 The Dove Coos
Michael Pento
May 26, 2006
It is crucial to understand what one of the key drivers of global
economic growth is today. If investors can realize what is occurring,
they will know that a protracted sell off in the commodity and
equity markets is probably not in the cards for several more
years.
Central bankers have not been deterred from their primary objective,
which is to try to engender prosperity by printing money, and
it is this inflation masquerading as growth that is deceiving
most investors. Unfortunately, our new Federal Reserve chairman
is no exception.
Ben Bernanke cooed right on cue at his April 27th testimony before
congress, stating that the campaign to raise interest rates might
take a pause even if rates are not yet balanced. Since this message
was repeated after the FOMC's latest meeting, the markets clearly
glimpsed the emergence of his pinfeathers as those of a dove,
a dove that fears recession far more than inflation.
There are three salient questions that must be asked at this
juncture. If the U.S. economy is as strong as most pundits' claim,
why is the dollar falling precipitously? If inflation expectations
are low, why are gold and virtually every commodity soaring?
And why are some of the major market averages near record highs,
when the economy is expected to slow and interest rates are rising?
The answer to all of these questions is that inflation is here
and much more virulent than professed. The apparent strength
the global economy is experiencing is being spurred by excess
liquidity both domestically and worldwide. The dollar is losing
its interest rate-driven support in anticipation of the fed ceasing
to raise rates and it will likely continue to adjust downward
against foreign currencies with a more favorable rate outlook.
The fact that the mainstream media and administration representatives
like to promulgate the notion that inflation is low does not
deceive the commodity markets. Excessive liquidity is finding
a home in real stores of value and it is this superfluous monetary
creation that is sending the equity averages to such lofty levels.
I believe the economy's rate of growth is slowing while the rate
of monetary creation continues to grow unabated. Moreover, if
the economy heads towards recession, Ben Bernanke is likely to
increase the rate of monetary creation even further and lower
the cost of money simultaneously, especially since the main driver
for a slowing economy may continue to be the weakening housing
market. According to CNN/Money, 22% of the 8.7 trillion mortgages
held by Americans will reset in 2006, which means a typical 3-year
a.r.m. will go from 3.6% to 5.6%. On a 500k mortgage, the monthly
payment would increase by $800, which should exacerbate an already
struggling real estate market.
Given the crosscurrents of today's economy and the likelihood
of further softness in housing, investors would be wise to shy
away from consumer discretionary stocks and focus on high yielding
foreign equities. That defensive strategy gives you a hedge against
a falling dollar and the cushion of dividends. Although I am
not sanguine on the U.S. stock market, I do not align myself
with most perennial bears. What they tend to overlook is that
elevated inflation rates tend to bolster most asset classes,
which can include common stocks, for longer than expected.
Even though a correction in commodity, equities and especially
housing markets seems quite possible in the near-term, don't
look for a collapse in these markets until the dollar falls apart,
a risk in today's market, but an event that might materialize
a lot later in the future than many might expect.
The Dollar has a Bernanke problem. Inflation is running strong.
Such concerns should govern an investor's thinking today, but
keep in mind these are long running sagas, not story lines that
are likely to bring about cataclysm at any moment.
May 22, 2006
-Michael Pento
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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
321gold Inc
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