Ever Closer to a Failed Auction (Michael Pento)

Tuesday, December 28, 2010
Michael Pento
By: Michael Pento

Yesterday was a rather depressing day on the economic data front. The S and P/Case-Shiller home price index fell 0.8% in the month of October from the year ago period. Even more troubling was the MOM decline of 1.3%. 18 of 20 cities were down and the index is off 30% from its peak. The real estate sector has most assuredly resumed its decline. The progenitor and nucleus of the credit crisis was the overleveraged real estate market. Now that home prices are falling once again there will more homeowners underwater on their mortgages and the incentives to walk away from the loans will increase. This will cause a further increase in foreclosure activity and further downward pressure on home prices.

To make matters worse, an auction of five-year US bonds went poorly and the yield on the 10-year bellwether bond is back to 3.49%. That auction is just a taste of what’s ahead. Soaring borrowing costs are the future for U.S. sovereign debt issuance. We are fast approaching the day when the U.S. will either have to pay an astronomical interest rate on borrowed funds or be unable to issue the debt at all.

China, Russia, and Brazil have felt it necessary to raise interest rates as inflation is hurting the middle class and their economies. At lease those countries are dealing with the problem. The U.S. is not only ignoring inflation but actually doing everything in its power to encourage it. More and more debt, soaring commodity prices and massive money printing are the prescription our government has given us.

All this and they want you to believe that all is ok just because retail sales were up?

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.