GDP Estimates Coming Down (Michael Pento)

Goldman Sachs Cuts Q1 GDP Estimates

Tuesday, April 5, 2011
Euro Pacific Capital
By: Michael Pento

The Pollyannas that were busy doing their linear projections for U.S. GDP back in 2010, were telling investors that the first quarter of 2011 would produce 4%+ growth in real GDP. Their logic was based on an ersatz recovery based upon government printing and spending. But now the evidence of their folly is smacking them straight in the face.

It’s nice to react to new information, but it is always better to get well in front of it. Investors could have been surprised by the news today of a decrease in the Institute for Supply Management’s index of non- manufacturing to 57.3 from 59.7 in February. Or they could have anticipated that drop and positioned their portfolios accordingly.

EuroPac investors were not so easily misled. But if you were a client of Goldman Sachs you may find it a bit disturbing that GDP growth estimates for the first three months of this year were taken down a full percentage point today to 2.5%. The IMF is joining the GDP slashing parade and cut Q1 growth down to 2.8% from 3%.

The big houses are now forced to chase their tails and lower GDP forecasts because they haven’t yet realized the dangers associated with equating growth to inflation. China is quickly waking up to that realization and has now raised interest rates for the fourth time since October 2010. Note to Bernanke; the PBOC did so ahead of the March CPI data due out next week. Now that’s what I call being proactive.

The Fed’s counterpart in Europe Jean Claude Trichet has also scheduled in a rate hike this Thursday in an attempt to offer citizens in the old country a real return on their savings. In sharp contrast, Mr. Bernanke is assuring us that this current bout of inflation is just a passing fancy.” In a speech last night in Stone Mountain Georgia, Bernanke said, ““I think my take on inflation right now is that we are indeed seeing some increases, obviously.” He continued, “I think the increase in inflation will be transitory.”

The Fed Chairman gave us a peek into the keen insight behind his sanguine stance. The reason behind his comfort with the direction of inflation is—and remember this guy has a doctorate in economics—the recent increase in U.S. inflation is driven primarily by rising commodity prices globally, and is unlikely to persist. That’s it! No mention of his monetary policy being the cause of inflation in the first place.

Bernanke’s refusal to admit his own role in global inflation assures us that he will be as wrong in his inflation projections as he was about the sub-prime real estate crisis being contained.

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.

Michael Burry: “My number one concern is that there has been a complete utter total abdication of personal responsibility though out our entire society.

Michael Burry (interview on Bloomberg)

The former hedge-fund manager who predicted the housing market’s plunge, said he is investing in farmable land, small technology companies and gold as he hunts original ideas and braces for a weaker dollar.

“I believe that agriculture land -- productive agricultural land with water on site -- will be very valuable in the future,” Burry, 39, said in a Bloomberg Television interview scheduled for broadcast this morning in New York. “I’ve put a good amount of money into that.”

Burry, as head of Scion Capital LLC, prodded Wall Street banks in early 2005 to create credit-default swaps to bet against bonds backed by the riskiest home loans. The strategy paid off as borrowers defaulted, letting his investors more than quintuple their money from 2000 to 2008, according to Michael Lewis’s book “The Big Short” (Norton/Allen Lane).

Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together.

“I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing -- we’ve been experiencing for a number of years -- is problematic.”

Comments on the Blame Game

“My number one concern is that there has been a complete utter total abdication of personal responsibility though out our entire society. I don’t think anyone anywhere is taking blame themselves for what they did to contribute to the crisis.

 And again I think it gets back to that blame game. It is the most damaging thing we can do as a country is to blame a narrow set and not look within ourselves for what each of us did or didn’t do to the basic wrong that led to this mess.” “From the borrower to the average broker all the way to the federal reserve through Congress, the President, several Presidents, I think that this has been coming for awhile and there has been a lessening of the credit standards over a period of time that ultimately led to the kind of blow off top that we have.”

Comments on the overall housing market

“It’s an artificial market. There are a tremendous number of homes where the home homeowner, I think it’s between 2.5 to 3 million homes, where the home homeowner are more than 9 months past due and are not giving notices that they are past due and they’re just living there for free. I actually know one that has been there for a few years without having to pay anything.

I think that Fannie and Freddie are basically being used as special purpose vehicles by our government to support the housing market. The private mortgage market is practically nonexistent; 96-97% of mortgages are flowing through Fannie and Freddie now. I think Fannie and Freddie are exercising a tremendous amount of power over the market by withholding properties from sale and not forcing foreclosure, the foreclosure process. I think that it would be best for the government just completely got out of the mortgage market and let the housing, because home prices are a function of income the leverage applied. Bloomberg Recap