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 Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Wuhan Virus Pricked the Everything Bubble

Politics / Coronavirus Depression Apr 15, 2020 - 11:34 AM GMT

By: Michael_Pento

Politics

Inflationary and Insolvency Implosion of the Bond Market

We are all praying for the Wuhan virus to die. But there is something the virus can actually “cure” itself: deflation. I put the word cure in quotes because it's not an actual issue in reality. Low inflation and disinflation are actually great conditions to enjoy and help an economy thrive. Increasing the purchasing power of consumers is something that should be cherished and targeted goal. Increases in productivity, along with a strong currency, raises your standard of living. In sharp contrast, Central Banks think any rate of inflation that is less than 2% is a deadly economic disease that must be vanquished faster than the Wuhan virus.


Many Austrian economists believed the money printing that occurred during the Great Recession of 2008 would engender massive inflation. That indeed turned out to be the case; but only with asset price inflation. The Fed’s balance sheet expansion left Consumer Price Inflation (CPI) far behind. This is because the Fed bailed out banks, not consumers. Mr. Bernanke printed trillions of new dollars to purchase bad assets from banks’ balance sheets. Thus, it gave banks credit in exchange for those assets; and that base money was primarily parked back at the Federal Reserve. In other words, there was a huge increase in Fed credit but not in loans that would have led to an increase in the broader monetary aggregates—the kind of money supply increase that leads to rising CPI. What money that was lent out arrived directly to Wall Street by the process of banks selling MBS, ABS and other troubles assets and then using that credit to buy more bonds and stocks. The rich got richer and the lower classes were, for the most part, left out in a big way.

However, this current virus-induced depression is being fought by central banks using some different tactics. Of course, the Fed—along with every other central bank in the developed world and beyond—is buying all the same bad assets from banks that existed during the Great Recession. But, this time around it is also purchasing corporate debt issued in the primary market, purchasing corporate bond ETFs, and making new loans directly to corporations and businesses. Most importantly, the Fed is also working directly hand and hand with the Treasury to send 100’s of billions in cash payments directly to consumers--A.KA. Helicopter Money. Therefore, Central banks aren’t just bailing out Wall Street like they did back in 2008; but are now directly increasing the broader monetary aggregates of M1, M2 and M3.

Hence, the Wuhan virus is going to solve the Fed's inflation deficiencies by paving the way towards its ultimate destiny, which is where all central banks have wanted to end up for a long time, using Helicopter money to send both asset prices and CPI much higher.

Of course, pushing prices higher in the context of a failing economy is no panacea to say the least. The Depression of 2020 will cause an even larger chasm between stock prices and the economy than what existed prior to the outbreak.

Abetting this stagflation will be the loss of confidence in global central banks to maintain the purchasing power of their paper currencies.

Much More Fiat Paper Will Be Needed and For a Very Long Time

Once central banks abrogate markets, and indeed become the market, they can never fully step away. The ECB and BOJ never were able to lift off zero percent interest rates once arriving at that level in the aftermath of the Great Recession; and the BOJ could never even exit QE. The ECB did briefly end QE at the end of 2018 but then had to quickly re-enter that dirty business in September of 2019. The Fed ended QE in October of 2014 and was able to reach 2.5% on FFR. However, by August and Sept of 2019 it had to begin cutting rates and went back into QE because of the soaring borrowing costs found in the REPO market. Please note that this trip back into QE and towards ZIRP was before the COVID-19 virus existed. What makes anyone think central banks can ever exit the capital and money markets? They cannot.

Shortly before the outbreak, the WSJ reported that 40% of all listed companies had not made any money in the prior 12 months. And, the Bank of International Settlements stated that 12% of corporations in the developed world needed to tap the junk bond market just to pay interest on existing obligations in order to stay afloat. According to the BLS, During the Great Recession the lasted from 12/07-06/09, a total of 19 months in duration, the economy lost 7.3 million jobs. The Wuhan virus that pricked the everything bubble has caused a total of 16.8 million jobs to be lost in just the last 3 weeks. What condition do you think these same Zombie corporation are in now that the global economy has been shut down and borrowing costs for many businesses have spiked some 10 percentage points above where they were pre-crisis?

The truth is Central bank balance sheets can never be unwound and will only grow inexorably from here. Investors need to ignore central bank bluster about returning to normalcy. For example, Jerome Powell predicted that the Fed’s balance sheet would retreat to around $2 trillion by this time. In sharp contrast, the value of Fed assets has skyrocketed to $6 trillion already and is on its way to $10 trillion by year’s end—and then far beyond from there. These money printers can no longer pretend this is only a temporary expansion of the money supply that can be quickly and permanently reversed. That game is over and with it should terminate the confidence in fiat paper currencies to hold value.

Hence, double digit CPI and intractable stagflation is on the way. This will lead to the real crash; an inflationary and insolvency implosion of the bond market where there is nothing governments can do to mitigate the crisis. For, if they stop printing money the record amount of debt outstanding crashes in price from the thermosphere due to the exit of its primary buyer. Or, central banks can continue to print yet more money in an attempt to keep soaring interest rates under control. But, creating more inflation will only cause the private market to push the sell button faster as short sellers pile on top of plunging fixed income prices and skyrocketing yields. The Wuhan virus has simply hit the FF button on when this pernicious crisis appears; but is was surely on its way regardless. Prepare now while you still have some time left before the real crash begins.

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