Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18
Gold Miners’ Status Updated - 13th Jan 18
Gold And Silver – Review of Annual, Qrtly, Monthly, Weekly Charts. Reality v Sentiment - 13th Jan 18
Gold GLD ETF Update.. Bear Market Reversal Watch - 13th Jan 18
Stock Market Leadership In 2018 To Come From Oil & Gas - 13th Jan 18
Stock Market Primed for a Reversal - 13th Jan 18
Live Trading Webinar: Discover 3 High-Confidence Trade Set-Ups - 13th Jan 18
Optimum Entry Point for Gold and Silver Stocks - 12th Jan 18
Stock Selloffs Great for Gold - 12th Jan 18
These 3 Facts Show Gold Is Set to Surge in 2018 - 12th Jan 18
How China is Locking Up Critical Resources in the US’s Own Backyard - 12th Jan 18
Stock futures are struggling. May reverse Today - 12th Jan 18
Three Surprising Places You See Cryptocurrency - 12th Jan 18
Semi Seconductor Stocks Canary Still Chirping, But He’s Gonna Croak in 2018 - 12th Jan 18
Land Rover Discovery Sport Panoramic Sunroof Questions Answered - 12th Jan 18
Information About Trading With Alpari And Its Advantages - 12th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

US Interest Rates Walking on Narrow Ledge

Interest-Rates / US Interest Rates Jan 09, 2018 - 09:53 AM GMT

By: Michael_Pento

Interest-Rates

There is a huge shock in store for those who have been lulled to sleep by a stock market that has become accustomed to no volatility and only an upward direction. And that alarm bell can be found in the price action of Bitcoin, which recently tumbled over 40% is less than a week. For the implosion within the cryptocurrency world foreshadows what will happen with the major averages as the Federal Reserve futilely attempts to stop monetizing the exploding mountain of U.S. debt.


I am fond of quoting the figure of total market capitalization as a percentage of GDP in order to illustrate the overvalued state of the equity market. That level has now surged to 145% of GDP; while history shows that stock values should represent just 50% of the underlying economy. In that same vein, another eye-popping figure compares global asset prices to GDP. Global asset prices (stocks and bonds) back in 1980 were only 110% of global GDP. Today, they have soared to an incredible and unsustainable 350% of the economy, according to data compiled to by Morgan Stanley.

Which also means due to the massive $3.8 trillion counterfeiting spree from the Fed since 2008, the S&P 500 dividend yield has now plummeted to just 1.8%. But then again, due to the delusion that the Fed can normalize interest rates, there have been five rate hikes on the shortest end of the curve since December of 2015. This means the 3-Year Note once again has a yield that is higher than the S&P 500 dividend yield. This also means that if the Fed follows through on its three rate hikes penciled in for 2018, the dividend yield on the S&P 500 would be less than a “risk-free” 1month T-bill, which has not been the case since the great panic of 2008 began. The reemergence of this phenomenon could surely launch a barrage of daggers upon Wall Street’s latest and greatest bubble.

The most important point I can make about this insanely overvalued stock market is that its lynchpin—that is, what’s holding the entire charade together--is the worldwide bubble in the bond market. As long as interest rates behave, the rally can continue. And by behave I mean that long-term rates can neither fall or rise by more than a relatively small number of basis points without sending the market into a tailspin.

Let me explain. First you must understand that the entire credit market construct is completely artificial and therefore guarantees it will end very badly and soon. However, central banks have now started to pull away their manipulation of interest rates; and that means one of two conditions is about to occur. The yield curve will continue on its path towards inversion and could do so in just a few months’ time. That would shut off the entire credit creation machine and send asset prices cascading down to earth. Or, alternatively, a spike in long-term interest rates could be in store, which would engender those same consequences.

And one has to really wonder why bond yields haven’t started to soar as of yet. In fact, yields going out ten years on the curve are up only about 20bps since December 2015. That’s the date when the Fed began the first of its five--to date--25bps rate hikes, for a total 125bps. At 2.45% the U.S. 10-Year Note is still less than half of nominal U.S. GDP growth. That means the yield should be at least double from where it is currently trading just to be in line with historical measures. But given the level of U.S. debt and our escalating solvency concerns, the benchmark yield should be much higher than the historical average.

After all, the current narrative is one of synchronized and accelerating global growth. Also, that inflation is rising towards the Fed’s 2% target. Not only this, the Fed’s balance sheet reduction rises to $50 billion per month by October, the Fed’s dot plot predicts three more rate hikes this year and the ECB has halved its QE program and is predicted to be completely finished printing money by the end of this year. Exploding debt and the reversal of central bank support for bonds should cause rates to spike.

Indeed, deficits are already rising due to demographics, but the swamp creatures in D.C. that inhabit both parties only care about deficits when they are not in power. The amount of red ink is projected to reach around $1.2 trillion per year by fiscal 2019; but that is just start of calamities.

So the daunting addition goes something like this: the baseline projection is that there will be $10 trillion added to the $21 trillion National debt over the next ten years. Not including Trump’s unpaid for tax cuts, which are projected to add another $1.5 trillion over the next decade. Then you add on to the debt Trump’s next endeavor, known as the most massive infrastructure project outside of China’s recent efforts to pave over the Fareast, which will add hundreds of billions to the total of red ink. And, since the next recession most likely isn’t more than just a few quarters away--and is already long overdue--deficits will jump again by a further trillion dollars per annum just like then did during the four years from 2009-2012.  Plus, every 100bps higher in average interest costs on the outstanding debt piles on another $200 billion in debt service payments per year. All this will be happening as the Fed is dumping $600 billion per year of MBS and Treasuries on to the balance sheet of taxpayers!

So, of course, interest rates should be soaring from their record low levels; and not just in the U.S. but around the globe. The only reason why they would not do so immediately is that global sovereign bond investors are aware that an economic crash is going to arrive in the very near future.

Then again, if rates do end up spiking on the nearly $10 trillion worth of negative-yielding global sovereign debt, it will cause interest payments on the record $230 trillion (320% of global debt to GDP) to become completely unserviceable. That will definitely cause the crash to arrive in short and brutal fashion. And once the bubble bursts on that “risk-free” sovereign debt, it will surely smash the worldwide equity hysteria with unrelenting fury. 

Therefore, long-term interest rates have a very narrow ledge to traverse in order to keep the turbines flowing into the worldwide equity bubble. Fall a few dozen basis points from here and the yield curve inverts rather quickly and a recession/depression will soon follow; just as it has always done throughout history. On the other hand, if rates were to quickly rise more than a few dozen basis points the competition for stocks becomes salient; while at the same time debt service payments on both the public and private sectors of the economy become a baneful situation.

You don’t have to be another victim of the government’s ill-fated rollercoaster cycles of inflationary bubbles and deflationary collapses. Intelligent and knowledgeable investors are running out of time to prepare for the wild ride ahead in 2018…which should finally be the year that the inevitable reality check arrives.

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.
       

© 2017 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

© 2005-2018 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