Stephanie Pomboy: Bernanke has blood on his hands

This weekend's Barron's has a great interview ($) with Wall Street strategist Stephanie Pomboy of MacroMavens. She says the Dirty Fed caused the financial crisis with easy money, the Dirty Fed created the commodity bubble with easy money, and the Dirty Fed is going to try to fix everything with the only thing it knows: more easy money.
If you look at the combination of higher rates and energy prices, we are really now running at levels that we haven't seen since just going into the financial meltdown. To quantify it, over the past six months, wage income is up $111 million, and outlays on food and energy are up $116 billion.


It is delicious in its irony, in a way, that QE is really the driver of this commodity bubble, because, obviously, when the Fed started putting rates to artificially low levels, everyone in the U.S. looked somewhere for higher yields. And the obvious place to go was emerging markets, and all the capital flowing into emerging markets fueled their economies and increased their demand for resources. At the same time, debasing the dollar obviously enhanced the allure of holding hard assets, which also benefited commodities. You can find any number of reasons why QE really drove the commodity boom. So if I'm correct that the Fed is going to have to continue this program to protect the U.S. recovery from these threats of higher rates, and food and energy prices, it is kind of ironic that they are going to be pursuing more aggressive quantitative easing, even though that is really what's driving higher rates and commodities.


If we pursue this logic to its natural conclusion, and the Fed continues with QE, it begets more of the same result, which is just to continue to inflate commodities. Then what happens is that we see commodity prices rise until they reach the point that something breaks. And my thesis is that, during my lifetime, interest rates have always been the catalyst for crisis. Rates backed up to the point that some weak link in the chain broke. This time, however, higher commodity prices will be the catalyst. But, again, it is deliciously ironic that these higher commodity prices are a function of overaggressive, easy monetary policy. In times past, it has always been tight monetary policy that has precipitated the crisis.


Q. What about the argument that Bernanke and his team had to do something or the economy was going to fall off a cliff, and that they had to create liquidity?

It is easy to sit back and say this. But had the Fed not had that attitude back in 2000, we wouldn't have been in this predicament. The problem is that we serially try to reflate our way out of these problems, rather than taking the pain and letting the economy actually cleanse itself.

This summer is going to be the beginning of the moment of truth. What happens when QE2 is done in June? Can the government go on running deficits of 10% of GDP without causing bond rates to go higher, crushing the recovery? Will the Dirty Fed come back in with QE3? Pomboy leans toward "yes," and given the Dirty Fed's track record, it's hard to disagree.

Pomboy recommends a barbell portfolio of gold and Treasuries. I still prefer cash over Treasuries. Buying Treasuries here is a high-risk, low-reward bet that rates will go a lot lower. With serial deficits in the same league as Greece, I wouldn't trust the U.S. government for 10 years at just 3.5%. What's the upside? If we get inflation, your bonds will get murdered. And if we tip back into severe recession, is that 3.5% really going to pay your Alpo bill?

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