'Helicopter Ben' Grounded - For Now

by: Michael Pento posted on: August 16, 2007    
The head of the Federal Reserve has so far not lived up to his moniker of “Helicopter Ben.” Unlike what his label suggests, Mr. Bernanke has only addressed the current liquidity crisis with system repurchases - which add temporary cash into the system-instead of coupon passes, which are a more permanent infusion of cash. By leaving the Fed Funds target rate at 5.25%, he has differentiated himself from Alan Greenspan, whose playbook response to a crisis was to devalue the currency without hesitation.

However, his band aid approach to the credit crunch should prove to be an inadequate cure for what this ailing economy needs. GDP has registered 2% growth in the last 3 quarters, below the 3% trend. Non-farm payroll growth has been averaging 136 thousand new jobs, which is below population growth. And productivity has averaged 1% for all of 2006 and has averaged 1.2% for the first 2 quarters of 2007, below the 2% average for the past few decades.

Although the economy is currently weak, I believe it may begin another leg down in the near future. Whatever growth the economy was experiencing had been bolstered by the recent liquidity boom engendered by record low credit spreads and interest rates. It should be noted that the Fed has not been increasing credit in this latest cycle; it was the banks that fueled the credit bubble. Now that the credit bubble has burst, the already anemic economy might really falter as credit becomes more expensive and harder to come by.

Mortgage equity extractions had reached $800 billion per year at their peak and are now running below $400 billion per annum and falling rapidly, a trend that will only be exacerbated by falling home values and tighter lending standards. The pace of leveraged buyouts should also ease due to higher borrowing costs. And while corporate stock buybacks have exceeded $100 billion in each of the last 6 quarters (a significant portion achieved by issuing debt), corporate borrowing costs have risen 150bps in recent weeks.

It’s no great stretch to conclude that we’re entering a cyclical deflationary credit crisis as a result of the above. If so, I would suggest investors raise cash and wait for the Fed to commence an aggressive easing policy in an attempt to raise asset price levels. My own view is that they will not lower rates until there is empirical evidence of a recession or a dramatic decrease in non-farm payroll growth and that Mr. Bernanke may want to prove that his “helicopter” moniker is a misnomer, but in the end I believe the Fed will do what it was created to do: inflate.

Related investment themes: Commodities, foreign stocks and a falling U.S. Dollar-might reverse for a short time but these trends will likely resume their course after brief correction. Should commodity-related ETFs such as DBC and GLD go on sale in coming weeks, it might be wise to add to positions.

Disclosure: none

This article has 3 comments! Add yours below...

Michael Pento

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This article has 3 comments:

  •  
    gordon
    Aug 16 04:48 PM
    CPI Inflation is understated by 2.4% by many studies,even if it's only 2% understated, that still means GDP is now flat to negative. (GDP is based on bogus imput costs!)
  •  
    Futures
    Lover
    Aug 16 05:30 PM
    I think Ben will keep rates exactly where they are, letting the economy run at 2% to form a firm compacted base for future growth. The Fed is watching inflation. Don't fool yourself about this. Ben does not want to have inflation to do like it did back in the late 1970s/early 1980s. That was a horrible time for us all! If inflation does not come under control, I think Ben will begin to raise rates to reduce inflation. So, don't think he won't because he will. I do suggest that one prepare one's financial situation to accommodate this scenario.
  •  
    leojbourne
    Aug 17 01:05 AM
    The rationalist approach to the situation is not applicable. Liquidity is not market driven. It is in the hands of the big players, like China, Saudi Arabia, sub rosa Fed open market operations and others. Once the weak fruit has been shaken from the trees and eaten by the pigs (for those who don't see the metaphor, this refers to greedy, small-time hedge funds and investors being gobbled up), the remaining fruit (the big players) will be stronger than ever. If there is deflation, the banks will prosper as their spreads increase. If there is inflation, the surviving hedge funds will reap huge profits from buying up CDOs at pennies on the dollar over the next few months. That's why they call them hedge funds: because the big players have all the bases covered.
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