Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

The Central Bank Time Machine

Interest-Rates / Central Banks Aug 23, 2019 - 03:37 PM GMT

By: Michael_Pento

Interest-Rates

We are now witnessing the death throes of the free market. The massive and record-breaking global debt overhang, which is now $250 trillion (330% of GDP), demands a deflationary deleveraging depression to occur; as a wave of defaults eliminates much of that untenable debt overhang. The vestiges of the free market are trying to accomplish this task, which is both healthy and necessary in the long term—no matter how destructive it may seem during the process. Just like a forest fire is sometimes necessary to clear away the dead brush in order to promote viable new growth. However, the “firemen” of today (central banks) are no longer in the business of containing wildfires, but instead proactively flooding the forest with a deluge of water to the point of destroying all life.

In point of fact, the free market is no longer being allowed to function. Communism has destroyed capitalism, as the vital savings and investment dynamic has been obliterated. Central banks have decided that savers deserve no return on their so-called risk-free investments and have hence forced into existence humongous bubbles in junk bonds and equity markets worldwide. They have destroyed the savings and investment dynamic and turned time backward.



This explains why market volatility has spiked. Markets want and need to correct the absurd valuations found in fixed income and risk assets, but governments constantly step in to try and reverse these gravitational forces. The result is wild swings in global markets that have neither completely crashed nor meaningfully advanced in the past 20 months. For example, the S&P 500 is virtually unchanged during this timeframe yet has experienced a few sharp selloffs and a 20% correction in between.

Every time market forces begin to take over, some government announces a fiscal stimulus package and/or a particular central bank announces a proposal to print yet more money. Nevertheless, we are quickly approaching the point where insolvent governments can no longer stimulate growth by adding to their pile of debt, and central banks are approaching the limit on their ability to reduce debt service costs and how much new credit they can create without destroying the confidence in fiat currencies. Thus, busting through their asinine 2% inflation target.

Measuring the steps that governments and central banks are willing to take and the effectiveness of such stimuli will be the key to understanding the inflation/deflation and growth dynamic that is essential to making money.

So how is the US economy doing now? Despite a relatively strong retail sales report for July and low unemployment claims, the general trend of the US economy is towards slowing. The all-important Aggregate Hours Worked index is a measurement of the total number of workers times the average hours in a workweek. Despite the 2,162,000 of net new jobs created for all private-sector employees from 7/2018-7/2019, the Index for aggregate weekly hours was unchanged at 111.9 during that period. This is because the average workweek for July 2018 was 34.5 hours; that figure has dropped to 34.3 for July 2019. Not coincidentally, there are now a record number of individuals that are holding more than one job. Not only this, but the 3-month rolling average for net new jobs created in July of last year was 237k; it plunged to 139k net new jobs created for the three-month average ending July 2019.

The Treasury Department said federal spending in July was $371 billion, up 23% from the same month in 2018. The fiscal-year-to-date deficit was $867 billion, compared with $684 billion last year at this time—with two months still left in fiscal 2019. Servicing costs for this current fiscal year’s National Debt are almost a half-trillion dollars ($497 billion through July) --and will be higher than 2018′s record $523 billion once this fiscal year ends in October. This calls attention to President Trump’s Twitter feed. He posted this doozy on August 8th, "As your president, one would think I would be thrilled with our very strong dollar. I am not!” Trump wants a weaker dollar, and the Fed wants more inflation. Once achieved, those record borrowing costs will explode higher.

The NY fed announced that consumer debt is now $1.5 trillion higher than 2008. Total Consumer Debt is at a record $13.9 trillion.

The disease of ZIRP, insolvency, and asset bubbles has infected the entire globe. Something is indeed rotten in the state of Denmark, and it is their mortgage market. Denmark is now offering mortgages with negative interest rates. Borrowers can now end up paying back less of the principal they paid on the home. They pay no interest and get paid to borrow.

Yet still, stock market carnival barkers claim they can find no market distortions or signs of excess leverage anywhere in the system. Well, why not start with the fact that the major global central banks alone have printed $22 trillion since 2008. They have created the biggest bubble in the history of planet earth known as the sovereign debt bubble. This has distorted asset prices across the board and set the table for the obliteration of the global economy upon its bursting. Such bubbles have become so large and precarious that governments are in a panic to create a perpetual state of ever-rising inflation to keep them from crashing.

But eventually, these bubbles always burst because bubbles by nature are never static. They are massively unstable and must either grow or explode. There isn’t a better reason for bond prices to collapse other than inflation. And the inflation “success” of central banks would be a great catalyst. The fact the fed wants more inflation, yet already has achieved a 2.2% y/y core CPI reading in July, is unnerving, to say the least. Once inflation begins to run hot--and that $22 trillion of new dry tinder catches fire--bond yields will start to soar. At that point there is nothing central banks can do. If they were to stop printing money the only bid for negative-yielding debt gets removed and bond yields will spike in an unprecedently destructive manner. Alternatively, they can keep on printing and watch hyperinflation obliterate the economy. That is the unavoidable outcome of creating a 633% increase in the supply of base money since 2008.

The other scenario is if the US economy joins the rest of the world and slips into a recession. This would cause the spread between Treasuries and Junk bonds to surge; cutting off the supply of new credit for most companies rated BBB or less. By the way, there is over $1 trillion worth of corporate debt that now has a negative yield.

Whether it is recession or inflation or both, the salient point is that bond yields are not destined to just slowly drift a few basis points higher in an innocuous fashion. Yields have become so enormously distorted that an explosion higher is virtually assured to occur. After all, if you own a sovereign or corporate bond with a negative yield and your central bank is forced to pull the plug on its bid prices will collapse with lightning speed. Likewise, junk bond prices in the US will crater the moment it becomes clear that zombie companies will soon be going belly-up. High-yield debt would then spike from the record low 5-8% range to the 14%-22% range; just as it did in the past two recessions. That is, at least until the Fed decides it is necessary to start directly purchasing Junk bonds.

Indeed, what central bankers have created is sort of a time machine. They have reversed the clock when it comes to the time value of money. The cost of money should normally increase alongside the solvency and inflation risks as we go through time. However, the growing mountain of negative-yielding debt has flipped time upside down; where savers lose more money as time passes. In other words, they can consume 100% of their savings today; or instead, choose to defer that instant gratification and be assured to lose a portion of that ability tomorrow.

In closing, you know Wall Street loves to say that gold is a bad investment because it doesn't have a yield and it cost you money to store it. Well, you know what else doesn't have a yield and costs you money to store it: Sovereign debt--27% of the developed world’s total global supply now has a negative yield. And that trillion-dollar pile of negative-yielding corporate debt is surging by the day.

This is why the buy and hold strategy of investing has become so dangerous and deadly for your financial wellbeing. Investors must have an active strategy that adapts to both deflationary collapses and stagflation cycles in markets.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2019 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules