By Michael Pento

Wall Street wants you to believe that the recent fall in commodity prices stems from a rising dollar that is due to an improvement in the American economy. The truth is that the rebound in the dollar is solely due to falling foreign currencies caused by a substantial slowdown in global GDP rates. The truth is that the weakness in the US economy and housing market--with its affect on financial institutions and the market in general--is intensifying.

A rising US dollar would normally signal great news for the US economy because it brings down the cost of imported goods and is usually indicative of a return to positive interest rates and a hard currency policy. It also telegraphs that the domestic rate of inflation should be headed lower. However, the dollar's recent appreciation was not due to a change in monetary policy from the Fed, nor was the pullback in commodities the result of an imminent substantial increase in their supply. The retreat in almost every commodity across the board signals that demand has contracted sharply as the US engendered credit crisis diffuses worldwide.

For investors to claim that the strengthening dollar is indicative of better days ahead for the US economy is tantamount to saying a person who has contracted a severe air borne virus can cured by coughing on someone else. Investors may soon come to realize that global stagflation is not a reason to buy US equities.

There is a small possibility that the global economy is just slowing on the margin and that the selloff in commodities is unfounded and overdone. The more likely scenario is that the selloff is due to demand destruction stemming from a severe contraction in global growth. If this is the case not only should most commodities be avoided for the next few months (with the exception of gold) but also global equities. It was foolishness to believe that the US-currently representing over 21% of global GDP--could slow down and not affect global growth to a substantial degree. It is likewise folly to believe that global GDP can slow yet leave the US unaffected. I do believe that foreign countries will soon develop their middle class to the extent that they can consume their own production, but clearly they have yet to reach that point.

The severe correction in global stock markets gives credence to the belief that the selloff in commodities is due to a demand destruction phenomenon. This has given a short term boost to the dollar on the outlook that foreign central banks will soon slash rates. At this point in time dollar bulls can only hope that Jean Claude Trichet and Mervin King drink Ben Bernanke's monetary Kool-Aid and begin to ignore inflation and worry about growth. The US dollar has already priced in several rate reductions by the Bank of England and the European Central Bank. However, if listening to their statements investors should not be too quick to believe they will follow the same direction as our Fed. According to Bloomberg, Bank of England President Mervin King said on August 13th "...the British economy is going through a difficult and painful adjustment...that cannot be avoided."

How refreshing it is to hear a central banker acknowledge his limitations and accept the consequences of the unwinding of an asset bubble. Contrast that statement, along with others that sound similar to his from ECB President Trichet, with policy emanating from Ben Bernanke. He's had the hubris to believe that the Fed can repeal the business cycle and will fight a recession at all cost. Mr. Bernanke also has mistakenly predicted the US economy will recover in the second half in each year of his tenure and has stated repeatedly that the Fed must balance the risks between inflation and growth. Wouldn't it be nicer if Mr. Bernanke instead accepted that the economy is going to be weak and assent that there is nothing he can do about it.

Bottom line is that if foreign central bankers keep to their word, this dollar rebound will be very short lived. Neophyte dollar bulls who have recently crawled out of the wood work should realize that in the long term oversees banks are doing what is necessary to fight inflation and strengthen their economies. By not debasing their currency these central bankers are providing an environment that is conducive to well balanced growth instead of an economy that is based on the creation of rolling asset bubbles. And in doing so has provided the only real prescription for a strong currency.