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Trading Lessons

Fiat Currencies get Flushed

Currencies / Fiat Currency Sep 04, 2012 - 02:54 AM GMT

By: Michael_Pento

Currencies

If the August Non-farm Payroll report produces a number of less than 100k jobs, the chances of QE III being announced on September 13th are close to 100%. However, if the number is north of 100k the odds drop, but are still about 80% on more Fed money printing.


The truth is that the worsening global economy is going to force the hands of both the Fed and ECB. For example, China's exports to EU (17) dropped 16.2% in July, as sales to Italy plunged 26.6% from a year earlier. The stumbling world economy has sent prices for base metals like iron ore falling 33% since July, which is the lowest level since October 2009. And now the nucleus of Europe, Germany, is starting to split. German unemployment increased five straight months in August to reach 2.9 million. Factory orders fell 7.8% in June YOY as manufacturing output contracted further in August. Finally, EU (17) unemployment hit a Euro-era record 11.3% in July, as U.S. initial jobless claims and the unemployment rate have started to creep back up.

But listen up all you lovers of the Phillips Curve and inflation atheists; Spain's unemployment rate has just reached another Euro-era high of 25.1% in July. However, inflation is headed straight up, rising from 1.8% in June, to 2.7% in August. But this is just the beginning of rising unemployment and inflation. Just wait until the ECB and Fed launch their attack on their currencies in September.

The European Central Bank and Federal Reserve are both about to announce this very month an incredible assault on the Euro and the dollar. The European Union said on August 31st that it proposes to grant the ECB sole authority to grant all banking licenses. This means the ECB would be allowed to make the European Stabilization Mechanism a bank -- if sanctioned by the German courts on September 12th. That would allow them an unfettered and unlimited ability to purchase PIIGS' debt and is exactly what Mario Draghi meant when he said he would do "whatever it takes to save the Euro."

Not to be outdone, Fed Chairman Bernanke gave a speech on the same day indicating that open-ended quantitative easing will most likely be announced on September 13th. Fed Presidents Eric Rosengren and John Williams spelled out what open-ended QE means. The Fed would print about $50 billion per month of newly created money until the unemployment rate and nominal GDP reach targets levels set by the central bank.

Incredibly, Mr. Bernanke said in his speech at Jackson Hole, WY that previous QEs have provided "meaningful support" for the economic recovery. He then quickly contradicted himself by saying that the recovery was "tepid" and that the economy was "far from satisfactory." He also said, "The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant." He continued, "...the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor-market conditions in a context of price stability." Mr. Bernanke actually believes he has provided the economy with price stability, despite the fact that oil prices have gone from $147 to $33 and back to $100 per barrel all under his watch--precisely due to Fed manipulations.

Therefore, the Fed also believes their attack on the dollar has helped the economic recovery and that it has been conducted with little to no negative consequences. Of course, to believe that you first have to ignore our rising unemployment rate and also fail to recognize the destruction of the middle class that has occurred since 2008. And incredibly, Bernanke also believes the $2 trillion worth of counterfeiting hasn't quite been enough to bring about economic prosperity, so now he's going have to do a lot more.

The saddest part of all is that the Fed and ECB don't realize their infatuation with inflation, artificial low rates and debt monetization has allowed the U.S. and Europe the ability to borrow way too much money. Their debt to GDP ratios have increased to the point that these nations now stand on the brink of insolvency. And now these central banks will embark on an unprecedented money printing spree that will eventually cause investors to eschew their currencies and bonds. Therefore, they have managed to turn what would have been a severe recession in 2008, into the current depression in Southern Europe; and a currency and bond market crisis in the U.S. circa 2015.

It looks like fiat currencies will get flushed in September. The only good news here is that the failed global experiment in counterfeit currencies may be quickly coming to an end. In the interim, investors that have exposure to energy and precious metal commodities will find sanctuary.

Michael Pento

President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2012 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

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