Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20
Does the Stock Market Really "See" the Future? - 12th Sept 20
Basel III and Gold, Silver and Platinum - 12th Sept 20
Tech Stocks FANG Index Nearing Critical Support – Could Breakout At Any Moment - 12th Sept 20
The Tech Stocks Quantum AI EXPLOSION is Coming! - 12th Sept 20
AMD Zen 3 Ryzen 4000 Questions Answered on Cores, Prices, Benchmarks and Threadripper Launch - 12th Sept 20
The Inflation Mega-trend is Going Hyper! - 11th Sep 20
Gold / Silver Ratio: Slowly I Toined… - 11th Sep 20
Stock Market Correction or Reversal? The Jury Isn't Out! - 11th Sep 20
Crude Oil – The Bearish Outlook Remains - 11th Sep 20
Crude Oil Breaks Lower – Sparking Fears Of Another Sub $30 Price Collapse - 11th Sep 20
Inflation by Fiat - 10th Sep 20
Unemployment Rate Drops. Will It Drag Gold Down? - 10th Sep 20
How Does The Global Economy Recover After This Global Pandemic? - 10th Sep 20
The Best Mobile Casino - 10th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Stock Market Calls Fed’s Bluff

Stock-Markets / Stock Markets 2015 Aug 31, 2015 - 04:38 PM GMT

By: Michael_Pento

Stock-Markets

As the Fed nears its proposed first rate hike in nine years the stock market is becoming frantic.  The Dow Jones Industrial Average is down around 10% on the year, as markets digest the troubling reality that our central bank may be raising interest rates into an emerging worldwide deflationary collapse.

The Fed normally raises rates when inflation is becoming intractable and robust growth is sending long-term rates spiking. However, this proposed rate hike cycle is occurring within the context of anemic growth and deflationary forces that are causing long-term U.S. Treasury rates to fall.


The yield curve spread, specifically the difference between Fed Funds Rate and the 10-year Note, is usually close to 4 percentage points at the start of major tightening cycles. This was the case at the start of the 1994 and 2004 campaigns to curb inflation. However, this go around the spread is less than 2 percentage points and the benchmark 10-Year Note yield is falling. This means the yield curve will invert very quickly and cut off banks’ profitability and incentives to lend; which will greatly exacerbate the deflationary impulses reverberating across the globe.

These deflationary forces will collide head on with a stock market that is already extremely overvalued as measured by Tobin’s Q ratio (the total value of corporate equities/replacement cost) and the total market cap to GDP.

Tobin’s Q Ratio:


Total Market Cap/GDP:

But the overvalued condition of stocks gets even worse when viewed in the context of anemic growth and the prospect of a hawkish Fed. Revenue growth, or the lack thereof, for S&P 500 companies was a negative 3.3% in Q2, leading to a minus 1% earnings growth for this benchmark Index.

U.S. GDP has not been faring much better, averaging a lackluster 2% annual growth rate since 2010. The highly accurate Atlanta Fed GDP Now has forecast GDP at just 1.3% for Q3, far short of what many perma-bulls on Wall Street are calling for.

For first time in its history the Fed would be raising rates into anemic and slowing GDP growth, negative earnings and revenue growth, and falling long-term interest rates.

And don’t believe Wall Street’s mantra that the deflationary forces emanating from China won’t affect stock prices because, as many claim, it accounts for a small percentage of S&P 500 revenue. This is the same flawed logic that led many of those same Cheerleaders to conclude subprime mortgages were a small subset of housing and would never spill over to national home prices or the economy.

The problem for China is that the government spent $20 trillion since 2007 building an unprecedented and unsustainable fixed asset bubble. Now that misallocation of capital has exhausted itself and the nation is left drowning in debt.  Those emerging market economies who supplied China with its infrastructure materials have run out of that bubble-induced demand and are now flirting with recession.

Europe, a major exporter to China, is growing at just above 1%. It is highly likely that following Japan’s negative Q2 GDP print the nation may be entering its third recession since 2012. And two of the highly vaunted BRIC economies, Russia and Brazil, are shrinking as well.

 
This global deflation and economic stagnation isn’t easily remedied. China cut its reserve requirement ratio and interest rates again this week; but the People’s Bank of China has done so five times since November of 2014 to no avail. It’s becoming apparent: China has lost command and control of their command and controlled markets and economy.

The Fed has deployed a Zero Interest Rate Policy for seven years and has already printed $3.7 trillion to boost markets and GDP growth. And U.S. debt to GDP is over 100%. Japan’s debt to GDP is at 230% and the Bank of Japan (BOJ) is printing 7 trillion yen ($58 billion) per month of QE. The European Central Bank (ECB) is printing $67 billion a month and the European Union (EU) has negative interest rates; but all this easy money and deficit spending isn’t helping these economies move much off the flat line.

There just isn’t much fiscal or monetary policy room left to maneuver. Global debt is up a whopping $60 trillion since the end of the Great Recession and interest rates are at all-time lows. The problem isn’t that the cost of money is too high or that its availability is scarce. The issue is global economies have become debt disabled and suffer from massive capital imbalances. These conditions can’t be fixed by more money printing.

This brings us back to Ms. Yellen and co. and the Fed’s current threat to raise rates. The Fed is aware there wouldn’t be a solvent entitlement program or pension plan without stock price increases of around 8% each year. A tightening cycle when markets and economies are on life support would put that target very far out of reach.

Therefore, look for the Fed to back away from rate hikes in the next few weeks as the Federal Open Market Committee finally realizes it will be stuck at near zero for many years to come. This should cause the highly overcrowded long dollar trade to roll over sharply very soon and provide investors to profit in anti-dollar investments such as precious metals.

A prudent investor should hide out in cash and hedge their portfolios against more carnage to come in the near term. That is, at least until the Fed’s fire brigade switches to a dovish monetary policy stance and comes running with another round of money printing. Maybe that will temporarily stop the bleeding in stock prices; but please don’t be fooled into believing it will save the economy.

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

Respectfully,

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

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

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

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2015 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

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


Post Comment

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

6 Critical Money Making Rules