 Banana Ben Strikes
Again
Michael Pento
Posted Sep 1, 2009
Just when you thought it was
safe to hold dollars, even for just a little while, Fed Chairman
Ben Bernanke once again climbed aboard his helicopter and spread
some more confetti (US dollars) across the sky.
Apparently having the world's
reserve currency drop 13% since March, even as measured against
a basket of other flawed fiat currencies isn't enough. And if
you were to measure the dollar's performance against hard assets
like copper since March, the currency has lost 50%. Yet despite
those facts, Fed head Bernanke thought it wise to increase the
size of the monetary base by $86 billion just last week alone!
That brought the base total to over $1.73 trillion, the highest
level since May and just $37 billion off its all time record
high.
Maybe he thought the rally
in the stock market was stalling. Or maybe he was afraid the
price of oil was having trouble breaking above $75 a barrel.
Either way, it's just plain disappointing to know that even after
he no longer needs to worry about being nominated to another
term, he's still playing politics.
I was fooled myself. I've written
recently about an imminent dollar rally due to the fact that
the monetary base had been dropping while bank lending was negative
when measured on a YOY basis. I thought the Fed was worried about
the huge build up of high powered money and had begun its exit
strategy.
In the long run it seems the
Fed has acquiesced to the plain truth that having an $11.7 trillion
National Debt means that a loose monetary policy is a necessity.
Perhaps it was no coincidence the Fed increased its balance sheet
in the same week it was announced that the deficit would grow
by at least $9 trillion over the next 10 years.
The economic reality is that
when a country owes a tremendous debt; it becomes less burdensome
and easier to pay off under an environment where the currency
is losing value. Of course the citizens of that same country
become poorer while they are taxed without their consent through
inflation. It is also true that the holders of that country's
debt become victims as well.
Is it any wonder the Chinese
are seeking alternatives to the US dollar as they move their
Treasury holdings to the short end of the curve in order to facilitate
an easy exit? For me this is a very tenuous position for the
Fed to hold. The world's reserve currency can't inflate its way
to prosperity. The danger of causing a disorderly decline of
the dollar is very high.
So perhaps there will be no
rebound from the dollar's decline and maybe there won't be a
well needed correction in the major averages - at least for now.
Debtors and the wealthy will prosper as savers, creditors and
the middle class continue to go broke.
But no country in the history
of planet earth was ever able to sharply devalue its currency
while bringing about a stable economy and fostering real growth.
That's because a strong currency is indicative of a strong country.
One that is providing investors with solid economic growth, positive
interest rates, a current account surplus and low inflation.
The opposite is evident in
a country that is plagued with a chronically falling currency.
But eventually a weak dollar will no longer mean the market goes
higher. At some point it will result in not only the end of nominal
gains in the averages but a violent move lower in bond prices
as well. And unfortunately, it will also result in a much lower
standard of living for most Americans.
The bottom line is this; a
dollar rally and a coincident decrease in the value of hard assets
may still occur in the short term due to their crowed trade status.
But it will not be because the Fed has begun to reduce the money
supply. The longer term trade has to be short the US dollar and
long commodities. Precisely because the Fed has made it abundantly
clear that it will rely on an inflationary monetary policy to
help the government pay off its debt.
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Michael Pento
Senior Market Strategist
Delta Global Advisors, Inc.
866-772-1198
email: mpento@deltaga.com
website: www.deltaga.com
An 18-year industry veteran, Mr. Pento has worked on the floor
of the N.Y.S.E. as well as serving as Vice President of Investments
for GunnAllen Financial immediately prior to joining Delta Global.
He also serves as Director of Research for the firm and has created
several investment products that are sold throughout Wall Street.
He has carried series 7, 63, 65, 55 and Life and Health Insurance
Licenses. Mr. Pento graduated from Rowan University in 1991
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