Analyst Stephanie Pomboy says the vaunted U.S. recovery is on thin ice. She recommends long gold and, perversely, it might seem, U.S. Treasurys.
The founder of research firm MacroMavens sees the distinct possibility of an extension of the Federal Reserve’s controversial quantitative easing policy. If that happens, the lockstep of dollars flooding out into hard assets, including gold, will continue, she says.
“I don't see the ingredients for a durable recovery. To say that the economy looks fine, excluding the fact that we are not creating any jobs, strikes me as a pretty major ‘except.’ We need to create real income,” Pomboy tells Barron’s in an interview.
Fed Chief Ben Bernanke would like to turn back the clock and get people to borrow their way into higher spending, Pomboy says, but a “new attitude about debt” seems to have taken hold.
“The people who really desperately want to borrow aren't being offered the opportunity. And the people who are really better-quality credits don't really have the appetite to borrow anymore,” she points out.
Meanwhile, rising energy and food prices are eating up income increases as a second wave of adjustable-rate mortgage resets comes due in April.
“Mortgage rates are starting to notch up. So the reset wave this year could be much more punitive to the economy generally and consumers specifically than it was last year,” Pomboy says.
A resumption of the decline in housing prices would force the Fed back into easing to stop mortgage rates from rising, Pomboy believes. The current round is set to end in June.
Pomboy is quick to note that Treasurys, which she calls the “government's certificates of confiscation,” are far from being a hard asset. However, a renewal of easing will bring the Fed back into the market to buy Treasurys.
“I wouldn't necessarily get long. But I sure as heck wouldn't be short,” she says. “Not only is the Fed now the largest holder of Treasurys, but thanks to Ben's printing press, it has unlimited capacity to buy. So this is one market where the fundamental laws of supply and demand do not apply.”
Gold is back near its previous record high price and silver has risen to the highest price it has seen since 1980. Traders are particularly concerned that the protests that have rocked the Middle East might spread deeper into the oil patch.
Rising energy prices could slow the U.S. recovery or kill it outright, potentially setting the stage for the extension of Fed easing envisioned by Pomboy.
"The likelihood that we move higher from here remains good," Walter de Wet at Standard Bank told Reuters, speaking of gold. "It's tension in the Middle East, (and) there's some dollar weakness."
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