|
|
Any
psychoanalyst looking at the behavior of investors today would see clear strains
of schizophrenia in a comparison between the markets for gold and US
Treasuries.
Currently, the 10-year Treasury yield is setting new lows on a daily basis.
In the financial models all economists were taught at school, this would be
an indication of an economy with low inflation expectations and a strong
currency. But the dollar has fallen over 12% since June, and the price of
gold continues to hit all-time highs. These results are completely
antithetical. Bonds are flashing a warning sign of deflation, while gold and
the dollar presage hyperinflation.
During the last period in which the US experienced significant economic
stress, the late 70's and early 80's, the markets in gold and Treasuries
showed a much higher degree of harmony. At that time, the Fed's extreme
depression of interest rates led to rapidly rising inflation, a weakening
dollar, and a massive spike in the price of gold. More significantly, yields
on Treasuries soared as investors demanded higher rates as compensation for
the added inflation risk. In other words, everything made sense.
Beginning in January of 1977, gold began an epic bull market which ended just
prior to February of 1980. In that time, the metal soared from $135 per ounce
to just under $860 per ounce, and the Dollar Index lost about 20% of its
value. Yields on the 10-year Treasury soared from 7.2% in January of 1977 to
12.4% in February of 1980. This occurred in an environment where the Federal
Reserve - under Arthur Burns - pursued an inflationary monetary policy. He
increased the monetary base from $62 billion to $114 billion in just eight
years.
Today, the environment is similar to what the country confronted 30 years
ago. Like then, our monetary base has surged - but this time even faster.
Instead of merely doubling in eight years as it did under Burns' watch, Alan
Greenspan and Ben Bernanke have tripled the base in twelve years (from $621
billion in 2000 to over $2 trillion today). Accordingly, the dollar price of
gold has more than quadrupled, from $280 per ounce in 2000 to over $1,300
today. Over that time, the dollar has registered a 35% drop in value.
However, in stark contrast to 1980, the yield on the 10-year Treasury note
has collapsed from 6.6% in 2000 to less than 2.4% today.
A nation should only be able to enjoy ultra-low interest rates if it has a
high savings rate, stable monetary policy, low inflation, and very low levels
of debt. The US savings rate, which had been range-bound between 7.5% and 15%
during the '60s and '70s, now stands at just 5.8%. And that rate reflects
recent belt-tightening in the wake of the credit crunch. The personal savings
rate had been negligible and sometimes negative from 1998 thru
2008. Washington's current annual budget deficit is 9% of GDP and the
national debt is 93% of GDP. And, of course, the Fed has - in its own words -
undertaken "unconventional measures" to push up inflation.
Therefore, none of the conditions that should engender low interest rates
currently exist.
Clearly both gold and the US dollar agree that Ben Bernanke will be
victorious in his quest to foment robust inflation. But Treasury investors
seem to believe that despite its current inflationary disposition, the Fed
will be able to either: A) hold down interest rates for an extended period or
B) withdraw its liquidity before things get out of hand. To take this
position, one would have to not only believe that the forex and gold markets
have it wrong, but also think that the Fed's printing press will lose its
power to depreciate the currency. This is a seriously misguided set of
assumptions.
Bernanke asserts that the Fed brought on the Great Depression by allowing the
money supply to contract by 30% after the Crash of 1929. He has also written
that the Depression relapse of 1937 stemmed from Washington's attempt to
balance the budget and raise interest rates. Therefore, I can reasonably
assume that he will not stop the presses until inflation has a firm and
undeniable grip on the American economy.
Many currently believe that 'Helicopter Ben' has yet to ignite inflation on
the ground because the money he dropped from the sky is still stuck in the
trees. In other words, the funds are caught in the banking system and not
spreading among the populace. Yet, M1 is up 6.2% YoY; and, in the last two
months, the compounded annual rate of change in M2 is 7.4%. Although these
single-digit increases do not yet indicate runaway inflation, a program of relentless quantitative easing has a
conclusion as predictable as driving 100mph around an icy mountain turn.
Since the Chairman has shown no will to hit the brakes, you'd have to be mad
to ride the yield curve alongside him.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to increase
portfolio returns. He is also a published economic theorist in the
Austrian school of economic theory.
|
|
