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From
all accounts it appears that the world is in the early stages of a major leg
up in food prices. The major macroeconomic trend will likely drive economic policy
and the investment outlook for years to come. Although mainstream pundits
like to focus on cyclical drivers like the weather, the real force behind the
move is secular. The U.S. is leading the world in a pandemic of monetary
inflation that is helping to cause commodity prices, food in particular, to
skyrocket across the globe.
The
Federal Reserve's monetary excess is currently being magnified by China's
misguided currency peg policy. As the United States debases its currency
through excess printing, China must follow suit. In order to maintain a
consistent relative valuation, China must adopt the monetary policy of the
United States.
Just
last week, China announced that in the 4th Quarter 2010 its foreign currency
reserves leapt by $199 billion to $2.85 trillion. The increase was much
larger than economists expected, and suggests that China is printing as much
as $2 billion worth of RMB per day in order to buy dollars to maintain the
peg. The big problem is that China, with a booming economy, is adopting a
monetary policy of an economy that is contracting. This is the perfect recipe
for inflation.
And
it's not just China that is enforcing a currency peg. Many other countries
intervene in the forex market when they feel their currency has risen too
high against the greenback.
For
example, the Chilean currency gained 17% in value against the USD in just 7
months during 2010. The surging currency underscored the country's status as
an emerging markets success story. But that condition abruptly ended last week
when Chile's central bank pledged to intervene in the local currency market
by increasing foreign currency reserves by $12 billion in 2011. After the
announcement, the currency predictably dropped against the dollar and caused
a major sell-off in Chilean equities.
The
specious idea behind this action is that foreign governments believe that by
keeping their currencies cheap they can bolster exports and maintain a strong
economy. But a rising currency does not necessarily restrain exports. If
those countries currently committed to pegs were to reverse course, their
problems with local inflation could diminish. And those lower prices could
offset to a certain degree the decreasing purchasing power experienced by the
importers of those countries' domestic goods.
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.
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