Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

US Economy Permanently Addicted to Zero Interest Rates

Interest-Rates / NIRP Feb 27, 2020 - 11:08 AM GMT

By: Michael_Pento

Interest-Rates In Fed Chair Jerome Powell's appearance before Congress on February 11th, formerly known as The Humphrey-Hawkins testimony, he asserted that the U.S. economy was, "In a very good place" and "There's nothing about this expansion that is unstable or unsustainable." But compare Powell's sophomoric declaration to what Charlie Munger, Vice-Chairman of Berkshire Hathaway and Warren Buffett's longtime right-hand-man, had to say about the market and the economy, "I think there are lots of troubles coming…there's too much-wretched excess."



Mr. Powell's comments rival in ignorance with that of former Fed Chair Bernanke's claim that the sub-prime mort crisis was contained. That is until the Great Recession wiped out 50% of stock valuations and over 30% of the real estate market. And of course, don't forget about Fed Chairs Yellen and Powell's contention that their Quantitative Tightening program would be like watching paint dry and run harmlessly in the background on autopilot. At least that was their belief until the junk bond market disintegrated and stocks went into freefall in the fall of 2018. Therefore, it should not be a surprise at all that the Fed doesn't recognize the greatest financial bubble in history: the worldwide bond market mania. Perhaps this is because central banks created it in the first place and therefore didn't want to take ownership of it.

Mr. Powell also averred this gem in his latest testimony, "Low rates are not really a choice anymore; they are a fact of reality." Credit must be given here for finally admitting the truth—albeit what was probably a slip of the tongue. The Fed is tacitly stating that keeping money at a virtually-free rate is now a mandatory condition for perpetuating asset bubbles and preventing mass defaults on the record-breaking level of corporate debt.

So, how can hoping interest rates never rise back to normal be a condition that is either stable or sustainable? Jay Powell must understand this is an untenable position to take. And, how stable can interest really be when the budget deficit for the first four months of fiscal 2020 has jumped to $389.2 billion? That is an increase of 25% over last year. The National Debt is now an incredible $23.3 trillion; it was "just" $9.1 trillion at the end of 2007. Total household debt increased by $193 billion in Q4 2019 and is now $14.15 trillion. This marks 22 consecutive quarterly increases, with total household debt now $1.5 trillion higher than 2007. That's the good news. Corporate debt has exploded by over 52% since the Great Recession and is at a record percentage of GDP. Total U.S. debt now stands at about 330% of GDP. This ratio was 150% of the economy prior to severing the dollar's tether to gold in 1971.

And, the total market capitalization of stocks as a percentage of GDP has soared by 50 percentage points since June 2007--another all-time record high. But what else would you expect when returns on cash are losing value when subtracting inflation.

The only way these debt and asset bubbles are manageable is if interest rates are artificially held down close to zero percent by central banks. Otherwise, the economy will collapse and cause the GDP denominator in these ratios to plunge, just as all of the debt in the numerator remains. In other words, these debt ratios, which are already daunting, will become absolutely nightmarish.

An economy that must lug along this tremendous debt burden encumbers its ability to grow. The Fed believes the only way to keep the credit markets open and keep the economy growing is by constantly lowering borrowing costs. However, it is now running out of room to lower interest rates—it only has 1.5% before it returns to zero. And, most of the major central banks around the world are already at zero. Therefore, without another round of massive fiscal stimulus, like we saw with Trump's Tax Cuts and Jobs Act of 2017, the prospects of continuing to hold a recession in abeyance much longer are dwindling by the day. This is especially true given the appetite and ability to significantly cut taxes or increase spending--while annual deficits are already north of $1 trillion (5% of GDP)--is greatly attenuated.

Somehow Mr. Powell finds solace in these scary facts. He doesn't understand that this bond bubble is international, and its bursting will wreak havoc across the globe. For example, the insolvent nation of Greece, which back in 2012 had its 10-year bond yielding a whopping 45%, has now seen its benchmark yield retreat to an all-time low of just 1% today. In fact, Greece is now issuing 13-week debt with a negative yield. This is especially concerning given that its Debt/GDP ratio has increased from 159% back in 2012, to 181% today. Mr. Powell should tremble while wondering what Greek bond yields would yield if the ECB ended Q.E. and stopped buying its debt. He's unconcerned because the ECB, BOJ, and PBOC are all caught in the same trammel of ensuring money is free forever.

I'll close with this piece of wisdom from Robert Kaplan, President of the Dallas Fed, in a paper he wrote about one year ago warning about the excesses in the corporate and government bond market:

"An elevated level of corporate debt, along with the high level of U.S. government debt, is likely to mean that the U.S. economy is much more interest-rate sensitive than it has been historically."

I would have graded Mr. Kaplan's paper with a "C" for using the word "likely" instead of "definitely" when referring to the economy's addiction to low rates. However, ultimately, he gets an F- for not recognizing that it is, in fact, the fault of central bankers for getting caught in a trap of their own creation.  

This is yet another admission by the Fed that interest rates can never be allowed to increase. Our central bank has now announced it is on hold forever. Therefore, it is not much longer before investors lose faith in fiat currencies, maintaining their value. And that is when the real crash will begin because a central can't fix an inflation problem by promising to create more inflation.

In the meantime, each day that goes by, the madness grows larger, and the inevitable reconciliation process will become all the more severe.

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