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
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Inflation Target Regrets

Economics / Inflation Oct 09, 2018 - 05:30 PM GMT

By: Michael_Pento

Economics

Beginning this fall, and continuing throughout 2019, the stock market’s performance should be vastly different from what has occurred during the prior few years. Indeed, the huge reconciliation of stock prices is arriving now.

The primary reason behind this is the watershed change in global central banks’ monetary policies. For years central banks had been keeping rates near 0%, or below, and at the same time printing over a hundred billion dollars’ worth of fiat currencies each and every month to purchase bonds and stocks. That is all changing now. According to Capital Economics, fourteen major global central banks are either in the process right now, or have indicated that they be will next year, in the process of raising interest rates. At the same time, QE on a global net basis will plunge from $180 billion per month at its peak during 2017, to $0 by December…and will then go negative in 2019.


The amount of corporate stock buybacks will plunge next year as well. Estimates of between $500 billion to $1 trillion of stock buybacks have occurred so far due to the one-time mandatory repatriation of foreign earnings found in Trump’s tax cut package passed in December of 2017. However, that one-time boost from repatriation is waning quickly. In addition, there are now much higher borrowing costs for corporations that have relied on the process of issuing debt to buy back shares. This will only get more expensive next year and will also attenuate the number of corporate buybacks.

The benefits corporations enjoyed from lower taxes this year are being gradually offset by rising debt service payments and tariffs. This pressure on these fronts will also increase greatly next year.

There will most assuredly be a plunge in earnings growth rates from the current 25% pace, to the low single digits at best when Q1 ’19 gets compared to Q1 of this year. When you combine that surge in borrowing costs with; the stronger dollar, tariffs from the trade war, oil price spike, rising wages, the slowdown in China, the chaos in EM currencies--along with the significant bond market and equity market volatility around the world--you can clearly understand why S&P 500 companies will endure much greater pressure on earnings next year. And, given the fact that these corporations generate nearly half of their revenues in from foreign markets, don’t expect their share prices to be immune.

But emerging markets are not the only nations that are in turmoil. Recently, the Italian stock market plunged 4% and bank stocks were halted, as the Italian 10 year Note yield surged 32 bps. That yield has gone from 1% in 2016, to 3.60% today. Bond yields are surging in Italy right now, while the ECB cut its bond purchases in half again to €15T this month--and is scheduled to end QE by the end of December. Therefore, the Italian bond market is going to have to exist on its own next year along with the faltering Italian economy. Spiking interest rates are serving to increase deficits even further, which in turn sends rates yet higher.

Italian debt is now rated just two notches above junk. But a downgrade from any of 3 credit rating agencies should cause another huge spike in borrowing costs. This could force the ECB to back away from its hawkish stance—but it will be too little too late--and the euro should be sent crashing against the USD. If Mario Draghi does not return to QE, but rather allows the Italian bond market to continue to collapse, the entire European banking system is at risk of failure in 2019. Of course, this would imperil the global banking system as well. Perhaps this is one of the reasons why U.S. banking shares have not appreciated this year.

In fact, when you turn off the cheerleaders on CNBC and actually look closer at the data in the U.S., you will find that the distress found throughout the globe is already effecting the domestic economy. Pending home sales fell 1.8% for August, according to the National Association of Realtors' seasonally adjusted index. Sales were down 2.3% compared with August 2017. That was the fourth monthly decline in the past five months and was the slowest sales pace since January.

Turning to autos: Ford, Toyota, Nissan and Honda reported y/y monthly sales declines in September of 11.2%, 10.4%, 12.2% and 7%, respectively. So, despite upbeat employment data, two of the most significant parts of the US economy are in outright contraction mode.

In other words, the notion that central banks saved the world by counterfeiting $14 trillion worth of new credit and by pushing interest rates to 0% and below for a decade is absurdly ridiculous. Rather, what they did end up creating was unprecedented and massive imbalances in the global economy, along with a humongous bubble in asset prices that exist worldwide. From which there is no escaping without devastating consequences.

This long awaited day of reckoning has been held in abeyance until now. However, the incredibly stupid and dangerous goal of governments to create a sustainable rate of inflation throughout the world has now been achieved. Inflation was masked for years by remaining sequestered in asset prices alone. But now it has spread to consumer prices and wages. Therefore, central banks have no choice but to react ex-post to keep inflation from transcending their fatuous and dangerous targets.

But, what they cannot fully understand it that there is a record $250 trillion of global debt that was issued in order to push up asset prices to unchartered valuations. And those asset price bubbles are completely dependent upon never-ending and ever-increasing central bank and government stimuli to remain in a bubble; or the entire artificial construct comes crashing down.

However, the inflation pump has been turned off this year and will go into reverse throughout next year. This change is not so much by choice but due to asset price levels and inflation rates that are at risk of becoming intractable if central banks did not act.

That is the trenchant difference from the past few years. It is going to be extremely painful for investors that are unprepared for this incredible change. It has become essential to model these changes that are now occurring in the growth and inflation dynamic. The Pento Portfolio Strategies’ proprietary Inflation/Deflation and Economic Cycle Model SM indicates there should soon be an opportunity to profit from the coming deflationary crash in markets; and then the strategy would be to pick up the pieces in the middle of the carnage to ride the next wave of inflation higher.

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.

© 2018 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