Tags: Dohmen | Economy | Contract | Again | bert | us

Wall Street Guru Dohmen: Slow Economy to Force More Fed Easing

Tuesday, 31 May 2011 02:00 PM

By Forrest Jones and Kathleen Walter

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The U.S. economy is headed back down the path to contraction thanks to excessive money printing, says Bert Dohmen, founder of Dohmen Capital Research Institute, an economic and investment research firm.

The problem, Dohmen points out, is that the gross domestic product growth figures used to measure recovery are flawed due to their use of miscalculated inflation numbers.

So if Federal Reserve is wrong about inflation — meaning it's worse than they say — then they are wrong about recovery.

"We are already in a new contraction in the economy at this time, and that will surface here very soon. Goldman Sachs downgraded their expectations for the S&P 500 Index from 1,500 to go to 1,450 this year, and that is what we have been forecasting for the last couple of months," Dohmen tells Newsmax.TV.

"If they would adjust it for the actual inflation instead of their faulty inflation numbers, then actually we already have negative GDP growth at this time."

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Downgrades to stock indices will accompany downgrades to corporate profits, and when the latter happens, the real sell-off will begin.

Higher stock prices and economic recovery are largely the product of Federal Reserve money printing, known as quantitative easing in which the Fed prints money to buy back government debt from banks in order to kick-start economic growth.

In June, the Fed is set to wrap up a second quantitative easing program, known as QE2 that pumped $600 billion into the banking system, which Dohmen describes as a huge amount of artificial money pumping up the economy.

Since growth is not stemming from something more fundamental, like businesses starting new projects on their own and are borrowing and hiring in the process, the economy will deflate once QE2 ends.

"Later this year when they see that the economy is really starting to weaken significantly, they will come out with another program, whether they call it QE3 or QE4 or have a different name for it. They will not allow deflationary forces to exert themselves again. Whether they will be successful in that is another question."

In the meantime, money printing will chase investors away from paper currencies and towards precious metals, although investors shouldn't discard the dollar altogether.

Things are bad in Europe, where troubles in fringe economies like Greece and Portugal are threatening to disrupt the continent's entire economy.

Asian economies aren't free from pitfalls either.

Plus despite all the uncertainty in the United States, America is home to a banking system and markets like none other in the world.

"In the U.S. we also have tremendous problems but when it comes down to it, if you have $100 million, where would you put that $100 million? You could put it under the mattress but that makes for a very lumpy mattress. You could put it in money market funds and maybe get one-eighth of a percent yield, and that's not very attractive," Dohmen says

"The safest instrument is still the U.S. T-bill, either the three-month or the six-month. Most people don't realize the yield on six-month Treasury bills right now is lower than it was at the height of the crisis in 2008. This means something. This means that a huge amount of money is going into these instruments. This means to me at least that someone is thinking that there is going to be another big problem which requires the ultimate safety for your money and that is T-bills."

Traders agree that T-bills have become attractive.

"There is a lot of cash looking for short-term paper that doesn’t have anywhere to go," says Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 20 primary dealers that trades with the Federal Reserve, according to Bloomberg.

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