Leprechauns, the Tooth Fairy and Stagflation (Michael Pento)

Euro Pacific Capital
by Michael Pento
August 18, 2011

Three things that Ben Bernanke doesn’t believe exist are Leprechauns, the Tooth Fairy and Stagflation. He has totally relied on specious theories like output gaps and a very high unemployment rate to keep inflation in check. What he fails to realize is that an increase in the money supply doesn’t always engender job growth or put fallow resources back into production. However, what it does always achieve is to increase the aggregate level of prices in our economy.



More evidence of our battle with stagflation was found in today’s economic data. Jobless claims for the week ending August 13^th rose by 9k to 408k. Existing Home sales fell 3.5% in the month of July, while the median price decreased to $174,000 from $182,100. And the Federal Reserve Bank of Philadelphia’s general economic index plunged to minus 30.7 this month, the lowest since March 2009, from 3.2 in July.

However, the continued weakness in the real estate market and in employment figures didn’t serve to squelch the increase in prices. On the consumer level prices increased .5% in July and were up 3.6% YOY. Data released on Tuesday showed import prices were up 14% YOY and yesterday’s Producer Price Index showed inflation on the wholesale level surged 7.2% from the previous twelve months.

The message from the markets corroborates the economic data. Industrial commodities like copper have severely corrected in price and the Ten year Treasury note yield has collapsed to nearly below two percent in a sign that recession is here. Meanwhile, the monetary metal gold is up $25 today and trading at well over $1,800 an ounce.

The Fed, along with the European Central Bank (ECB), has decided that since debt levels have become so intractable they must monetize a massive quantity of government bonds. Analysts at the Royal Bank of Scotland have predicted the ECB will buy €2.5 billion worth of Spanish and Italian bonds each day, which is equivalent to €600 billion a year. And eventually the bank could wind up purchasing €850 billion ($1.2 trillion) of Spanish and Italian debt. Not to be outdone, the Fed Chairman has indicated that his $2.9 trillion balance sheet would remain intact (at a minimum) for an additional two years.

The Central Banks’ actions from the planet’s two largest economies have forced investors into the gold market. And their deliberate debasement of their currencies has led to a hallowing out of savings, productive investment and the middle class--leading to an exacerbated and prolonged economic malaise. Bernanke may ascribe to stagflation the same credibility as fairy tale creatures, but that doesn’t make it any less a reality.

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.

Don't Stub Your Toe (Michael Pento)

Wednesday, March 16, 2011
By: Michael Pento

While Bernanke is busy closing his eyes and his mind to everything related to inflation, the Producer Price Index was screaming at him this morning. The PPI for February increased by 1.6% month over month and surged 5.6% year over year. But please allow the Fed to divert your attention to the meaningless core rate, which was up just 0.2% from the January reading. The cost of food increased 3.9% in just one month, the most since November 1974. But apparently, according to the Fed, food is a discretionary luxury and is something that should be overlooked.

It’s simply getting more and more absurd and difficult for the Fed to claim inflation is quiescent. Very soon they will either have to decide to sell 100’s of billions of dollars in bonds and aggressively raise interest rates—thus crushing this nascent recovery—or allow inflation to cause the dollar and the bond market to crater.

Meanwhile, we had a breath of fresh air on the housing front. New home construction rates fell 22.5% in the month of February to a 479k annual rate. While most in the MSM view this as bad news, they once again miss the point. New home construction companies should be building virtually zero homes until the market clears the overhang of existing inventory. Less new construction will help expedite the healing process.

Not only are exogenous natural catastrophes hurting global GDP growth but the global sovereign debt crisis hasn’t gone away either. The Moody’s ratings agency cut Portuguese debt by two notches from A1 to A3 and kept the rating on a negative outlook, suggesting more downgrades may follow. The downgrade is likely to make it even more expensive for Portugal to raise money on the international debt markets. The country's 10-year cost of borrowing hit a new high of nearly 8% last week.

The global problems haven’t gone away; they have as simply been kicked down the road along with the U.S. recession. Only now the can has morphed into a giant aluminum boulder. The next kick will do a lot more than just stub your toe.

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.

Bernanke's Gift to Producers (Michael Pento)

Tuesday, December 14, 2010

Michael Pento
By: Michael Pento

Producer Prices rose in November by the most in eight months, according to the Department of Labor. Wholesale costs increased by .8% from one month to the next; but repeat after me, Bernanke isn’t printing money and there is no inflation. Further evidence of inflation being benign was illustrated in the fact that if you eliminate everything people actually consume every day, the jump in prices was “just” .3% from October to November. However, if you happen to fall in the category of individual who is in the habit of eating, food prices jumped 1% month over month on the producer price level. Also, if you can’t ride your bicycle to work, it was be disconcerting to learn that energy prices rose 2.1% in just one month!

Food producers such as Kraft and Dean Foods will continue to face a daunting decision; do they pass along these soaring input costs or do they compress margins and reduce their profits. Businesses are already suffering undue pressure from the fallout of the financial crisis. The Fed’s offered consolation is a much higher cost of doing business, which has in turn lead to reduced hiring practices and an increasing rate of unemployment.

Of course, none of that matters because the retail sales report showed that consumer purchases increased by (coincidentally) .8%. Now that figure just happens to coincide with the increase in the PPI. So maybe all of the increase in sales was the result of inflation. We’ll find that out tomorrow when the figures for CPI are released.

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.