Tuesday, April 26, 2011
Euro Pacific Capital
By: Michael Pento
Fed Head Bernanke will say in his first press conference tomorrow that QE II will end as scheduled in June. The Chairman will also stipulate that he will maintain the size of the Fed’s balance sheet and that interest rates will remain exceptionally low for an extended period of time. The main reason why he will continue to overlook the crumbling currency and rising rates of inflation is the double-dipping housing market.
The S&P/Case-Shiller home price index of 20 cities fell 3.3% from February 2010, which is the biggest year-over-year decrease since November 2009. Home prices fell 0.2% in February from the prior month on a seasonally adjusted basis and on an unadjusted basis dropped 1.1% from the prior month. The 20-city index fell in February to 139.27, which is perilously close to its post-bubble low of 139.26 reached in April 2009.
The Commerce Department reported yesterday that new home sales were down 21.9% from the year ago period and that prices fell by 4.9% in the twelve months prior. The National Association of Realtors reported that sales were down 6.3% from the year ago period and that prices also fell 5.9% from the March 2010 period.
A vibrant and healthy banking sector is the primary goal of the Fed. Creating inflation in the housing market is thought of as the only permanent solution to bailing out the financial services sector and the economy. Therefore, the idea that the Fed is close to a significant increase in interest rates and substantially selling assets is preposterous.
Unfortunately, their goal to rescue the real estate market at any and all cost comes with a few of those unintended consequences. One is the destruction of the country’s middle class and the other is the end of the U.S. dollar as the world’s reserve currency.
So I have some important questions to ask Mr. Bernanke right now—seeing that my invitation to his press conference seems to have been lost in the mail. “Which mandate takes precedence; full employment or stable prices? Since initial jobless claims are now rising along with inflation, what battle are you going to fight?” “Mr. Bernanke, if you were to raise interest rates and sell the MBS and Treasuries on your balance sheet—thus lowering their value--would the Fed become insolvent?” And lastly, “If raising interest rates in the middle of the last decade caused asset bubbles to pop and a global credit crisis to ensue, why would it be a different outcome this time around, since the overall level of debt in the nation remains at an all-time high?
Maybe it is better that they didn’t invite me to ask Bernanke these questions after all.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.