Bernanke is Still Bubble Blind
Interest-Rates / US Federal Reserve Bank Jun 05, 2015 - 09:53 AM GMTBy: Michael_Pento
Even though the former Chairman of the Federal Reserve is now getting paid privately for his economic and market prognostications, he is still unable to identify or acknowledge the monumental bubbles that central banks have engineered. Mr. Bernanke, who was recently interviewed in Korea, tried to assure investors that rate hikes (whenever they begin) would be good news for the U.S. economy. He was also very "optimistic" there would not be a hard landing in China. And, not surprisingly, the man who is now gainfully employed at the Brookings Institution, Pimco and hedge fund Citadel, is also "encouraged" by Japanese Premier Shinzo Abe's growth strategy. This is despite the fact that the thrust of Abenomics has been to depreciate the value of the Yen by 35 percent in the past two and a half years.
However, investors need to question if the solace Mr. Bernanke is trying to once again pervade should be accepted with complete alacrity. After all, the erstwhile Fed Head completely missed the real estate-related credit bubble and the effects of its collapse upon the global economy. And now he has again become blind to the bubbles in China, Japan and the United States.
The command and control communist government of China has been on a debt binge since the year 2000. Total credit market debt has soared 28 times (from $1 trillion to $28 trillion) in the past 15 years! And, in response to the worldwide Great Recession of 2007, the government of China put in place policies that quadrupled the total debt outstanding--rising from 160 percent of GDP, to nearly 290 percent today.
However, this humongous debt accumulation did not occur within the context of robust and accelerating economic growth. In fact, the growth rate in China fell from 13% in 2007, to 7% today. And this decline in the growth rate didn't weigh on the equity market at all, as the Shanghai exchange has surged 140% since the summer of 2013. But the above data seems to comfort Mr. Bernanke into believing a hard landing in China is out of the question. Nevertheless, investors need to understand that another crash in the Chinese stock market and economy similar to what occurred in 2007 cannot be so easily veiled by another $20 trillion infrastructure plan to build more empty cities.
Likewise, despite Bernanke's calming characterization of the Japanese economic condition, the retirement-island nation is drowning in debt. It is also an economy that hasn't grown in five years and sits atop of an epic equity bubble. The Japanese National debt to GDP ratio is fast approaching 250 percent; but this figure does not include corporate and household debt, which balloons to 500% of GDP when factored in. However, the over 100% gain on the Nikkei Dow in just over two years doesn't bother Ben Bernanke one bit either. Indeed, he has chosen to overlook the surging stock market, crumbling currency and intractable surge in debt. Bernanke remains unshaken even given the fact that the insolvent bubble-ridden nation has a 10-year note that yields an incredible 0.4%--proving the BOJ has completely wiped away the free-market price discovery mechanism and propelled JGBs firmly into the twilight zone. Once the inevitable mean reversion of interest rates occurs, the tsunami of debt defaults will shake the global economy to the core.
Mr. Bernanke's vision doesn't become any clearer when viewing our domestic economy. He stated the markets will cheer the Fed's first rate hike in 9 years; but the truth may be vastly different. The market now stands extremely overvalued by nearly every metric. The median PE ratio on NYSE stocks stands at an all-time record high of over 20 times. The so called "Q" ratio, which measures the market value of U.S. equities in relation to the replacement cost of the firms' assets, is higher today than at every other time in history outside of the NASDAQ bubble peak. Likewise, the total market cap to GDP ratio now stands at 127%, which is vastly higher than the 82% average and far above the 110% peak witnessed at the start of the Great Recession of 2007.
These peak valuations exist precisely because central banks have forced investor out along the risk curve in a desperate search for a return on their savings. Now the Fed (both current and former members) are on a campaign to convince nervous investors not to sell stocks once liftoff of the Fed Funds Rate begins.
However, the problem is the Fed's first rate hike will cause investors to begin pricing in future increases by the current Chair Ms. Janet Yellen. This is because the median estimate from the 17 members on the Federal Open Market Committee is 1.8% for Fed Funds by the end of 2016. The first move off the zero-bound range, which the FOMC has virtually promised will occur sometime this year, has to be taken as the starting gun for the race toward that 1.8% target within 12-18 months--depending on the commencement period.
And since the Fed has removed itself from giving any date guidance for rate hikes, the second move higher will have to be purely data dependent. Unless the economy slips back into another recession, the Fed will be hiking rates on a regular basis throughout 2016. This will cause the U.S. dollar to surge even higher against the Yen and the Euro, which will place much greater downward pressure on the already anemic state of S&P 500 revenue and earnings. The resulting influence of a surging dollar and a rising cost of debt service should be devastating to the current equity bubble.
The bottom line is that Central Bankers both past and present have a vested interest in convincing investors that the strategies of zero percent interest rates and quantitative easing have been a success. But the sad truth is these policies have led to an additional $60 trillion of new debt piled onto the global economy since the end of the Great Recession; causing the re-emergence of colossal real estate, bond and equity bubbles worldwide. Mr. Bernanke may still be blind to these bubbles created by himself and current central bankers...but all investors need do to see them is open their eyes.
Michael Pento 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
(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.
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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.
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