which was achieved after six previous increases since October 2009.
The fact is that our central bank has not displayed any effort what so ever to preserve the dollars status as the world's reserve currency. In fact, they have simply taken it for granted and showed disdain for the greenbacks eminent position. The Fed's balance sheet remains over $2.3 trillion even though their purchases of Mortgage backed securities ended over two months ago. Not to be outdone by our central bank, the current administration believes the major problem we face is that we do not yet have enough debt.
President Obama's Chief Economic Advisor Lawrence Summers has advocated an additional $200 billion in deficit spending saying, "I cannot agree with those who suggest that it somehow threatens the future to provide truly temporary, high-bang-for-the-buck jobs and growth measures," he said. "Spurring growth, if we can achieve it, is by far the best way to improve our fiscal position." But how is it that anyone can believe that a government can create viable growth or sustainable wealth? The truth is that it's incapable of any such thing. Redistributing savings from one part of the economy to another cannot lead to growth. Borrowing money from foreign sources only amounts to a deferred tax on future production with interest. And inflation is just another form of a cruel tax placed upon the middle class without their consent.
But the real problem with thinking what the U.S. needs to do is spend more and keep interest rates in the cellar is that most of the rest of the world has already started to repent. They now understand that they must reduce leveraged instead of borrowing more and are raising interest rates to protect their currencies.
The twentieth century has taught Europeans two valuable lessons. Namely, that killing each other isn't really a good way to bring about peace and that massively inflating a currency doesn't engender prosperity. Now the twenty-first century is hopefully teaching them that debt cannot be bailed out by issuing more debt. Case in point, Italy recently joined Greece, Spain and Portugal in enacting austerity programs to slash budget deficits. In the case of Italy, their plan is to cut spending by 25 billion Euros this year with the aim to slash the budget deficit it to 2.7% of GDP by 2012. So while Europe is embracing austerity, the U.S. is headed in the opposite direction.
The two most important factors in protecting the value of any nation's currency is to have the central bank provide interest rates that are above the rate of inflation and for the government to ensure the debt of the nation can always be easily serviced. Canada, Europe, South America and Asia are moving slowly towards that goal. Those economies are also learning that any fiat currency (even the "almighty dollar") can never truly be an adequate substitute for owning gold-especially when our government and Fed are determined to undermine the dollar's purchasing power. But the pressing question has now become how long those economies will continue to squander their savings by parking them in U.S. dollars if we continue to debase both the value of our debt and the currency in which it is based.
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By Michael Pento | May 27, 2010 | 9:15 AM | 0 CommentsTweet This
I'm headed off to CNBC this morning to appear on "The Call" at 11:30am.
Hopefully, I'll get a chance to explain how the recent economic statistics and market indicators are warning investors of a global economic slowdown. I will also warn of the importance in keeping the US dollar the world's reserve currency. Which, by the way, we are apparently taking for granted by continuing to increase the size of the Fed's balance sheet at the same time Congress is stepping up plans to blow up the deficit.
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By Michael Pento | May 25, 2010 | 11:38 AM | 4 CommentsTweet This
I feel better today don't you? Our Treasury Secretary is was once again on his knees over in China begging for them to let our currency lose value against the Yuan. Hmm..., poor Mr. Geithner. Not only does he believe that America's main problem is an over-valued currency, but he also contends that this completely temporary and phony domestic recovery is due mostly because of a rebound in the private sector. A Private sector rebound? The government has manipulated interest rates to zero percent and then taken over the entire mortgage market. They also have piled on so much debt that the entire solvency of the government now hinges on a continued bull market in bond prices. That has nothing to do with having a balanced economy or providing the country with viable private sector growth.
Despite his unfounded optimism, Bloomberg reports that the rate banks say they pay for three-month loans in dollars climbed for an 11th day as concern mounted that Europe's debt crisis will prompt financial institutions to question one another's creditworthiness. The London interbank offer rate, or Libor, for such loans advanced to 0.536 percent, the highest level since July 7, from 0.510 percent yesterday, according to data from the British Bankers' Association. And that the dollar Libor-OIS spread, a gauge of banks' reluctance to lend, widened to the most since July 17.
But not to worry, Geithner believes the world economy is undergoing a robust recovery. Just like Ben Bernanke at the Fed, he is busy trying to convince the passengers on the Titanic that we have just stopped for a swim.
However, if Geithner gets his way and the Chinese do in fact allow their currency to rise it will have, in the short term, a much more detrimental impact on the U.S. than the Chinese. We cannot immediately retool and/or build factories and mines to supplant the production of the Chinese. Therefore, our trade deficit will actually increase for at least a few years-just like it did the last time the Renminbi was revalued back in 2005. But the immediate problem for us will be to find a ready buyer for our Treasury debt. With no such entity standing ready to replace Chinese demand, interest rates will rise and send the fragile U.S. recovery into a tailspin.
I understand that Geithner is a politician first and must lie as part of his job description. But investors need to know the truth about our currency and this recovery. The market has discovered the truth and is sending us a warning message. Ignore it at your peril.
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By Michael Pento | May 24, 2010 | 10:37 AM | 1 CommentTweet This
Thanks to the government's desire to pull forward demand in the real estate market via the First-time home buyer's tax credit, sales of existing homes shot up in April to the highest level in five months as buyers took advantage of government largess.
Purchases increased 7.6 percent to a 5.77 million annual rate, figures from the National Association of Realtors showed today in Washington.
However, most importantly, despite government efforts to re-ignite the housing bubble, the nominal number of previously owned homes on the market jumped 12% to 4.04 million, the highest level since July, today's report showed. At the current sales pace, it would take 8.4 months to sell those houses compared with 8.1 months at the end of the prior month.
Therefore, once the effect of the tax credit expires in June, the annual sales rate will plummet. Once the sales rate plummets, the true measurement of the month's supply number will be revealed-and it will be unbelievable ugly. Point being, the huge build-up in inventory, which is being markedly masked by government stimulus, will cause home prices to take another significant fall in the second half of this year. And since the Real estate sector leads the economy, the second half contraction in GDP looks to be, unfortunately, right on track.
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By Michael Pento | May 21, 2010 | 11:32 AM | 0 CommentsTweet This
Who should investors listen to; the markets or the Fed? One says we are in for a double dip recession, the other just raised GDP forecasts.
The head of our central bank Benjamin S. Bernanke has a perfect track record for predicting economic outcomes. Unfortunately, his track record is only perfect due to its 100% inaccuracy. The Fed Chairman once assured investors that the subprime housing crisis was contained and would not bring down real estate prices or affect the overall economy.
Then, after being proven completely wrong by the near collapse of the entire global economy, Mr. Bernanke moved to an emergency Federal Funds target rate of 0-25 bps and has held it there for 17 months. And even though the economy has posted three straight quarters of growth, has shown no inkling to provide American savers with a decent return on their money deposited in banks.
Now we find the Federal Reserve once again proving it has an unlimited aptitude for ineptness by actually raising their G.D.P. forecast from a growth range of 2.8%-3.5% to 3.2-3.7%. That's correct; Federal Reserve officials raised their U.S. growth estimates for 2010 and lowered forecasts for unemployment and inflation, according to minutes of the Federal Open Market Committee meeting on April 27-28. They left their 2011 forecast unchanged at 3.4 percent to 4.5 percent. Fed officials' forecast for the average unemployment rate in the last quarter of 2010 fell to 9.1 percent to 9.5 percent versus 9.5 percent to 9.7 percent estimate made in January.
However, contrary to the Fed's predicted trend of improvement in employment numbers and economic data, on Thursday we saw first time claims for unemployment jump by 21,000 to 471,000 in the week ended May 15th. The four-week moving average also climbed to 453,500 last week from 450,500. Additionally, the Index of Leading Economic Indicators during the month of April saw a .1 percent decrease. That dip in the Conference Board's outlook for the next three to six months followed a revised 1.3 percent gain in March and was the first decline for the index in a year.
Meanwhile, sovereign debt contagion threatens to dismantle the Euro currency as Eurozone borrowing costs may become intractable if interest rates continue to rise. China is busy trying to pop their property bubble at the same time the Shanghai Composite Index is down 21% in 2010. Not to be outdone, Australia has collapsed their resource sector by imposing a 40% tax on the earnings of mining companies.
The threat of a metastasizing government debt default crisis similar to the credit crisis of 2008 has sent crude oil prices tumbling from over $85 a barrel to $68 in a matter of weeks. Dr. Copper has plummeted from $3.60 a pound in April to $2.93 as of this writing. But none of that matters to the Fed or gives them pause to reflect on their ebullient outlook.
It doesn't take superhuman predictive powers to have the ability to look at markets. What is it that Mr. Bernanke and company look at other than the rear view mirror when making prognostications about growth, unemployment and inflation? We have given the most incredibly powers to the Federal Reserve; namely, to dictate a target rate for the cost of money. But we have allowed to be appointed at the Fed a group of individuals who not only cannot accurately assess a given series of data but also have chosen to completely ignore markets.
The CRB Index is trading at its lowest level since October of 2009 and is telling investors that the global economy is in the process of slowing. But the Fed is stacked with academics that have never had to earn a living by predicting economic and market directions. Their failure to listen to the message of markets is the key reason they have such a miserable record of making accurate projections. For the betterment of the nation, the next appointment to serve at the Fed should be someone from the trading pit and not from Princeton.
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