All Aboard The Consumption Wagon (Michael Pento) and Bernanke's Titanic Ready to Launch

Friday, October 29, 2010
By: Michael Pento

This morning’s GDP report shows that the consumer has regained their profligate habits of borrowing money to consume foreign made goods. The 2% growth in Q3 GDP, albeit still quite anemic, wasn’t achieved by increasing the goods producing sector of the economy or by boosting exports. It was mostly accomplished by boosting household spending.

Consumer spending grew at a 2.6% annual rate, which was the most in four years. Of course, this should make Ben Bernanke happy, as the thought process of the Fed is to get banks to lend more and for consumers to start piling on debt again. Now if only we can get an asset bubble in real estate once again he would become completely ecstatic.

The Titanic II sails next week and even if the market is initially disappointed in its size the long term outcome is a lower dollar and higher commodity prices.

The R-squared or inverse correlation of the USD to the S&P500 has been over .90 for the last two months. Thatmeans 90% of the markets move to the upside is based upon the dollar going down—I hate that. There was a time in the early 80’s when dollar up was great for stocks. It meant low inflation, a falling cost of capital, a growing middle class and strong foreign investment. But the Fed wants nominal growth in GDP and asset prices and that’s what they are going to achieve.

The true answer to creating viable GDP growth is to grow the goods producing sector of the economy. That can be accomplished by lowering the corporate tax rate, abolishing minimum wage laws, reducing regulations, busting unions, reforming the public school system, balancing the budget and supporting the currency by raising rates and reducing the Fed’s balance sheet. It cannot be accomplished by printing and borrowing money.

The main problem with this counterfeiting and debt bonanza is that we are quickly approaching the day when a sinking USD doesn’t send stocks higher and Bernanke’s purchases of US debt doesn’t send interest rates lower but instead sends them inexorably rising.