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July 26^th 2021

 The Fed’s manipulation of the money supply and its cost has served to obliterate the function of asset price discovery, just as it has also caused the middle and lower classes to reduce their standard of living. Since a greater percentage of their falling real incomes goes to the purchase of food and energy–the things most effected by money printing–the wealth gap, which the fed avows to care about, has become greatly exacerbated.

After foolishly and desperately pursuing inflation many years, the dog finally caught the truck. But predictably, the freedom killers at the FOMC are coming to realize inflation is easily tractable on both ends of the spectrum. Its asinine 2% inflation goal was meant to be a ceiling when first proposed; but was underachieved for many years. However, that level has now been transcended by leaps and bounds. The evil inflation genie was released out of the bottle and putting it back in will entail destroying the stock market and economy as a direct consequence. In other words, it took trillions upon trillions of helicopter dollars to get inflation and asset prices where they are today. And unless the Treasury and Fed assent to doing that same thing on a more consistent basis, asset prices and the economy should succumb to a deflationary meltdown next year. A Pyrrhic victory over inflation is the best we can hope for.

On a slightly brighter note, James Bullard, President of the Saint Louis Fed, is now conveying a rare bit of sanity from the odious organization he represents. He conveyed in a recent Bloomberg interview that the time to taper the fed’s asset purchases is now. Most importantly, he went on to say that the fed no longer has the luxury of tapering its QE program in a pre-determined timeline, as Ben Bernanke laid out in the first Taper back in 2013. Bullard said the fed must have flexibility this time around. But the Fed President emphasized that this is not because of the fear that he might unwind purchases too quickly. But rather, because of the fear that inflation is running so hot that the fed must have the ability to end its bond purchases sooner.

However, this is where the wisdom of Mr. Bullard unfortunately ends. He said he expects GDP growth to be stronger in the next few years than it was prior to the pandemic. This assumption was based primarily on hope; and no specific reason was offered to support this view other than some amorphic blather about technological improvements that have supposedly been made over the past two years—really? In contrast, any potential economic growth has been severely encumbered by inflationary pressures, much bigger and more unstable asset bubbles and a humongous increase in the debt load.

To this point, Total non-financial debt has skyrocketed from $54.3 trillion, at the start of the pandemic, to $62 trillion as of the end of Q1 2021, according to the latest data available from the Flow of Funds Report. That is a $7.7 trillion increase in the past 5 quarters. To put this in context, in the 5 quarters leading up to the pandemic, Total Non-financial Debt increased by just $2.9 trillion. Which was, by the way, already an incredibly onerous increase in new debt that was being piled on to an economy that was already debt disabled. It is an immutable economic law that debt is a tax on future growth, as it deprives the economy of crucial capital investments, just as it also chokes off consumption.

In the last year and a half, the fed’s balance sheet has skyrocket by $4.1 trillion. This means from the creation of the Federal Reserve back in 1913, all the way through to the start of 2020, the fed’s balance sheet grew to $4.1 trillion. Incredibly, it has now skyrocketed to $8.2 trillion. Meaning the fed took 18 months to permanently print what it formerly took 107 years monetize. However, sometime during 2022 the fed’s balance sheet will stop growing once Mr. Powell ends QE. Hence, the amount of newly created money that will be flowing into the markets will go from a $4.1 trillion pace to $0. Also, in the last year and a half the government dumped $6 trillion of fiscal stimulus into the economy. In 2022 that number will crash from 25% of GDP, to just 2% of GDP–in other words, just a few hundred billion dollars. Also, investors should not ignore the mutations of COVID-19 that are already causing governments to put on new restrictions and shutting down parts of the globe. If anybody thinks the stock market will be unaffected by all this, they are either lying to you or ignorant about what drives stock prices.

You just cannot have the stock market trading at more than 2x underlying US GDP unless something very unusual is going on. Either the economy is growing at warp speed, or the fed’s balance sheet must be booming in similar fashion in order to justify these equity market valuations. The problem is you will have none of it come next year.

I think this quote from my friend John Rubino of DollarCollapse.com sums up the precarious position central banks have placed the equity market in perfectly: “But hey, working into one’s 70s while loading up on volatile assets like stocks is just the price we have to pay so the big banks and their favored customers make enough money to finance incumbent politicians’ re-election campaigns. See, the system works!”

My follow up quote is as follows: The soul of America has been sold out to deep-state war mongers, race-baiting politicians, Wall Street avarice and arrogant-anti-capitalist central bankers. May God help us through this current turmoil and the chaos that is to come.

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

July 12^th 2021

We are probably very close to the peak of this ersatz bull market and economy. Peak vaccination distribution, along with the peak optimism about the vanquished pandemic and the re-opening of the economy. U.S. corporations are experiencing peak profit margins. The economy has enjoyed peak fiscal and monetary stimulus and those tailwinds will soon become strong headwinds. Also, peak tax relief is now in the rear-view mirror; and higher taxes are around the corner. Finally, peak asset valuations have arrived and the associated wealth effect is now waning.

Confirming this view is a series of slowing economic data–a reduction in the rate of change in growth and inflation. For now, this is not a crisis or a recession; but is set to become one next year.  Here are some facts and data:

Personal income decreased $414.3 billion (2.0 percent) in May, according to the Bureau of Economic Analysis. Personal consumption expenditures were virtually unchanged. Despite the fact that job openings are at an all-time high, at the same time, initial jobless claims are running at a level that is 75% above/higher than the pre-pandemic level. This begs the question: why is the US laying off people at a rate that is three quarters greater than before COVID-19, despite the fact that the economy has reopened? After all, the pandemic crisis is now a year and a half old; shouldn’t layoffs be almost non-existent?

The U.S. international trade deficit in goods widened 2.8% to $88.1 billion in May. The current account deficit, a broader trade measure that includes earnings on investments, widened to a 14-year high in the first quarter. What this means is that the US economy is not really booming at all, it is just taking newly minted dollars and buying things that are made overseas. What we have is peak consumption of things that aren’t made in the USA. Hence, there is not a condition of sustainable and robust GDP growth.

And, even the once-mighty housing market is starting to cool down sharply. Mortgage applications to purchase a home were 17% lower than the same week ending June 25th one year ago. The reason: home prices have risen to the highest level ever—up 14.6% y/y; and are becoming more and more unaffordable relative to incomes, while the cost to take out a loan has increased.

What all this means is that the stock market has reached a point that is in peak danger of a crash. This condition is virtually unavoidable given that the boom was completely artificial and thus unsustainable. In fact, the economy in an even more fragile state than it was prior to the pandemic. However, and this is crucial, even though chaos is coming, the timing for it to start is not at this moment. We need to be vigilant for a recession and/or credit crisis because that will be the catalyst for the 30-80% plunge to begin. This is what my 20-point IDEC model is designed to predict.

There now exists the greatest amount of margin debt on record, both in nominal terms and percentage of GDP terms. The numbers are $812 billion, which is nearly 4% of GDP. Also, passively managed funds now account for nearly half of all mutual fund and ETF assets. Up from just 14% in 2005. This means investors are just blindly piling into funds that mirror the averages. Hence, when the next bear market arrives, the market will go no bid as a result of the massive liquidations of these funds that occur simultaneously. This will force these same funds to sell the underlying securities to meet redemptions, which will in turn cause more passive holders to panic out of these funds.

Avoiding huge draw-downs in your investment portfolio is absolutely mandatory. According to NED Davis research, since 1960, the average time for the S&P 500 to recover from a 20% correction is 3 years. But a 20% correction isn’t the real risk. As already indicated, the more likely danger is a 50%+ plunge. That is how much the market would have to drop just to get back to fair value, according to the most relevant metric total market cap of equities to GDP. Hence, the greatest opportunity to make money in this market should be to short it.

The catalyst will be the same as what caused the downdrafts in 2000, 2008, 2018, & 2019: The Fed believes its own hype and begins to remove the monetary stimulus in the hope the economy has recovered. However, what the fed doesn’t understand, or refuses to acknowledge, is its massive manipulation of interest rates has caused the level of debt and asset prices to skyrocket far beyond the support of the free market, which places the economy in a much more dangerous position. Therefore, an innocuous removal of its falsified stimulus is impossible.

Bottom line: the bull market is ending because the fed is set to kill it. The process may be slow to evolve because the Mr. Powell probably won’t start tapering until the end of this year. However, once the process is in full gear, the reality check should begin.

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

June 28^th 2021

The Japanese Government Bond market is nearly $10 trillion in size. It is the 2nd biggest bond market in the world. However, it comes as a shock that this humongous market barely trades any longer.

The government of Japan has systematically supplanted and killed the entire private market for its bonds. Meaning, there are almost no private investors who will touch it any more. The Bank of Japan has bought so much debt that it forced interest rates below zero percent back in 2016; and the result is the free market has subsequently died.

Investors are now refusing to buy JGBs, which are guaranteed to lose principal in nominal terms—and deeply negative results after adjusting for inflation. But at the same time, are not in any hurry to sell their existing holdings because they understand the government will be propping up bond prices.

In this same vein, the 5-year greek yield recently turned negative. This is prima facie evidence that centrals banks have committed murder-one when it comes to markets. Back in February of 2012, at the height of the European debt crisis, the Greek 5-year Bond Yield skyrocketed to 63%. The free-market deemed the nation to be insolvent and that it could never pay back its debt without returning to the Drachma; and then turning it into confetti. Hence, bond yields surged—makes perfect sense, correct? Also in 2012, the Greek National debt to GDP ratio was 160%. Today, that ratio has soared to an all-time record high of 210%; and yet, these bonds display a negative cash flow going out 5 years in duration. Only one thing has changed: central banks deemed it mandatory to step in and replace the entire demand for government debt in order to force interest rates towards zero percent. It is the only way these countries would have any semblance of solvency.

Sadly, the U.S. is headed in this exact same direction as Greece and Japan. And, that is why we can be certain central banks’ monetary tightening cycles can’t last for very long and will end in disaster–as per usual. In fact, Mr. Powell will probably torpedo markets before he is able to end his current historic and massive QE program.

If you want to know how fragile markets really are, just look at the 2.5% selloff during the week surrounding Powell’s June FOMC press conference. The fed hasn’t started to end QE yet. In fact, it hasn’t even set a date to start the taper. All the fed’s money printers have done is admit that they have begun to discuss when to think about a time for the start of tapering $120b per month in asset purchases.

Now let’s talk about the gold market because it is related to what this commentary is all about.

We issued a warning on gold back in Sept of 2020 because of what we termed “the vaccine dead zone” was approaching, which would cause real interest rates to soar. That is exactly what occurred. Gold dropped by 20% from August ’20, thru April ‘21. Now the Fed has admitted that it has begun to talk about ending QE. But this is not the start of another bear market in gold. Instead, it is most likely the end of the bear market and the incipient beginnings of a massive bull market. Why? because of what I pointed out at the start of this commentary. The fed can’t remove very much liquidity from the system before chaos reigns on Wall Street.

The simple truth is, asset values and debt levels have grown to become such enormous monstrosities that they prohibit the tightening of monetary policy much at all before the entire fragile and artificial edifice collapses.

Right now, my 20-point Inflation/Deflation and Economic Cycle model indicates there is still some room to run on this bull market. This is what prevents us from panicking out of stocks prematurely, as some are prone to do. However, the time for a massive reconciliation of asset prices is growing close.

Wall Street’s favorite mantra post the Financial Crisis was: either the economy improves enough to boost earnings and the market, or the Fed will keep printing money in order to support stocks and engender a perpetual bull market. Now, as a result of the Fed’s “success” with creating runaway inflation, the exact opposite calculation is now true: either the economy soon slows down significantly enough on its own, which will depress EPS & inflation, or the Fed will tighten monetary policy until inflation is tamed, which will cause asset bubbles to collapse.

Central banks have destroyed price discovery across the board. As these maniac money printers begin to exit their market manipulations, the free market will demand much lower asset prices. The challenge for investors is to actively manage your portfolio in order to maintain—or perhaps even increase–your standard of living, in spite of the carnage that is set to occur on Wall Street and Main Street.

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

The Japanese Government Bond market is nearly $10 trillion in size. It is the 2nd biggest bond market in the world. However, it comes as a shock that this humongous market barely trades any longer.

The government of Japan has systematically supplanted and killed the entire private market for its bonds. Meaning, there are almost no private investors who will touch it any more. The Bank of Japan has bought so much debt that it forced interest rates below zero percent back in 2016; and the result is the free market has subsequently died.

Investors are now refusing to buy JGBs, which are guaranteed to lose principal in nominal terms—and deeply negative results after adjusting for inflation. But at the same time, are not in any hurry to sell their existing holdings because they understand the government will be propping up bond prices.

In this same vein, the 5-year greek yield recently turned negative. This is prima facie evidence that centrals banks have committed murder-one when it comes to markets. Back in February of 2012, at the height of the European debt crisis, the Greek 5-year Bond Yield skyrocketed to 63%. The free-market deemed the nation to be insolvent and that it could never pay back its debt without returning to the Drachma; and then turning it into confetti. Hence, bond yields surged—makes perfect sense, correct? Also in 2012, the Greek National debt to GDP ratio was 160%. Today, that ratio has soared to an all-time record high of 210%; and yet, these bonds display a negative cash flow going out 5 years in duration. Only one thing has changed: central banks deemed it mandatory to step in and replace the entire demand for government debt in order to force interest rates towards zero percent. It is the only way these countries would have any semblance of solvency.

Sadly, the U.S. is headed in this exact same direction as Greece and Japan. And, that is why we can be certain central banks’ monetary tightening cycles can’t last for very long and will end in disaster–as per usual. In fact, Mr. Powell will probably torpedo markets before he is able to end his current historic and massive QE program.

If you want to know how fragile markets really are, just look at the 2.5% selloff during the week surrounding Powell’s June FOMC press conference. The fed hasn’t started to end QE yet. In fact, it hasn’t even set a date to start the taper. All the fed’s money printers have done is admit that they have begun to discuss when to think about a time for the start of tapering $120b per month in asset purchases.

Now let’s talk about the gold market because it is related to what this commentary is all about.

We issued a warning on gold back in Sept of 2020 because of what we termed “the vaccine dead zone” was approaching, which would cause real interest rates to soar. That is exactly what occurred. Gold dropped by 20% from August ’20, thru April ‘21. Now the Fed has admitted that it has begun to talk about ending QE. But this is not the start of another bear market in gold. Instead, it is most likely the end of the bear market and the incipient beginnings of a massive bull market. Why? because of what I pointed out at the start of this commentary. The fed can’t remove very much liquidity from the system before chaos reigns on Wall Street.

The simple truth is, asset values and debt levels have grown to become such enormous monstrosities that they prohibit the tightening of monetary policy much at all before the entire fragile and artificial edifice collapses.

Right now, my 20-point Inflation/Deflation and Economic Cycle model indicates there is still some room to run on this bull market. This is what prevents us from panicking out of stocks prematurely, as some are prone to do. However, the time for a massive reconciliation of asset prices is growing close.

Wall Street’s favorite mantra post the Financial Crisis was: either the economy improves enough to boost earnings and the market, or the Fed will keep printing money in order to support stocks and engender a perpetual bull market. Now, as a result of the Fed’s “success” with creating runaway inflation, the exact opposite calculation is now true: either the economy soon slows down significantly enough on its own, which will depress EPS & inflation, or the Fed will tighten monetary policy until inflation is tamed, which will cause asset bubbles to collapse.

Central banks have destroyed price discovery across the board. As these maniac money printers begin to exit their market manipulations, the free market will demand much lower asset prices. The challenge for investors is to actively manage your portfolio in order to maintain—or perhaps even increase–your standard of living, in spite of the carnage that is set to occur on Wall Street and Main Street.

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

June 21, 2021

The Producer Price Index for the month of May was up 6.6% year over year. This was the greatest yearly increase since the Bureau of Labor Statistics began tracking the data. In addition, the Headline Consumer Price Index rose 5% year over year in May, which is the fastest pace since August 2008. Import Prices also surged in May, soaring by 11.3% in the past twelve months—the greatest surge in a decade. However, those blistering rates of inflation didn’t rattle the bond market much at all. In fact, the bond market is completey unfazed by the current inflation data.

Below is a chart of the Benchmark Treasury yield intra-day on June 10^th, the day of the hottest CPI print in 13 years. And it wasn’t a sell-the-news even either, because interest rates had been falling into the release of the strongest inflation print in over a decade.

But it’s not just the bond market that is quiescent about inflation. Commodity prices have started to slip too. Lumber prices are tumbling, as new home prices have now climbed above the reach of most consumers. And, Dr. Copper is declaring that peak growth and inflation has arrived too, regardless of the strong data seen today.

Of course, having interest rates this low are completely ridiculous. The Atlanta Fed GDP estimate for Q2 real economic growth is 10.3%–estimate as of June 16, 2021.  When you add Consumer Price Inflation into the calculation, you get 15.5% nominal GDP growth. Now, what would you think an investor would require in a fixed income instrument offered by Uncle Sam going out 10 years when nominal growth is above 15%? Well, history dictates that it should be close to that 15% nominal GDP figure. But instead, Benchmark Treasuries offer just 1.5!

That is the most distorted and manipulated rate in the history of the United States, thanks to relentless central bank intervention. However, such a low relative yield could only exist if the current rate of growth and inflation is deemed to have peaked by whatever is left of the free market. Who are these players? For the most part, they are an elite group of individuals with massively deep pockets and access to the best information.

But still, the current inflationary environment is confounding many investors and most in the main stream financial media; who tend to just perform the exercise of linear extrapolation to predict the future.

So why are bond yields falling, along with key commodity prices, when the current data on growth and inflation are so strong? The answer is threefold. These savviest of investors understand that the bulk of government fiscal stimulus has passed. In fact, approximately 88% of the total amount earmarked for direct relief has already been disseminated, according to the IRS. Also, the Fed is on the precipice of winding down its humongous and record-setting $120 billion per month stimulus scheme. But perhaps the most important reason for the certainty we have that growth and inflation rates have peaked, is that this past pandemic-induced recession was anything but typical.

During most economic downturns, the economy goes through a period of sharp deleveraging. But the exact opposite occurred during the COVID-19 recession. Total debt, both public and private, has now soared to just below $80 trillion, which is now 380% of GDP. The previous cycle-high was 370%, which occurred back in Q2 2009—at the nadir of the Great Recession. And debt is still being piled on. Household debt totaled $16.9 trillion for the 1st quarter of this year. It soared at a 6.5% annual rate, which was the fastest pace of debt growth since 2006.

The fact is, the economy was late-cycle prior to the pandemic, and has simply returned to late- cycle once again. Meaning, there has been no deleveraging of the corporate or consumer balance sheets, as is the usual case at the end of a recession and the start of a new business cycle. Debt levels have increased significantly across the board–especially at the Federal government level. The US economy was debt-disabled prior to the pandemic and it will be even more so ex post. An economy with a debt to GDP ratio near 400% just can’t grow quickly and will experience low inflation–that is, of course, unless and until the currency plummets and causes interest rates to soar.

Not only this, but there has been absolutely zero reconciliation of asset prices this time around. In an ordinary recession, asset prices are sold as debt is paid off. In this case, real estate, equities and bond prices are trading at all-time record-highs. Hence, the economy should soon return to its pre-pandemic late business cycle conditions of below trend growth and inflation, with the most dangerous and deflationary asset price correction in history still ahead.

Mr. Powell and his merry band of money printers at the Fed recently wrapped up the June FOMC meeting. After aggressively courting inflation for years, they have finally received satisfaction. But they now want to spurn it–happily, in my opinion. Hence, they pulled forward the dot-plot to indicate 2 rate hikes by the end of 2023. And, during Powell’s press conference he indicated the tapering talks have begun. However, the 10-year Note still was anchored around 1.5% despite the more hawkish fed.

Here’s a glimpse of what lies ahead for the market: by the second quarter of 2022, which is only 3 quarters away now. The year over year rate of change in growth and inflation will not just be slowing down, it should be plunging. At the same time, as mentioned already, virtually all the fiscal stimulus will be over and done. No more expanded child income tax credits, no more stimulus checks, enhanced unemployment will have ended, student loan/mortgage and rental forbearance will have expired. And, the Fed won’t just be talking about tapering, it will be in the middle of eliminating its $120 billion per month bond-buying scheme.

In other words, the credit markets should be freezing up and the stock market should be plunging from record high valuations by that time. Today’s Fed decision expedited the timeline for that chaos to begin. The buy and hold portfolio is a danger to your retirement’s health. the time to get into a dynamically-managed strategy in now.

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

June 14, 2021

Inflation is running white-hot right now, and the reason is clear. It is because the Treasury poured $6 trillion into the economy between March of 2020 to March of 2021. That amounts to nearly $50,000 per US family in the name of pandemic relief. According to David Stockman, the government’s largess was equal to 7.5 times the $800 billion of economic growth lost due to the various lockdowns and restrictions—both self-imposed or mandated. This time around the money wasn’t just sent to Wall Street, as it was in the wake of the Great Financial Crisis of 2008. Covid-19 was a perfect excuse to deploy Modern Monetary Theory (MMT) directly to state and local governments, consumers, and businesses as well.

In other words, the government didn’t just re-liquefy the banking system and then maybe hope consumers would receive some of the monetary crumbs as an ancillary consequence. The various virus-related rescue packages circumvented banks and pushed funds directly to the mass population. Paying people to lay fallow while at the same time giving them money to actually increase their consumption habits is a perfect recipe for rapidly rising Consumer Price Inflation. However, such a feat cannot be duplicated anytime soon without destroying the US dollar and the full faith and credit in our sovereign bond market.

As far as the stock market is concerned, you can’t drive the proverbial investment vehicle while looking in the rearview mirror. It’s always the next macroeconomic condition for which investors need to prepare for, as the current state of affairs is always priced-in. Accelerating rates of growth and inflation should prove to be transitory because they have been based on the artificial measures of fiscal and monetary carpet bombs.

However, the experiment with MMT is in the process of ending…for the time being. September 4th will mark the end of the $300 per week in enhanced unemployment subsidies. These erstwhile employees will have to head back to work, many for less pay. But they will be producing goods and services, which will be key towards relieving supply shortages and reducing bottlenecks that tend to increase prices. Not only this, but 41 million people have to start paying student loans once again come October 1st. Americans now owe about $1.7 trillion of student debt, more than twice the size of their credit-card liabilities, according to Bloomberg. And, over the course of this fall, mortgages and rent forbearance ends. Meaning, consumers must soon resume paying their greatest monthly expense–thus, vastly reducing their discretionary spending.

Hence, the US economy is about to go over a massive fiscal cliff; and the monetary cliff is just as deep. Indeed, the plunge has already begun. First, the Fed will end up having reduced the annual growth in its balance sheet to around $1.5 trillion for all of 2021, from $3.2 trillion in debt that was monetized during all of 2020.

Second, Mr. Powell announced on June 2nd that the fed would begin to sell $13.7 billion of its corporate bonds and ETF holdings. Now admittedly, this is a very small fraction of the total $10 trillion corporate debt market. But it’s the psychology of markets that matter. Back in March 2020, the Fed said it would purchase an unlimited number of Treasuries and MBS, as well as buying corporate bonds and ETFs for the first time in its history. Wall Street became completely aware that the Fed was going to create a bull market in prices across the entire fixed-income spectrum. And predictably, investors began to front-run the central bank’s indiscriminate and infinite bids.

Therefore, it didn’t matter that Mr. Powell only had to purchase $13.7 billion of corporate debt. The Fed went all-in on its backstop for bonds, and everyone became aware it would not let these prices drop. In fact, it eventually sent bond prices and yields to the twilight zone.

For instance, the yield on CCC corporate debt, which is the junkiest of junk-rated corporate debt and only one notch above “D” for default, is just 7%. That yield is the lowest in history and more than 700 bps points below their long-term average. This is one of the many illustrations why the next time QE ends, and interest rates rise, the results will be disastrous.

If you want to know why the stock market has stalled out over the past couple of months, your reason is the fiscal and monetary juice that has supported asset prices, and the economy has started to wane. This will cause a period of disinflation to emerge very soon, requiring investors to own the asset classes and sectors that benefit under such a regime — such as dividend payers that tend to increase their payout. However, the disinflation could turn into a very destabilizing deflationary environment next year. Hence, the next opportunity to make a significant amount of money in the stock market could very well be to short it, as equity prices begin their toboggan ride down the slide.

No one can be sure when this will happen. It could occur during the course of the official tapering of asset purchases. Or, even perhaps once the rate hiking cycle commences. In either case, the fuse has already been lit on the next deflationary recession/depression, which should fracture the equity market deeper and harder than any other time in history when it arrives.

June 7, 2021

The U.S. central bank has metastasized from an institution that was originally designed to assist distressed banks, to one that believes its purview now includes perpetuating asset bubbles, fighting global warming and reconciling racial inequities. Another distortion of the original purpose of the Fed is that its mandate has changed from providing stable prices and full employment, to creating an inflation rate above 2% for a period of time equivalent to the duration it was below that level.

But the members of the FOMC claim there is nothing to fear if inflation were to ever grow too hot because it has the tools to bring it under control. In other words, when necessary, the FOMC can not only stop QE but it can raise rates aggressively enough to vanquish inflation without destroying the markets and economy along the way. Let’s see just how true this contention really is.

But before we get to how “successful” the fed will be to tame inflation, a funny thing happened on the way to achieve its 2% goal. Our central bank focuses on the incredibly distorted core rate of inflation found in the Personal Consumption Expenditures Price Index. But meanwhile, prices are surging in the real world. For instance, headline PCE inflation increased by 3.65% year over year in April. And even in the fed’s preferred metric, prices jumped by 3.1% y/y. Not only this, but a slightly less massaged reading of inflation, which can be found in the headline CPI metric, had prices rising by 4.2% y/y.

If you want an even more accurate view of the current rate of inflation just look at home prices, which are up 21% y/y, according to Redfin data. Also, the 19 commodities in the CRB Index have soared by over 60% in the past 12 months. Safe to say, the actual rate of inflation is already far above the Fed’s inane 2% target.

These absurd inflation rates were brought about by paying citizens $6 trillion between 3/20-3/21 to lay fallow at home and not produce goods and services. Hence, creating supply shortages; and a huge void to absorb the massive liquidity wave. Therefore, the rate of inflation has already climbed to a point that is dramatically destabilizing to the economy. This is the conundrum for our Treasury and Fed: keep printing money and cause inflation to run intractable, which will destroy the stock market and the economy. Or, stop monetizing debt and let the gravitational forces of deflation implode the gargantuan asset bubbles. Given the history of the Fed, it is clear Mr. Powell will soon try to once again convince investors that the U.S. economy has healed and it’s time to normalize monetary policy.

Most in government and on Wall Street claim that the Treasury can slowly and innocuously reduce its spending while the Fed gradually stops printing money. However, this is virtually impossible because of the massive amount of debt taken on since the start of the global pandemic and the mind-boggling level of asset prices–which are predicated on free and continuous money printing.

Twenty percent of the largest U.S. corporations are in the zombie category (meaning they don’t earn enough money to even pay interest on outstanding debt). Those big businesses are carrying some $2.6 trillion in debt, according to Barron’s. Once the free-money spigot is turned off, massive bankruptcies will emerge. The asset bubbles in junk bonds, real estate and equities have been built on top of that risk-free-rate of zero percent. Take it away and the game ends in catastrophe.

History is clear regarding this dynamic. In the year 2000—the peak of the NASDAQ bubble–the Fed Funds Rate (FFR) was 6.5%. It was reduced to 1% by June 2003, in order to help ease the pain of the imploding stock market. But by June 2006, the Fed promised the crisis was over and had the FFR back to a lower high of 5.25%.

However, Mr. Bernanke had it all wrong. Bringing interest rates close to the average rate caused the housing market to crash. In the wake of the Great Financial Crisis, the FFR was taken to zero percent by December 2008—it was the first time in history that money became almost free.

Of course, the members of the FOMC are very slow learners. The Fed was once again assuring a weary consumer that the once in a hundred-year storm had passed, and the current Fed-Head Jerome Powell finished the job started by Janet Yellen when he took rates to another lower high of just 2.5% in 2018. Nevertheless, a crash in the equity market in the fall of 2018, plus a REPO market crisis in the summer of 2019 caused the Fed to cut rates three times, to 1.75% by October of that same year. Unsurprisingly, the global Pandemic eventually put the FFR back to zero percent, but it was already on its way there before the advent of COVID-19.

Money printing, debt accumulation and asset bubbles have become the fragile foundation for which this current economy is built. Therefore, the notion that the Fed can end its $120 billion per month QE program and gradually raise interest rates back anywhere close to the normal level of 5-6% is ridiculous. Indeed, it would be shocking if it could get rates close to the previous high of 2.5%–the new lower high on the FFR is probably below one percent given the massive increase in the number of insolvent companies and unsustainable level of equity valuations.

Forget about 2% core PCE inflation. Intractable inflation is acutely manifest in asset prices right now! However, the government and many businesses can only pretend to be solvent while borrowing costs are close to zero. Take the free money away and the whole system goes belly-up.

For proof, just think about the following three key data points. For proof, just look at the following three key charts.

If the Fed couldn’t normalize rates before, how could it possibly come close to doing so now?

The truth is any real effort to tighten monetary policy back to the previous old high of 2.5% will cause the credit markets to freeze once again, which should cause a more intense market crash than the other previous attempts to normalize borrowing costs. Nevertheless, Mr. Powell will soon lead the average investor down this predictably perilous path toward perdition. The question is, what happens when consumers and investors reach the epiphany that the Fed’s tools for the purpose of taming inflation have now become broken?

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

May 10, 2021

The rates of growth and inflation are now surging in the U.S., but that shouldn’t be a surprise to anyone. What else would you expect when the Federal government has sent $6 trillion dollars in helicopter money to state and local governments, businesses, and individuals over the past year. Then, at the same time, millions of homeowners are told they don’t have to pay their mortgages. In addition, our central bank has printed trillions of dollars to push asset prices through record-high valuations and continues to create $120 billion each month in order to keep Wall Street happy.

All the above is happening while the economy opens up due to the dissemination of COVID-19 vaccines. The markets have anticipated this economic boom and have now nearly fully priced it all in. For instance, home prices have soared by 12% year over year in February, which was the fastest increase in the past seven years. And, the total market cap of equities is now over 200% of GDP—about twice the level reached at the start of the Great Recession.

But that rate of change in growth and inflation will be peaking in the next two months. I’ll explain why that is and what that means for investors?

First off, borrowing costs and the rate of inflation are much higher than they were a year ago. Consumer Price Inflation jumped by 2.6% year-over-year in March, as compared to only a 0.3% increase y/y in April 2020. And, the rate on Benchmark Treasuries has increased by more than 100 bps since last year. Not only this, tax rates are headed higher on both corporations and on those consumers who are traditionally responsible for creating job growth. A rising cost of living, increased debt service payments, and an attack on capital formation—and indeed capitalism itself–should serve to vastly inhibit economic growth later this year and especially into 2022.

This dovetails into the overall fiscal cliff that is rapidly approaching. The $6 trillion in pandemic assistance over the past year was a powerful adrenaline shot that greatly boosted consumption. But artificial sugar highs are temporary, and there are no more comparable helicopter money drops in the works. Even if all of President Biden’s proposed $4 trillion infrastructure and American Families Plan is made into law, it will be spaced out over ten years. Hence, the impact will be much more muted and diffused than the previous two massive fiscal carpet bombs. Also, the total of 18 months’ worth of mortgage forbearance ends on approximately 2.7 million distressed homeowners come this fall. And, the Pandemic Emergency Unemployment Compensation Program provided 53 weeks of additional jobless benefits. That extra $300 per week expires the week ending September 5, 2021.

Secondly, we are approaching peak COVID-19 optimism. The number of individuals getting vaccinated per day is now dropping quickly. In other words, peak vaccination in the U.S. has arrived. The U.S. averaged 2.4 million vaccinations per day during the last week of April, according to the Centers for Disease Control and Prevention data. That level is down from a peak of 3.4 million vaccinations administered on April 13. What is more discouraging is that the global death rate from COVID-19 is rising sharply. The 7-day average was 13,235 deaths on April 30. That is twice as high as it was during the April 2020 peak and four thousand more deaths per day than the month-ago period. Come this fall and winter, we will learn more about the longevity of these vaccines. What exactly is the duration of the immunity they provide, and do they protect from the more contagious and virulent variants that are currently ravaging places like India, Laos, and Thailand? We may need to re-vaccinate the majority of the population all over again. If so, how smoothly will that happen? The current belief is that the pandemic will be behind us come this summer. But we must be vigilant against a COVID resurgence later this year, which will likely bring with it the associated economy-killing restrictions and lockdowns.

And thirdly, the most salient factor that is set to implode the array of asset bubbles that are currently in existence is the monetary cliff. Fed-Head Jerome Powell should officially announce the plan to taper his asset purchase program this summer. In fact, Dallas Federal Reserve Bank President Robert Kaplan thinks the time to discuss tapering has already arrived. He said the following on April 30: “We are now at a point where I’m observing excesses and imbalances in financial markets,” He especially highlighted stock valuations, tight credit spreads, and surging home prices as the real dangers. However, the truth is the unofficial tapering of asset purchases is already underway. The Fed’s balance sheet increased by $3.2 trillion during all of 2020, but that figure should “only” increase by $1.5 trillion for this year. Turning off the monetary firehouse completely in 2022 will be far more destructive than the last time it occurred in the years following the Great Recession.

The last time the Fed announced a plan to taper its $85 billion per month QE program was back in May 2013. As a consequence, the S&P 500 dropped 6.5% in three weeks. But that relatively minor hiccup occurred because the stock market was extremely cheap in comparison to where it sits today. The Total Market Capitalization of Equities compared to GDP was just 103% at the time of the first Taper Tantrum. In sharp contrast, it is 205% of GDP today!  And Jerome Powel’s $120 billion per month QE scheme is almost 1.5x the size of then-Fed Chair Ben Bernanke’s money printing endeavor.

Also, during the two years prior to “The Taper Tantrum” (from May 2011 thru May 2013), the Fed’s balance sheet increased by just $600 billion. This compares to the whopping $4.7 trillion of asset purchases that will have occurred from January 2020 thru the end of this year—assuming the Fed doesn’t start reducing its purchases until 2022. Those trillions of dollars helped send asset prices to the thermosphere and have inflated a much bigger bubble than has ever existed before. Hence, this removal of monetary support should carry much greater significance this time.

Yet another consequence of the Fed’s monetary manipulation is the effect it’s having on the corporate bond market. U.S. corporate debt outstanding has surged to reach $10.6 trillion. That is a record high 50% of GDP. For context, this figure was just 16% of GDP back in 1980. Junk-rated debt yields are at the tightest spreads to Treasuries, and their yields are the lowest in history. Of course, the yield on Treasuries has been massively distorted by the Fed as well. In fact, the government was able to sell $40 billion in T-bills on April 29 with a yield of exactly zero. Yes, the bubble in fixed income is incredulous.

Asset prices have been driven higher precisely because of the near $5 trillion in newly minted money that was thrown at Wall Street over the past two years. However, sometime next year, we will learn what happens to these bubbles when the monetary speedometer goes from $5 trillion to $0.

What all this means is that the rates of growth and inflation are about to slow. This isn’t a reason to panic…yet, but it does require a change in your investment allocations.  For now, the deceleration should be at a gradual pace for the remainder of this year, which means bond and bond proxies should start to fare better than the asset classes, style factors, and sectors that are geared towards a rapidly accelerating economy.

However, disinflation and slowing growth could morph into deflation and recession next year. Such macroeconomic conditions should prove devastating for these record asset bubbles. Good money managers must know how to appropriately navigate these cycles. And, most importantly, be able to determine when it is time to sprint for the emergency exit before the real chaos begins. That requires the ability to know when to raise cash, move into short-duration bonds, get the long the dollar, and allocate to a net-short position in equities.

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

April 26, 2021

 We all should be aware that the current Federal Reserve of the United States is not America’s first central bank. In fact, we’ve had a few others before this current disastrous iteration came into existence in 1913. We hope and believe it won’t be long before this latest version goes away for good.

Our first central bank was founded in 1782 and was called The Bank of North America. Soon after, in 1791, The Bank of North America became The First Bank of the United States, chartered by Congress.  However, in 1811 its twenty-year charter expired and was not renewed.

Five years later, Congress chartered its successor called the Second Bank of the United States that lasted from 1816-1836. This Central Bank collapsed for the same reason the others did before it: they were, for the most part, filled with corruption and became progenitors of speculation and economic instability.

Our founding fathers could never imagine the extent the current U.S. central bank would eventually go to usurp the power from free markets and destroy the value of the dollar.

Why This Federal Reserve Should Soon Become Extinct

I was asked recently in an interview how sure I was that the stock market would crash. My answer was that it is virtually guaranteed to occur given that valuation of equities is–for the first time ever—over twice the level of GDP. And, this metric is a full 100 percentage points greater than it was just prior to the start of the Great Recession. The only question is whether the crash will just be of the 30% variety, or will it be a total wipeout of around 80%, like we witnessed at the end of the Dot.com era.

The next crisis should start sometime between the second half of ’21 through the end of ’22. The catalyst will be the same as it always is: a central bank that tightens its monetary policy because of the delusion that an economic crisis has ended, and it is time to normalize monetary policy. Alas, normalization is impossible precisely because debt and asset bubbles rely on ultra-low rates to survive—and those asset bubbles which exist today are without precedent. Once the monetary support is removed the stock and credit markets begin to melt down as the fuel (liquidity) for these bubbles evaporates.

I have no doubt that the Fed will respond to a 30% market crash with another massive liquidity infusion. However, this liquidity injection may not be as effective as it has been in the past. First off, if the selloff begins anytime between now and the end of next year, the option of significantly reducing the Fed Funds Rate (FFR) is a non-starter. The Fed usually needs at least 500 bps of interest rate relief to turn the markets and the economy around. But Mr. Powell will have no room to lower rates because the FFR will still be at zero percent. In fact, the FOMC’s latest Dot Plot predicts the liftoff from zero won’t be until 2024. And, the Fed’s consummation of its tapering program won’t take place until the middle of 2022. Hence, the Fed should already be engaged with its asset purchase program (QE) in some proportion until the second half of 2022. The central bank will already have its gas pedal essentially to the floor, so the impact from more easing from that level will be muted in comparison to other crises. In addition, with total US debt at a record 400% of GDP, there just isn’t the wiggle room for much more fiscal support without causing a backup in yields.

Most importantly, the Faith in central banking and their fiat currencies is already being shaken to the foundation. Back in the credit crisis of 2008, what was touted by then Fed Chair Ben Bernanke as a once-in-a-lifetime emergency monetary-easing policy has now turned into a perfunctory and ordinary plan of action. The Fed’s retreat to the zero-bound and forays into Quantitative Easing have become, sadly, a rather pedestrian function. This latest trip down the rabbit hole of free money and QE began in 2019–well before the COVID-19 pandemic began.

All previous ventures into QE and free money were greeted with much lower long-term interest rates. This is exactly what the Fed wanted and needed to happen. Lower borrowing costs across the yield curve helps to infuse the economy with new money and serves to re-inflate asset prices.

This tactic has been remarkably effective in the past because subdued inflation and confidence in our sovereign bond market were believed to be permanent economic features–perhaps due to the 40-year bull market in Treasuries. However, the Fed may not be so lucky during this next coming crisis. Our central bank has already printed $7 trillion since 2008 to re-inflate asset bubbles and to support banks’ balance sheets. And, our Nation’s debt now stands at 130% of GDP. Another massive and multi-trillion-dollar increase in the Fed’s balance sheet at this juncture may destroy any confidence remaining in U.S. Treasury solvency.

The Fed has gone so rogue that it is trying to destroy the evidence of its inflation and money printing crimes. Our central bank is no longer reporting its weekly money supply data. M1 & M2 appear to be going the way of M3, which the Fed stopped reporting back in 2006. This chart gives you a clue as to the real reason that our current central bank needs to hide the truth.

But we are not fooled, and neither should you. Investors are growing weary of having their retirement funds destroyed every few years when the Fed’s asset bubbles collapse. And, the perpetual near-zero return from banks is getting harder and harder for savers to overcome. If long-term Treasury yields respond to the next round of money printing by rising instead of falling, as they have done in the past, the next market crash won’t be kept in check easily. Indeed, both equities and fixed income could fall concurrently, which could turn a painful bear market into a complete meltdown—perhaps worse than ever before suffered for those investors that adhere to the buy-and-hold mentality.

This could be the catalyst that sends the current Federal Reserve into the dustbin of history. A free and independent population demands that its central bank shares those very same qualities. The next U.S. central bank must once again link its currency to gold instead of the foolish and corrupt whims of plutocrats and feckless politicians.

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

March 22^nd 2021

In a recent interview, I referred to the Fed as a disgusting institution. I want to explain why I believe that to be the case, as I do not like to disparage anyone or any entity indiscriminately or capriciously—only when absolutely necessary. To be clear, central bankers may not be nefarious in nature, but their product is iniquitous.

Any entity whose very purpose for existence is to destroy markets is inherently disgusting and, in the end, one that ends up being evil.  At its core, the Fed is Robin-Hood in reverse, stealing from the poor by destroying their purchasing power to give to the rich by inflating their asset prices. The Fed, along with all central banks, are inherently freedom killers, middle-class eviscerators, and economic destabilizers, regardless of stated intentions. If that wasn’t bad enough, the problem now is that the Fed has usurped markets to the point of no return.

The Fed’s very mandate encompasses the unholy operation of obliterating price discovery in its paramount function of determining what money actually costs. This process should only be the purview of the free market.  Of course, the level of interest rates does indeed affect all other asset prices. But the Fed wasn’t content with just an indirect influence on asset prices. It eventually morphed from its initial focus on rescuing troubled banks to ensuring stable prices and full employment and then turning to its ultimate purpose of promoting perpetual bull markets in stocks, bonds, and real estate. But the Fed isn’t even satisfied with that, it is now actually also in the business of ensuring the U.S. embraces a government that promotes egalitarian socialist principles and rejects its capitalist roots.

This function is by no means exclusive to America. In fact, such views originated in socialist Europe and are clearly manifest in the European Central Bank.

How far from reality and embracing free markets is the ECB?

The President of the ECB, Madame Lagarde, is now claiming that financial conditions are tightening and putting the nascent recovery from the pandemic in jeopardy. The reason for her concern is interest rates…they are simply rising too quickly and are now too high, in her opinion. And the level of interest rates is of so much concern that the ECB wants to stem that rise in bond yields. What is the level of sovereign borrowing costs that are now being deemed detrimental to the European economy? Well, for examples, the Spanish 10-year note is 0.3%, and the German 10-year note is negative 0.35%. And, because of these “excessively-high” and “frightening” borrowing costs, the ECB is now front-end loading its 1.8-trillion-euro money-printing scheme. In other words, stepping up the pace of its short-term bond-buying, so more bonds are bought presently rather towards the proposed end of its QE program in March 2022.

This is a perfect example of how warped our fiat monetary system has become. Only in the delusional mind of a socialist central banker could negative borrowing costs be excessive. That’s negative in nominal terms; forget about after adjusting for inflation, which sends those already negative yields much lower.

What about Jerome Powell? For now, rising yields are just representative of a healthy economy. This view was reiterated to at the March FOMC meeting and press conference. We have a 1.7% 10-year Note today. But what about once that yield hits 2%+ later this spring or early summer? Will the credit markets continue to function normally; what about the crowded Emerging Markets and short dollar trades? My guess is they will falter as rates breach 2% and lead to an extreme tightening of financial conditions. This is shocking for investors to grasp: if the economy and markets can’t function with benchmark Treasury rates at 2%, what will happen once they normalize to 6-7%?

However, here’s the point: tight financial conditions are coming regardless of what the Fed does. It is unavoidable precisely because of the humongous extent and duration these borrowing costs have been manipulated.

There’s no end in sight for the trap our central bank is in. For without the massive and indiscriminate purchases of the Fed, our Treasury auctions would fail. Meaning, private buyers would only show up after a super spike in yields; but that would render the government insolvent, along with bonds across the entire fixed-income spectrum. To this point, the federal budget gap widened 68% in the first five months of the fiscal year. For the 12 months that ended in February, the deficit totaled $3.5 trillion, or 16.5% of GDP. This, I remind you, is while debt service costs are at a record low and some 500 bps below average. Under a free-market interest rate regime, the deficit would be closer to 35% of GDP! Hence, my conclusion regarding the nefarious trade of central banking is irrefutable.

Our bond market is now in revolt. The conundrum now is that the Fed must continue to print money at a record pace to keep asset bubbles from crashing. However, if central bankers keep monetizing debt in its reckless pursuit of higher inflation, the disruptive move higher in bond yields could become absolutely intractable and catastrophic for these same asset bubbles.

Later on this year, and into 2022, we will be looking at an economy and stock market that will be suffering from higher taxes, higher interest rates on a massively increased corporate and government debt burden, and much higher inflation. In addition, there will be a fiscal and monetary cliff of record proportions—the Fed’s announcement to end the record $120b per month QE program and the wearing off of $6 trillion worth of government stimulus handed out y/y from March 2020-March 2021. Also, the efficacy of the vaccines on COVID-19 variants will become manifest. We may be faced with the fact that we will be living with this virus, along with various restrictions and lockdowns even after the vaccines have been fully administered. God forbid this to happen, but we must remain vigilant.

Hence, even if the market survives this late spring early summer’s interest rate spike, we will still have to deal with the eventual reconciliation of these asset bubbles once the record-breaking fiscal and monetary cliff arrives. Investors would be wise to avoid the Deep State of Wall Street’s set-it-and-forget-it portfolios and instead actively manage these wild swings between inflation/growth and deflation/depression.

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