Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Economy GDP 2021

Economics / US Economy Dec 31, 2020 - 02:38 PM GMT

By: Michael_Pento

Economics Wall Street is universally bullish on the economy and stock market for 2021. For example, Morgan Stanley is on record predicting the U.S. economy will expand by 5.9% next year. The stock market has front-run this optimism. The most important valuation metric, total market cap to GDP, currently stands at an unprecedented 185%. This absurd valuation only makes sense if investors believe corporate profits will skyrocket next year. No other bull market in history even comes close to this historic distortion between the price of stocks and the underlying economy.


br> But, let’s take a moment to unpack this theory of a booming economy next year. To accomplish this, we fist have to look back to what occurred during 2020.  The outbreak of the Wuhan Virus shut the economy down for most of the first half of this year. But, after falling by a seasonally adjust annual rate of 31.7% in Q2, the economy rebounded sharply in the second half. Hence, the overall U.S. economy is projected to contract by about 3.5% for all of 2020. Don’t forget that the unemployment rate is still highly elevated and there are still many issues with small businesses that can’t access the capital markets. Hence, what have now is a highly bifurcated economy with some big winners and many huge losers.

2020 was marked by a tremendous divergence in economic sectors. There was a crash in the leisure and hospitality sectors, but a boom in home improvement, e-commerce and the financial services industries. Most importantly, the reason why the entire economy didn’t crash throughout all of 2020 was because the government borrowed and printed $3 trillion and handed it out to Wall Street, small businesses and individuals—with another $900 billion ready for dissemination in a couple of weeks. Therefore, for the most part, consumers simply switched from going out to eat, jumping on planes and booking hotel rooms; to ordering electronic gadgets online, refurbishing their homes and gambling on Wall Street.

So now, assuming the vaccines all work as advertised (that’s a big assumption indeed), consumers will once again start taking vacations and making dinner reservations. However, this activity will be drawn from the money that was erstwhile being spent on home improvement and work-from-home office gear. The point here is there will not be another $4 trillion is stimulus doled out in 2021—not if Republican Senator Mitch McConnell has anything to say about it. And, if the virus appears to become tractable by mid-year, the Fed may begin to reduce its record and unsustainable pace of $120 billion in QE per month.

If the above proves true, there is no way the U.S. economy will be in the 6% GDP boom that is predicted by Wall Street next year. At best, it should return to the rather pedestrian 2.2% year-over-year growth rate experienced between December 2019 and December 2020. And, that is assuming the scars from a humongous increase in debt across the board vanish quickly. It also must be the case that the 10 million jobs lost since the pandemic began will come roaring back. And, the crippled retail sector, which includes 1 out of every 6 restaurants that have permanently closed their doors, won’t become a drag on the economy either. The truth is, Wall Street’s soaring EPS postulate, which will cause a melt-up of stocks in 2021, is a farce.

And, as I already mentioned, the jury is still out on how these vaccines will perform. The news about a more virulent strain of COVID-19 puts a salient question of the table: how will theses new MRNA vaccines deal with a COVID-19 virus that mutates more than the measles; but yet slightly less than the influenza virus?

Nevertheless, the most prominent risk in the near future is that the Fed begins to retreat on its monetary support. Of course, Mr. Powell won’t raise interest rates until at least 2023. However, the eventual dialing back of QE could cause havoc in markets.

The Fed Chair stated the following at his December FOMC press conference:

When asked about the markets extraordinarily-high asset valuations and if it was a bubble, he replied, “That’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a return perspective.”

And, when asked about the solvency of the U.S. Treasury Powell stated, “I think the question is we’ve always looked at debt to GDP and we’re very high by that measure. By some other measures, we’re actually not that high. In particular, you can look at the real interest rate payments, the amount of what does it cost. And from that standpoint, if you sort of take real interest costs of the federal deficit and divide that by GDP, we’re actually on a more sustainable fiscal path, if you look at it through those eyes.”

The translations for these statements are that Mr. Powell has tacitly acknowledged we can only remain a solvent nation as long as the Treasury can borrow money for virtually free and the stock market bubble can only remain inflated as long as the Fed keeps buying enough junk bonds to keep interest rates at all-time record lows.

Rising interest rates will eventually torpedo this bull market. That time will arrive whenever, or if ever, normalization of our economy returns. Meaning, nominal GDP rises to somewhere in the neighborhood of 5% (2.5% inflation + 2.5% real growth). Of course, we could also get there by having inflation rising much higher than real growth, which is a much more likely outcome. At that point, the benchmark US Treasury Note should yield at least the same as nominal growth. However, after remaining at record low levels for most of the last dozen years, absolute carnage will arise from borrowing costs that begin to surge by hundreds of basis points across the sovereign yield curve--with much more damage occurring in corporate debt market--especially junk bonds. This will cause the economy and markets to tank.

The Fed’s gradual exit from its manipulation of the bond market will once again cause panic on Wall Street.  But panic is something reserved for those who rely on the deep state of Wall Street for advice. Only those without a data-driven process do that. In sharp contrast, we will closely monitor the pertinent components of the IDEC Model for the timing to sprint towards the very narrow exit door. And then get short this massive equity bubble to protect and profit from its collapse. It’s the only sane thing to do.

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

Respectfully,

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

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

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

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2019 Copyright Michael Pento - All Rights Reserved

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

Michael Pento Archive

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


Post Comment

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