Pentonomics

Fiscal and Monetary Cliffs Have Arrived

January 10th 2022

 According to Doug Ramsey of the Leuthold Group, 334 companies trading on the New York Stock Exchange recently hit a 52-week low, more than double the amount that marked new one-year highs. That’s happened only three other times in history — all of them occurring in December 1999.

How did we get back to the precipice of the year 2000, where tech stocks plunged 80% and the S&P 500 lost 50% of its value over the ensuing two years? Well, start off with the fact that the amount of new money created by our central bank in the past 14 years is $8 trillion. That, by the way, is an increase in base money supply only and does not include all of the new money created by our debt-based monetary system. So, from 1913 to 2008, the Fed created $800 billion. And, it took from 2008 until today—just 14 years–for it to have created $8.8 trillion in base money supply. Is there really any wonder why inflation has now become a salient issue, especially for the middle and lower classes, and why the stock market is now set up for a meltdown similar to the NASDAQ collapse of two decades ago?

Some might claim that the bubble in the stock market was much different in 2000 than it is today. They are correct. The overvaluation 22 years ago pales in comparison to today. With its record high P/S ratio of 3.5, as opposed to just 1.8 back in 2000. And the mind-numbing record high 210% TMC/GDP ratio, which is an incredible 68 percentage points ahead of where it ascended to 22 years ago.

Ok, so the stock market is much more expensive today than at any other time in history, but what will the catalyst be to set it tumbling off the cliff? Last week I talked about the monetary cliff coming in the next two months. To review: The Fed will wind down its record-breaking $120 billion per month counterfeiting scheme to zero dollars in that timeframe. This Q.E. involved the process of handing newly created money to banks, consumers, and businesses to boost consumption. But by ending this flow of new money, the Fed will also end its tacit support for the municipal bond market, primary dealers, money market mutual funds, REPO market, International SWAP lines, ETF market, primary and secondary corporate debt markets, commercial paper market, and support for student, auto and credit card loans. All of which were directly supported by Jerome Powell’s with the Fed’s latest Q.E. program.

But it doesn’t end there. Mr. Powell cannot be content with just ending Q.E., not with CPI running at 6.8%! Therefore, very soon after Q.E. is terminated, interest rates are heading higher, and the balance sheet of the Fed must start shrinking. However, an occasional 25-bps rate hike here or there won’t cut it. He has to hike rates by 680-bps just to get to a zero percent real Fed Funds Rate. Now, of course, Powell doesn’t intend to hike monetary policy that much because he is fully aware it would collapse the whole artificial market construct well before he gets anywhere close to that level. But the point here is that the FOMC has lost the luxury of being able to delay and dither as it has in the past because inflation is running at a 40-year high. Hence, the Fed will need to hike rates rather aggressively until inflation, the economy, or asset prices come crashing down. But since all three are so closely linked together, they will likely all cascade simultaneously.

And, now this week, I want to shed some new light on the concurrent fiscal cliff and shoot a hole through Wall Street’s excess savings B.S. As most of you are already aware, I’ve been pretty clear about the negative consumption effects that will result from the ending of $6 trillion in government handouts over the previous two years. This massive and unprecedented largess caused the savings rate in the U.S. to jump from 7.8% in January 2020 to 33.8% by April of the same year. However, that savings rate has now collapsed back down to 6.9%—below its pre-pandemic level. But what about the stash of savings consumers are sitting on that is supposed to carry GDP ever-higher this year?

Well, it appears that the rainy day fund is dwindling quickly. According to the N.Y. Times and Moody’s Analytics, the excess savings among many working- and middle-class households could be exhausted as soon as early 2022. This would not only reduce their financial cushions but also potentially affect the economy since consumer spending has risen to become nearly 70% of GDP.

We have already seen multiple pandemic-era federal aid programs expire last September, including the massive federal supplement to unemployment benefits. Now, with the Expanded Child Income tax credit having expired, which gave up to $300 per child under 6, and up to $250 per child ages 7 to 17 over the period from July to December, the fiscal challenges have become salient for many Americans.

But what about that pile of savings? Estimates are that it now amounts to around $2.0 trillion (8.5% of GDP). It’s mostly in the hands of the very rich, who are savers and have a much lower marginal propensity to consume than those in the middle and lower classes. According to a study from Oxford Economics, 80% of that savings is in the hands of the top 20% of earners, and 42% went to the top 1%. Again, this is important because it is the middle and lower classes that are responsible for the majority of consumption. So, how is this economically-crucial cohort doing? Well, in addition to getting hurt by inflation and falling real wages, they are running out of their stimulus hoard quickly. According to a recent study done by JP Morgan Chase, households making $68,896 per year or less only have an extra $517 in their checking accounts on average compared with their pre-pandemic level. As unimpressive as that sounds, add in the fact that people don’t eat into their savings with the same zeal that they spend a fresh government handout, and you can see that so-called “mountain of savings” Wall Street loves to tout isn’t much more than a molehill.

When you factor in the massive fiscal and monetary cliffs together with the most overvalued stock market in history, you have the recipe for potential unprecedented stock market chaos, which should be front-end loaded in ‘22. If your retirement savings is with a deep state of Wall Street firm, you hold some mix of stocks and bonds that is set on autopilot. Their fate should be the same as the Hindenburg and Titanic.

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 Great Reconciliation of Asset Prices

December 20th, 2021

The coming new year will be fraught with risk due to the removal of central bank and government supports. This could very likely lead to the collapse of the most overvalued stock market in history.

According to the Conference Board, US economic growth is set to slow from 5.5% annual growth for all of 2021, to 3.5% during 2022. Of course, Wall Street apologists almost never predict a recession until we are in the middle of one. Nevertheless, it is clear that the growth of the economy will slow significantly next year. And, in the view of Pento Portfolio Strategies, the risk of a recession and an asset bubble collapse is high.

S&P 500 EPS growth will plunge from 45% this year, to just 5-6% in ’22. Again, this is the optimistic view that leaves a great deal of room for error to the downside and virtually zero to the upside. After all, you can only open up an economy once following a global pandemic, and that already happened this year. And, it will be nearly impossible to comp the previous two years’ $6 trillion fiscal support, along with the $4.6 trillion expansion of the monetary base.

We recently learned from the Bureau of Labor Statistics (BLS) that Consumer Price Inflation (CPI) surged by 6.8%, and Producer Price Inflation (PPI) shot up by 9.6% y/y in November. This helped to send Real Average Hourly Earnings down by 1.9 percent from November 2020 to 2021. CPI is running at a 40-year high and is at a rate that is 3.4 times higher than the Fed’s asinine 2% target.

Of course, the clueless Fed finally started reacting to all this inflation by announcing at the December FOMC meeting that it would be speeding up the pace of its taper by two times. But this is happening just when the rate of inflation is actually peaking. In reality, Fed-Head Jerome Powell had no choice but to expedite the tapering of his QE program. After all, it is an untenable notion that the Fed should be adding to the supply of money at a breakneck pace when CPI is the highest since 1982. But without question, Mr. Powell deserves much derision for waiting until inflation reached a multi-decade high before starting to taper asset purchases, let alone begin to raise interest rates off the current level of 0%.

It will take (ten) 25 basis point rate hikes to reach a 2.5% Fed Funds Rate (FFR), which the FOMC now regards as a neutral overnight lending rate. Powell believes a neutral FFR would be 50 bps above the FOMC’s 2% inflation target—assuming inflation falls to that level. In spite of these plans, the chances are very small that the Fed will end up being able to hike rates very much at all before the entire artificial economic construct comes crashing down. This is because the yield curve is already rapidly heading towards inversion even before the tapering of QE has really even begun. An inverted yield curve is a predictor of a recession that has worked 100% of the time. The spread between 2 and 10-year Notes has already contracted from 159 bps at the end of March to just about 75 bps today. Meaning, by the time the QE taper is consummated, there probably won’t be very much room at all to hike rates before an inversion takes place.

But regardless of the Fed’s feckless nature, the fact remains that the biggest buyer and direct supporter of Mortgage-Backed Securities and Treasury Bonds, along with its stated support of corporate debt (including Junk bonds), will be exiting the market entirely come March ‘22. This leaves a tremendously dangerous vacuum in place, especially in non-government-backed debt. The Fed’s QE program has kept the massive real estate and equity bubbles afloat, as well as the $12 trillion worth of Business debt from imploding. But Powell’s Put has expired because inflation is now a big problem.

Then, you must factor in the stubborn COVID Delta variant and the new and more contagious Omicron mutation, which Mr. Powell now views as potentially adding upward pressure on inflation. This could cause the Fed to tighten its monetary policies even more quickly. The consumer will also be left with the complete lack of any fiscal support of any significance next year, after receiving $50k on average per American family over the previous two years.

The truth is, the solvency of nearly every developed nation on earth is contingent on interest rates that remain in the sub-basement of history–AKA, record lows and around zero percent. This is only possible if central banks maintain complete domination of free-market forces and keep their hydraulic presses down on yields. Let’s be honest, without the backstop of these state-owned entities, solvency and inflation concerns would combine to force yields much higher. In the case of the US, with CPI inflation at 6.8% and a national debt-to-income ratio above 725%, it would be impossible for a 10-year Treasury bond to yield just 1.4% without the heavy hand of the Federal Reserve. The point here is that the US has immense solvency and inflation problem now, yet still enjoys record-low borrowing costs thanks to the Fed.

However, this function is now changing. A central bank can usually usurp the free market regarding its sovereign borrowing costs as long as both solvency and inflation concerns are quiescent. For example, the Fed has yet to truly exit its yield curve suppression programs, which have existed for the better part of the last two decades, because consumer price inflation was not an issue. This is true even though our Nation’s debt to GDP ratio is higher today than any time since WWII. Up until this point, that growing trend towards insolvency has been veiled thanks to the central bank’s interventions. But the resurgence of inflation, in conjunction with that humongous debt burden, has become extremely problematic.

In the absence of inflation, central banks have been able to print enough money to ameliorate recessions, bear markets, real estate debacles, and solvency concerns–such as the European debt crisis circa 2012. Where Bond yields in the southern periphery soared to 40% before European Central Bank chief Mario Draghi promised to monetize the debt issues away. Again, he could only accomplish that because inflation was not a concern a decade ago in the Eurozone.

Turning back to the US, the next recession, which is likely to occur in ’22, will cause solvency concerns to spike as revenue collapses and the National Debt-to-Federal-income ratio soars. However, this time around the Fed’s ability to monetize away collapsing asset prices and crumbling economic growth will be fettered by an inflation rate that is already many times greater than it is comfortable with.

That leaves the Fed and Treasury with a dangerous dilemma: allow asset prices and the economy to implode, which will certainly fix the inflation problem; but will most likely lead to a depression. Or, try and pull the economy and assets higher by once again borrowing and printing multiple trillions of dollars, which will send the rate of inflation skyrocketing from its 40-year high. That will risk destroying confidence in the USD and any faith that remains in the bond market. Therefore, the stock market and economy would collapse anyway as inexorably rising inflation pulls yields on sovereign, municipal and corporate bonds ever higher.

Wall Street’s perma-bulls will never admit that the Fed’s Put has now expired. Of course, the Powell Pivot will indeed happen once again as he continues to meander between hawkish and dovish depending on the lagging economic data he receives. But his next pivot back to an uber dove will only occur ex-post the Great Reconciliation of Asset Prices. This is why a buy-and-hold strategy no longer works and why identifying inflation and deflation cycles has become so critical.

 

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.”

 

Interest Rate Normalization is Impossible

November 8, 2021

Stagflation is undermining the U.S. economy, and that poses a huge problem for Mr. Powell and his merry band of money printers.

Inflation is running at a pace that is just about 3x faster than real GDP growth–a figure the Fed can no longer ignore. This is why Mr. Powell had no choice but to announce at November’s FOMC press conference that the Fed would reduce its purchases of MBS and Treasuries by $15 billion each month starting this month. Therefore, officially pushing the economy further towards the edge of the monetary cliff. Meaning, the amount of new monetary creation will go from a record $120 billion per month to zero by the middle of 2022.

Slowing Growth

The U.S. economy grew at a SAAR of just 2.0% in the third quarter, down from 6.7% in the prior period. This deceleration of growth will continue into next year, despite a brief reversal of this trend in the current quarter.

The most astute money managers look at the shape of the yield curve for clues to economic growth. A compressing difference between long- and short-term interest rates means the economy is slowing. When short-term rates are higher than long-term rates, it means a recession is high. Well, there’s no inversion now, so no reason to fear a further contraction in GDP. Right? Wrong! Did you know that the U.S. 30-year Treasury has a lower yield than the 20-year bond? This isn’t the most monitored duration. 10’s and 2’s are. But it would be unwise to ignore this extremely rare event.

Disposable Personal income actually fell by 1.3%, or $237 billion, during September. This can’t be good news for consumers faced with 5.4% CPI. They are drawing down savings quickly as the government subsidies wound down during the last month of the quarter. That trend of depleting savings will escalate into next year. Perhaps this is why the world’s largest retailer outside of China, Amazon, warned last week for the 4th quarter on weaker revenue and earnings. In fact, that slump in income means that the personal savings rate fell to 7.5% last month, which is now below its pre-pandemic level.  It isn’t much of a mystery why consumer confidence is so dour. The Index of Consumer Expectations is down 14.3% on an annual basis.

Despite these facts, Wall St. predicts an economic rebound during 2022. Of course, there should be a brief period of accelerating growth in the 4th quarter primarily due to a reduction in the COVID Delta Variant and the issuance of Expanded Child Income Tax credits. This temporary rebound was evident in the ISM Services Index, rising to 69.8 in October. Nevertheless, starting in Q1 of next year, the economy will have already experienced the full benefit of any reduced Delta cases–assuming the new Delta Plus mutation fizzles out, which is a big assumption. Also, the front-end loaded child tax credit payments end in December. Therefore, the fiscal cliff will be in full effect, just as the global monetary cliff will be in free fall. Add in higher interest rates, high inflation, supply chain bottlenecks, a shrinking labor force participation rate, and a faltering Chinese real estate bubble, and the picture becomes even direr.

Jerome Powell’s Inside Joke

The narrative from Wall Street is that central banks will merely have to lightly tap on the monetary breaks, and inflation will gradually ease back down to 2%. This will lead the financial markets to continue to pile up record high after record high. That might have been a possible scenario if global central banks had not distorted interest rates to such obscene levels. And, as a direct result, conjured the most overvalued equity market in history into existence.

For example, investors must think about this: what would be the yield on European 10-year bonds without the ECB’s record-breaking pace of money printing, which must soon end to combat a 4% inflation rate in the Eurozone? Interest should begin to normalize, and that wouldn’t ordinarily be a problem. However, due to unprecedented interest rate manipulation, the German 10-year Bund is starting off at a negative 0.08 percent. That yield was 5% in the year 2000, before the ECB, along with the other major central banks, adopted interest rate suppression measures. It’s the same dynamic throughout the developed world–including the United States. Benchmark Treasuries were 6% back in 2000, which was prior to the great interest rates suppression scheme taken on by the Fed. Today that yield is just 1.5%.

Hence, interest rate normalization wouldn’t be much of an issue if yields were so distant from historically normal levels. In sharp contrast, they are at the very minimum at least 450 bps away from normal. I say at the very least, because interest rates should be much higher today than they were 20 years ago. This is due to a much higher rate of inflation than witnessed in 2000, coupled with the increased solvency concerns on Treasury debt. To put figures on that statement: The rate of inflation is 200 bps higher than it was in 2000. And, the National debt to GDP ratio is an incredible 70 percentage points higher today than it was at the turn of the millennia.

The simple truth is interest rate normalization would render the U.S. an insolvent nation. The National debt is already $29 trillion–a full 725% of Federal revenue. And, the amount of money needed to service that debt would soar into the trillions each year if rates were to rise anywhere close to a normal level.

Also, rate normalization would result in the wipeout of the record-setting equity bubble, as evident in the current Price to Sales (P/S) and Total Market Cap (TCM) to GDP ratios. There aren’t any better measurements of the valuation of equities than those two ratios. The TMC/GDP ratio was 130% back in 2000. However, it is a shocking 211% today. Similarly, the P/S ratio was 1.5 in 2000; it has skyrocketed to around 3 recently.

Hence, not too far along Mr. Powell’s effort to end Q.E. and the raising the Fed Funds Rate, asset prices should collapse—including the real estate complex–and cause the Fed to once again inform Wall Street that it was just kidding when it comes to allowing the free market to set prices.

Then, watch out for a humongous amount of permanent Universal Basic Income to be deployed, which will be monetized by the Fed. The Stagflation suffered today should pale in comparison to what is to come, as any faith left in the currency and bond market will be destroyed.

Riding these inflation and deflation waves appropriately is crucial to your investment success.

 

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 Demand Shock of 2022

October 11, 2021

 Investors are growing cautious as we approach the fourth quarter, and their trepidation is justified. Here’s a brief summary of the situation: there is a potential global financial crisis stemming from the Chinese property market meltdown, supply chain bottlenecks are growing worse, Q3 Earnings warnings are being reported from many large corporations, interest rates are rising, inflation is at a 40-year high, tax hikes are coming in ’22, and the threat of a U.S. debt default still hangs in the air until the end of November.

The macroeconomic situation today is one of stagflation. Meaning, inflation rates are higher than normal at the same time GDP growth is slowing. To this point, the data shows that 6.2 million people lost their benefits in the week of September 11th, as most government pandemic unemployment relief programs expired. These people all need to find a job, and quickly, to supplant that huge government weekly stipend that is now gone. Instead, we find that weekly layoffs are consistently higher than any other time since before the pandemic all the way back through 2015. And, we see that only 194k net new jobs were added during the month of September.

Capital Economics has this to say about the situation:

“with the labor force still three million individuals lower than it was in February 2020, and surveys suggesting that the number who don’t want a job is increasing, it’s looking more and more likely that labor supply has suffered a permanent hit from the pandemic.”

We also note that the Q3 GDP growth estimate from the highly accurate Atlanta fed plunged to just 1.3%, from the 6.7% pace of growth recorded by the BEA during Q2.

So, it is stagflation for now; but deflation is just a few quarters away because there is a demand shock set to occur stemming from plunging asset prices. The stock market’s recent volatility can be likened to a typical pothole in the pavement. However, a huge crater has formed just down the road. The perfect storm for the stock market and economy is in full development and should hit the U.S. by the second quarter of next year.

Here are a few more details on what we are facing very soon. We have the baneful conditions of higher taxes coming next year on capital creators and its formation, higher interest rates, and higher inflation than what has been witnessed for the past few decades. Not only this, but we have the world’s second-biggest economy (China) that has seen its economic growth derailed by the collapse of its real estate bubble, which has been the very foundation of its growth for the past 20 years. In fact, China’s factory output fell into contraction in September, indicating the economy is already faltering. Then, you add in the dysfunction in D.C., which is unable to agree on another massive fiscal stimulus package. Meaning, government deficit spending, which was 18% of GDP ($3.7 trillion) in 2020, and 16% of GDP ($3.1 trillion) in 2021, will plunge to a still awful, but just about 5% of GDP ($1.2 trillion) in 2022, according to the non-partisan CBO.

Of course, it should be abundantly clear that monetizing huge government deficits actually harms economic growth in the long term. However, printing a massive amount of new money and handing it directly to consumers and businesses does, in the short term, cause an economic adrenalin rush to occur. The payback from that will be acutely felt next year.

Hence, the biggest fiscal cliff since the end of WWII will hit GDP at the very same time the Fed will be forced to tighten monetary policy due to the highest rates of inflation in the past 40 years–leading to the biggest monetary cliff on record. Namely, our central bank has printed $4.4 trillion (an average of $250 billion worth of new money creation each month) over the past 18 months. But Mr. Powell has already indicated the Fed should be printing zero new dollars by the middle of next year, which will set the table for rate hikes towards the end of ‘22. All of these things will collide into the most overvalued stock market in history–and by a humongous margin. The total market cap of equities as a percentage of GDP is 200% today, while the average is 80%. And, the previous peak was 140%, which was reached at the apex of the Great NASDAQ bubble in 2000. As a reminder, from that level the S&P lost 50% and tech stocks plunged by 80% from 2000-2002.

So, for now, it is just an ordinary and pedestrian decline for the stock market to endure that will be marked by extreme volatility in both directions. However, investors should prepare to short high beta stocks and junk bonds when the timing is appropriate. Buckle up; another crash is coming. The question is, will investors continue to abide in the 60/40 stock and bond portfolio if equities are plunging and the bond ballast is broken? Or, will they be prepared to dynamically adjust their portfolios to protect and profit from the great reconciliation of fixed income and equity prices that lies just ahead?

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 Great Deflation of 2022

August 30, 2021

 It is not very surprising to me that nearly every talking head on Wall Street is convinced inflation has now become entrenched as a permanent feature in the U.S. economy. This is because most mainstream economists have no clue what is the progenitor of inflation. They have been inculcated to believe inflation is the result of a wage-price spiral caused by a low rate of unemployment.

In truth, inflation is all about the destruction of confidence in a fiat currency’s purchasing power. And there is no better way to do that than for the government to massively increase the supply of money and place it directly into the hands of its citizenry. That is exactly what occurred in the wake of the global COVID-19 pandemic. The U.S. government handed out the equivalent of $50,000 to every American family in various forms of loans, grants, stimulus checks, enhanced unemployment, tax rebates, and debt forbearance measures. In other words, helicopter money and Modern Monetary Theory (MMT) were deployed—and in a big way. The result was the largest increase of inflation in 40 years.

We’ve had some of the highest GDP growth rates in U.S. history over the past few months and the greatest increase in monetary largess since the creation of the Fed. But this is mostly all in the rearview mirror now. Consumer Price Inflation is all about the handing of money directly to consumers that has been monetized by the Fed. It is not so much about low-interest rates and Quantitative Easings—that is more of an inflation phenomenon for Wall Street and the very wealthy.

The idea that Consumer Price Inflation is now a permanent issue is not grounded in science. As already mentioned, inflation comes from a rapid and sustained increase in the broad money supply, which causes falling confidence in the purchasing power of a currency. At least for now, that function is attenuating.

After all, what exactly is there about a global pandemic that would cause inflation to become a more permanent issue in the U.S. economy? In the 11 years leading up to the pandemic, inflation was not a daunting issue—it was contained within the canyons of Wall Street. In fact, the Fed was extremely concerned the rate of Consumer Price Inflation was too low. And, that the economy was in peril of falling into some kind of deflationary death spiral. This is despite ultra-low borrowing costs and money printing from the Fed.

The proof is in the data. The Effective Fed Funds Rate was below one percent from October of 2008 thru June of 2017. The Fed was also engaged in QE’s 1,2, & 3 from December 2008 thru October 2014. And yet, here are the average 12-month changes in CPI for each of the given years:

2009 = -0.3%

2010 = 1.6%

2011 = 3.2%

2012 = 2.1%

2013 = 1.5%

2014 = 1.6%

2015 = 0.1%

2016 = 1.3%

2017 = 2.1%

2018 = 2.4%

2019 = 1.8%

 

This means, in the 11 years following the start of the Great Recession, all the way through the start of the Global Pandemic, consumer price inflation was quiescent despite the prevailing conditions of zero interest rates and quantitative easings. However, consumer price inflation began to skyrocket by the second quarter of 2021. In fact, it has averaged nearly 5% over the past four months. What caused the trenchant change? It was The 6 trillion dollars’ worth of helicopter money that was dumped on top of consumers’ heads. Regular QE just creates asset price inflation for the primary benefit of big banks and Wall Street.

But, the helicopters have now been grounded for consumers and soon will be hitting the tarmac for Wall Street once the Fed’s tapering commences this winter. Hence, CPI is about to come crashing down, just as is the growth in the money supply. M2 money supply surged by 27% in February 2021 from the year-ago period. But, in June of this year, that growth was just 0.8% month over month, or down to just 12% year-on-year.

The Government Lifeline is Being Cut

The highly-followed and well-regarded University of Michigan Consumer Sentiment Index tumbled to 70.2 in its preliminary August reading. That is down more than 13% from July’s number of 81.2. And below the April 2020 mark of 71.8, which was the lowest data point in the pandemic era. According to Richard Curtin, Chief economist for the University of Michigan’s survey, “Over the past half-century, the Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy.”

Of course, a part of this miserable reading on consumer confidence has to do with falling real wages. But I believe the lion’s share of their dour view is based on the elimination of government forbearance measures on mortgages, along with the termination of helicopter money drops from the government. All told, this amounted to $6 trillion worth of bread and circuses handed out to consumers over the past 18 months. This massive government lifeline (equal to 25% of GDP) will be pared down to just 2% of GDP in ’22.

Indeed, this function is already showing up in consumer spending. Retail sales for the month of July fell 1.1%, worse than the Dow Jones estimate of a 0.3% decline. The reduced consumption was a direct result of a lack of new stimulus checks handed out from D.C. Keep in mind that retail sales are reported as s a nominal figure; they are not adjusted for inflation. Hence, since nominal retail sales are falling sharply—at least for the month-over-month period–the economy must now be faltering because we know prices have yet to recede, and yet nominal sales are still declining. This notion is being backed up by applications to purchase a new home, which are down nearly 20% from last year. That doesn’t fit Wall Street’s narrative of a reopening economy that is experiencing strong economic growth and much higher rates of inflation.

On top of all this you can add the following to the deflation and slow-growth condition: Federal pandemic-related stimulus caused a huge spike in the number of Americans that owed no federal income tax. According to the Tax Policy Center, 107 million households owed no income taxes in 2020, up from 76 million in 2019. So, multiple millions more Americans should now have to resume paying Federal income taxes this year because last year’s tax holiday has now expired.

Oh, and by the way, the erstwhile engine of global economic growth (China) is now blown. China’s huge stimulus package in the wake of the Great Recession helped pull the global economy out of its malaise. This debt-disabled nation is now unable to repeat that same trick again.

Back to the U.S., the Fed facilitated Washington’s unprecedented largess by printing over $4.1 trillion since the outbreak of COVID-19—doubling the size of its balance sheet in 18 months, from what took 107 years to first accumulate.

But all that is ending now. Next year has the potential to be known as the Great Deflation of 2022. This will be engendered by the epiphany that COVID-19 and its mutations have not been vanquished as falsely advertised, the massive $6 trillion fiscal cliff will be in freefall, and the Fed’s tapering of $1.44 trillion per annum of QE down to $0, will be in process.

Then, the economy will be left with a large number of permanently unemployed people and businesses that have permanently closed their doors. And, the $7.7 trillion worth of unproductive debt incurred during the five quarters from the start of 2020, until Q1 of this year, which the economy must now lug around.

All this should lead to a stock market that plunges from unprecedentedly high valuations starting next year. And, in the end, that is anything but inflationary. Indeed, what it should lead to is more like a deflationary depression. But the story doesn’t end there. Unfortunately, that will cause government to change Modern Monetary Theory from just a theory to a new mandate for the central bank. And hence, the inflation-deflation, boom-bust cycle will continue…but with greater intensity. The challenge for investors is to be on the correct side of that trade.

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.”

 

Happy 50th Anniversary Gold

 Happy 50th Anniversary Gold

August 23rd 2021

 Friday the 13th of August 1971 was a very important date in U.S. history. It was the date that set the table for the beginning of the end of the USD’s world reserve currency status. And, greatly expedited the road to perdition for the dollar’s purchasing power.

That means this past Friday was the 50-year anniversary of President Nixon’s absolute termination of the dollar’s ability to be redeemed for gold. Therefore, I thought it would be a good idea to review gold’s performance since that time against some popular investments—especially since the MSFM took this same opportunity to impugn this most precious of metals—as they are always prone to do. And, to also once again explain what really drives the gold market.

Here’s a good example of what the media is saying about gold right now: “Nobody wants your rocks, right? I mean, the gold bugs have come up with every story under the sun as to why gold should go up, and it doesn’t,” that’s according to one J.C. Parets, Allstarcharts.com founder and chief strategist, in an interview with Yahoo Finance. He continued: “In fact, over the last year, you’d be hard-pressed to find a worse investment over the last year [than] gold.” Joining Yahoo in the poo-poo parade for gold, Bloomberg and the Wall Street Journal ran comparisons between gold and the S&P 500 since 1971–both before and after dividends are factored in. According to the reports, gold beat the nominal return of the benchmark Index but trailed once dividends are factored into the picture. Their conclusions: gold is not a great short-term hedge against inflation, and stocks offer far better protection from a rising Consumer Price Index.

Here’s my take: I’ve said many times before that while I might be a gold bug at heart, there are times when gold can also rip your heart right out. However, the truth is that gold is great hedge against inflation over the long run; but it does even better if you actively manage your allocation weighting.

When looked at with a less biased eye than Wall Street’s, there are some salient conclusions that can be drawn from the performance of gold since the Fed broke the gold window in 1971. Gold has not only kept pace with the return on the S&P 500 (before inclusive of reinvested dividends) but has actually beaten intermediate-term bonds over the past five decades. So no, it hasn’t become the worthless rock that Wall Street and the Bitcon crowd would like you to believe. Also, there are intervals and cycles when gold vastly outperforms and underperforms the market. Hence, while it is true that gold can be a very profitable investment, it is also true you should actively manage your allocation to PM to hopefully avoid the huge drawdowns that take place.

Some more facts you should know: The July reading on CPI had it rising at 5.4% and the PPI soaring 7.8% Y/Y. That’s the highest U.S. consumer price inflation in nearly 40 years and the highest producer prices on record. However, the dollar price of gold is actually down over 6% this year and down about 10% over the past 12 months. And the miners, as represented by GDX, have shed nearly 14% this year and are down 25% y/y. So, why is this most-beloved inflation hedge performing so badly of late? That is because the price of gold depends mostly on the direction of real interest rates. Real rates had been rising in the first two quarters of this year, forcing gold lower. However, the direction of real interest rates has begun to fall during Q3. I believe this process should intensify next year. Falling nominal and real rates next year should provide the gold market with a strong rebound, especially after the tapering of QE begins.

But what all this proves is that Wall Street is not only biased against gold but hopelessly ignorant as to the real function of the precious metal. It is crucial to understand that gold isn’t really an investment, like stocks or bonds. It doesn’t grow its earnings, or pay dividends, or even offer any interest like fixed income. Gold mining stocks are investments, but the metal itself is not. Gold is a competing currency that must be measured against the return on cash. It offers a viable replacement for dollars that exist in a completely liquid savings or checking account or short-term Treasuries. In other words, the performance of gold is most accurately measured when compared with the returns on holding cash or cash equivalents. Gold should not be compared with stocks or long-duration bonds. However, gold can still very favorably compete with those investments, especially during times of stagflation.

When nominal interest rates are being capped by central bank money printing, the rate of inflation tends to rise, and economic growth tends to falter. That’s called stagflation (a combination of slowing economic growth and rising inflation), which is the best environment for gold.

Even though gold is not technically an investment (investments are meant to provide a real, after-tax return on your money), it is the best form of money humans have ever found. And, despite gold being the best place to park your wealth to maintain its purchasing power, it still has a 50-year history of being very competitive with bonds and stocks—even though that comparison isn’t a fair one.

Of course, when compared with the Fed’s crappy currency, gold shines brighter than a supernova. For proof of this fact, it took just 35 dollars to buy an ounce of gold in 1971; but today, it takes about $1,800. Sadly, since 1913 the dollar has lost 96% of its purchasing power. Hence, you must evaluate gold in a fair and honest fashion. When doing that, gold proves its value over many millennia. No fiat currency can do that. In fact, all eventually have gone to zero.

Testing a theory in an objective and unbiased fashion is the only way to arrive at the truth. Gold isn’t an investment but still beats U.S. government bonds and the S&P 500 prior to dividends.  And, it trounces the performance of all fiat currencies. Indeed, gold is a great store of value that has proven effective to maintain your standard of living for thousands of years. Knowing how to trade gold can make it even more precious.

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.”

 

Fed: Murderer of Markets and the Middle Class

July 26th 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.”

Peak of the Fake Bull Market

July 12th 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.”

 

 

 

 

How Central Banks Murdered the Markets

June 28th 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.”

15% Nominal GDP With a 1.5% Benchmark Treasury Yield!?

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 10th, 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.”