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Michael Pento: Bond Market Crash Dead Ahead

In his latest commentary, financial strategist Michael Pento maps out the coming year. Spoiler alert: It ends ugly.

Debt Be Damned

The U.S. National Debt is about to surge like never before, along with the rest of the entire planet’s gigantic pile of sovereign IOUs. America started with a $23.5 trillion debt before the Wuhan virus outbreak, with annual deficits running over a $1 trillion; and projected to be at least that amount for the next dozen years. But then, the stock market and economy crashed due to the catalyst of the COVID-19 pandemic, which pricked the massive bubble in junk bonds and equities that I have been warning about for years.

In addition to the automatic stabilizers that kick in during a recession, like unemployment insurance and food stamps, the Treasury is now buying commercial paper, suspending interest payments on student loans, and writing checks to small businesses. There are also various other bailouts and stimulus packages in the works; the IRS is allowing taxpayers a deferment for three months of up to $300 billion. Also, the government will soon be sending checks to nearly every American, the proposal is for at least $1,000 for each adult and $500 per child, per month—around $500 billion in total. Helicopter money is now coming, and both parties embrace it with alacrity. The total amount of stimulus proposed so far was reported by Bloomberg to be $1.3 trillion this year alone.

A global depression is now here, but the question is for how long. A small taste of the miserable data that is to come came from the Empire State Manufacturing Survey for the month of March. The index plummeted by the most in history to an incredible minus 21.5. Since the survey was taken, we have seen entire counties shut down, U.S. schools and corporations shuttered, and at least 50 major retailers are shutting their doors, and that number is growing daily. The retail sector employs a total of 15.7 million people. There will be about 3.5 million jobs that are predicted to be lost if this economic slowdown turns out to be like the average since WWII. However, it is clear this economic contraction will be nothing like the typical recession. Indeed, when was the last time a great portion of the world’s population was told to shelter in place. Around 67 million Americans think they will have trouble paying their credit card bills due to the coronavirus, according to WalletHub. And, nearly 80% of Americans are living paycheck to paycheck—we really need this virus to dissipate quickly, but the probability of that outcome is impossible to know.

To give you further insight as to how bad the unemployment numbers could get, let’s look at where the jobs are now. In the U.S., most of the jobs created since the Great Recession ended back in 2009 have been in the Leisure and Hospitality sectors. According to the BLS, there are nearly 17 million people employed in those two sectors alone. But now, a great deal of those doors have been closed. Many of these people are 1099 employees and have no access to unemployment insurance. Those that are W-2 employees will see a huge reduction of their income and may not see an immediate request to be rehired once the economy begins to recover.

This is because there will be a serious degradation of consumer and business’ balance sheets. Coming into this crisis, there was a record amount of household debt and a record amount of corporate debt both in nominal terms and as a percentage of GDP. There is now a significant shock to the incomes of the public and private sectors, while all the existing debt remains and new debt is being accumulated. Government assistance can help, but it will not make people 100% whole.

But now the major averages have crashed by over 30%, and the Russell 2000 is down just shy of 40% in one month. Not only are all of the gains made last year now gone but the market has given back all the gains made since January 2017. As an aside, I was wondering how all those C-suite geniuses feel that levered up their corporations in record proportions to buy back stocks at record highs? I also wonder what public or private pension fund will be solvent since there has been no money made in the last three years, and the Benchmark Treasury yield is 1%? These retirement funds need to make at least 7-8% each year to come close to satisfying their obligations.

To combat these issues, global governments are reacting with massive fiscal and monetary stimulus. We already mentioned what the U.S. Treasury is doing. Also, the Fed cut rates back to zero, is buying commercial paper, openly admitted to launching Q.E. 5, and massively expanded its REPO facility—which it was supposed to draw down to zero beginning in April. In sharp contrast, Mr. Powell’s balance sheet has now exploded to an all-time high of $4.7 trillion. The Fed may also start buying corporate debt very soon and announced unlimited Q.E. on Monday, March 23rd.

Wall Street now needs a 50% increase in stocks just to get back to where it was a month ago. That’s how the math works when you are down about 35%.

At the end of this crisis, we will have an even bigger mountain of debt, interest rates than are even further into the twilight zone and the seeds of runaway inflation that have been fertilized with a gigantic pile of poop from a massive herd of government-fattened brontosauruses. That is the real crash still coming, which will occur after the market soars back to record highs on unprecedented money printing, interest rate manipulation, and debt-fueled stimuli. To be clear, the inflationary/insolvency crash of the bond market is dead ahead.

In the interim, we should continue to see wild swings in asset prices as the market struggles to reconcile with a temporary, yet brutal, depression that is being offset by Helicopter money. PPS models these cycles of inflation/deflation and growth/recession. That is your best chance to increase your standard of living, even during the increasing occasions when Wall Street burns.

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

 

Emigrate While You Still Can – To Finca Bayano

30 thoughts on "Michael Pento: Bond Market Crash Dead Ahead"

  1. Pento’s article makes sense, so that’s why I think he’s wrong. I grew up being taught that debt is inherently restrictive, that eventually credit is cut off and higher interest rates have to be paid to borrow more. That made sense to me. But as I further came to learn central banks like the FED are the lenders of last resort and they can set the terms, including outright forgiveness. The FED already reimburses the US gov the interest it pays on the FED’s Treasury bonds (which most don’t know) so who would know – or even care – if the fed waived the requirement to repay principle when the bonds mature?

    It’s a totally different game when it’s not a closed system. That’s what my parents didn’t consider. A legal, global counterfeiter. Pento sounds like my parents and my father’s friends who were mostly bond brokers. Logical and with a sound understanding, but interest rates have only fallen as global debt has increased, exactly contrary to what they expected. Maybe they – and he – will be right eventually, but I’m not holding my breath.

    However, I’m usually wrong in my predictions, so maybe hyper inflation is coming soon. That makes sense to me too, but I may be a slow learner.

    1. The Gulf Stream is hyper-inflation, but the ocean is deflation. Both will occur, hyper-stagflation. Many will starve.

  2. Hey if youre such a bond genius, maybe you can answer this:

    How can the USG eliminate 20-25% of its national debt in one day? Without adding any cash or inflationary pressure to the system? How can it systematically eliminate 40-80% of the debt over the next year while fueling a massive economic recovery and feeding desperately needed dollars into the global system?

    Yes, this can easily be done. All you doom porters who never made a living in the markets have no creative financial imagination. See if you can pass the test. If not, STFU

    1. I believe John and Michael Pento have both made a living in the markets, but by all means, enlighten us with your creative brilliance.

      I suspect you fail to realize that debt is what our money is, and if you reduce the debt by the amounts you are talking about it would be crushingly deflationary.

      Gold is the money of kings
      Silver is the money of gentlemen
      Barter is the money of peasants
      Debt is the money of slaves

      Guess which one applies in the era of central banking. The debt is the money, that’s the trap. But hey dude, dazzle us.

      1. The Fed owns 4-5 Trillion US Treasury bonds. Annul them. Erase them, . All of this cash is already in the market. It is non inflationary and reduces outstanding debt by 20%. The Fed can continue purchasing and extinguishing Treasuries which will drive rates ever lower while adding desperately needed dollars to the global markets. The national debt continues to sink.

        If there are any technical regularly issues, suspend them,

        Now the Fed steps in and buys up all the investment grade, legit public use munis which have been dumped, and continues buying. These bonds are then also erased. This frees up tens or hundreds of billions for already in place agencies and authorities to borrow fresh money on delevered balance sheets to take on rebuilding American infrastructure — water, sewer, roads, 5G, moderate income housing — thousands of jobs (NO UNION BOONDOGGLES) for construction workers laid idle.

        Money for this is either printed or raised through new bond sales to meet urgent demand from the world to get in on the US market and the shrunken Treasury market, Low oil prices will help kill inflation. Cut off all strategic manufacturing from China, and offer new loans to strategic partners to subvert One Belt One Road.

        If necessary, loans to companies in need of working capital and to rehire workers, with equity warrants to capture the vast majority of price recovery from now to the high water mark (just as in private equity,) Management doesnt like it? Fine, Leave and lose all your deferred comp and see clawback of your last 5 years’ bonus and other extra comp. This structure alone kills incentive for most buybacks. But they should be outlawed until the high water mark is regained anyway.,

        Any or all of this will ignite the US economy like a rocket when the virus eases. Start with the Fed balance sheet wipe, get that cash to workers, and focus on municipal and infrastructure next.

        Bailouts for now insolvent public pensions? They come with decoupling from State constitutions, and new benefit structures based on actual contributions and assets. Those who see benefit cuts can borrow against assets interest free, but those assets return to the state at death, No more Democrat boondoggles buying votes from public unions with magical math pensions.

        Time to clean it up.

        1. You provide a possibility and that is more than most pundits offer on tel a vision and so called economists do. There definetely are solutions to improve situation for many people who will suffer otherwise. The crisis in the 1930 was also only a finance crises(labour was abundant, resources where abundant and production capacity was growing all the time.

          1. I spent four years sitting next to STeven Mnuchin at Goldman. I spent years running the trading desk for the biggest bank in Europe. I felt with all of the regulators. These are not people of vision or creativity. They use the same tools every time. They are all slaves to the same masters. I have yet to hear anyone explain why a version of this would not work.n I have been calling for this for some time. Once we began our confrontation with China. When people said “Oh no! China might damage our economy by selling its Treasuries, I said, ‘Fine, then we should just cancel them.’ The response was that it would be inflationary. We can see there is no inflation in the world. Without a massive stimulus, there will be ruinous, Depression-style deflation. No demand and the issuance of debt will such up all the money. Goods will become cheap but no one will have any money to buy them, That is the WRONG path

          2. Why don’t you start your own bank, loan money and then forgive all the debt? You are either a shill or you have forgotten that the federal Reserve is a private bank. Why would they give away all of their money and profit? You would cause a Venezuela style collapse instead of the one we are headed for. Neither one is a good thing. They must have fired you at Goldman. A trading desk is not banking. It’s speculation with other people’s money. You would like to give away other people’s money wouldn’t you.

          3. The Fed has the power to print limitless amounts of money simply by creating it in the Fed accounts. They already hold those treasuries and have paid for them. There would be no net effect on anything but the Fed;s balance sheet which is a fantasy construct anyway. No, when I left Goldman for a massive job elsewhere they spent days trying to get me to stay, I wiped the floor with my old department once I got settled. It wasnt hard. GS is not a client first kinda shop.
            And I spent years as a Dept head at a major international bank. Dealt with both EU and US regulators as a lender and securitizer. And, fixed income trading, done properly, is relative value recognition combined with understanding statistics, mass psychology and plain old salesmanship. Obviously you know little of the business. I forgive you,

          4. Your reply tells me the shill theory is correct. You want to promote MMT and socialism. A free lunch for everyone means that no one gets enough to eat. Perhaps you have been given a seat at the elite’s table where they feast on other’s misery. Too bad.

          5. Again, your reply evidences zero understanding of the fractional reserve banking system, the Federal Reserve system. Financial markets or economic systems. I am about as far from a socialist as a human being can be, and MMT is an irresponsible disaster when undertaken SOLELY to rescue overlevered financial institutions. You are probably a big Gold Bug. I like gold. It’s shiny and nice, and coins are beautiful. But it isn’t edible, you can’t heat your house with it, it doesn’t lay edible eggs, and it is just as intrinsically valueless in a crash as paper money (you can actually burn paper money for warmth.) We are in an unprecedented environment due to an unprecedented pandemic. I believe saving people’s homes and jobs and lives allows for extraordinary measures by the government, and any idea that might help make that less damaging is worth considering. Being an armchair whiner is easy, thinking about new ideas and approaches is hard. What have YOU contributed to the conversation>? Doom porn is also fun. I have LOTS of guns and ammo, so I’m ready for that too. Dried foods, water tanks, and a concrete “bunker” to shelter in. Just in case. Don’t ever want to need them. As for free lunches, only for school kids who have financial need. Everyone else who can work, MUST,

          6. Thank you Nivea for the extremely detailed response. Any chance a version of this is bouncing around anywhere that counts? I’ll have to read your comments three or four more times but again thank you. Also any source material for these these general ideas or is this all you? In your opinion might we see some of this happen? My gut tells me that could be the case as far fetched as it may sound to some. I think we might see some real creative action upcoming but does anyone have the guts to attempt any of this? What say you?

          7. Yes. I have known the President for over 20 years and I worked with Secretary Mnuchin for several years at Goldman. I created and executed complex and innovative structures and solutions for both. After leaving Goldman, I structures (with two colleagues) the first CRE CLO, as well as several other products not focused on leveraging credit but on market inefficiencies. So, I have sent my proposal to both of them via my contact with the Executive Office of the President. I assume he will see it at some point. My hope if that one of them will give it to their staff and they will discuss it with the Fed, as Powell will have to agree to do something totally out of the box, which might be seen as political. But, being able to finance the entire larger bailout structure they are proposing (both the current $2 billion bill and the largest commitment) in a deficit-neutral transaction would seem to be in the interest of market stability and the nation’s economic health.

            In my view, the banking system has functioned as a big casino to make bankers rich for too long. Nothing has changed since 2008 except the bets are now all in derivatives and the fee structures have been made egregious for most transactions. And, of course, lying to and stealing from customers is still a way of life on Wall Street. Some things will never change. If Mnuchin, who was quite expert at gaining clients’ trust, has decided to use his gift for expropriation for the good of the nation rather than his own and his “friends” in the fund industry and the banks, he is fully capable of doing the right thing and a good job, even while not being the sharpest knife in the drawer when it comes to analytics or math.

            Trump was a dead’s nuts brilliant developer – the best I worked with back then. He turned about $20 million of his own and $30 million of investor capital into over a billion dollars on a couple of deals I worked on with him, The guy is just a fantastic, relentlessly positive and driven deal maker. It’s a shame he sullied his name with all the sleazy garbage businesses. His comeback from the early 90s S&L/real estate collapse was epic. He works like a sled dog.

          8. Hi Nivea, one more thing to consider on corona virus. This comes straight out of Oxford University. Look up: “half-of-united-kingdom-already-infected-with-coronavirus-says-oxford-model”. If their data is correct, which it appears to be, if one is to really dig into the numbers from the various resources available, you will find that the likely mortality rate of corona virus is .01% or the same as the seasonal flu. This is not me saying this. It is Oxford university. I make no comment on this other than to share the information. I will continue reading your comments and I am very grateful for everything you are sharing. Your comments are the best reading I have found on this entire subject in a long time, maybe forever, and I read most every good article on dollarcollapse and other similar websites for about a decade now. Thank you so much. I love your clarity and creativity. In my opinion, and this is the opinion of a nobody, we need leadership at the highest levels that think like you think. I will be rereading your comments again. I just read them to my wife and she is gobsmacked at your knowledge of the situation. Hopefully we get some reason coupled with creativity and courage to address the issues the whole world faces now. Based on what I’ve seen for decades I doubt that will happen but I’m foolish enough to cling to hope.

          9. No, I believe the death rate for all people infected will be very low – likely below 1%. But if most of America gets infected, that’s about 3.3 million people. The USA is not going to accept that many deaths, or half that many. We will immolate our economy first, as we are doing. Now, if you spread that out over 3 years and reduce it by half, THAT might be worth taking our chances. Two-three months of shut down is survivable. I know the Oxford whiz who started this whole thing has recanted, but my brother, the Head of Medicine at one of the most prestigious research hospitals in the world, had said from the start this is a 20-40,000 death disease, not worse than a bad flu season if we handle it properly.

            The insane reporting in the media – MSNBC in particular, is disgusting. Their endless attacks on Trump – yesterday it was “Trump doesn’t care if millions die as long as he gets re-elected!” Are loathsome. And, they seek to spread fear and panic while the Feds try to spread calm and resolve. I never, ever thought Trump would be the adult in the room.

            And thanks for your kind words.

          10. On the issue of corona virus… some food for thought. Do a Google search for average number of deaths from the seasonal flu in the United States. Pick any year or maybe any recent year so you’re within the normal trend. Then lookup the number of seasonal flu deaths for this year. Then look up the number of deaths from coronavirus in the United States so far. Here’s what you will find and you can verify it. The average number of deaths per season for the seasonal flu in the US is 34000. So far this year there have been 23000 deaths from the seasonal flu, which is a very low number for this day on the calendar. And then check the number of deaths from Coronavirus. That number is 1000. If you add coronavirus deaths to our current flu season deaths you get 24,000 deaths which is 10,000 deaths less than the average flu season death tole. I’m not making a comment about this but it is worth considering.

          11. This is not really relevant, When the hospital wards in major cities are overflowing with CV patients in the tens of thousands, and 30 or 40,000 in NYC aloneneed ventilators, the traditional flu numbers will be irrelevant. We may manage to save the vast majority of these people through the heroism and brilliance of our medical personnel. The number of deaths will be in the tens of thousands. Be realistic – we are trying to limit and spread out the impact through the sequestration of the population. Ultimately, over the next two years, the deaths will be in six or seven figures, barring an effective and immediate cure and vaccine. A disaster? Yes. A globe-shattering apocalypse? Hardly.

          12. So, when we ‘cancel’ the trillion dollar debt borrowed from China, they’re not going to retaliate, right?
            Keep in mind, they liquidated 100 million of their own people.

          13. No one said cancel any debt held by China or anyone other than the Fed. The Fed holds almost 5 Trillion in UST obligations. THOSE can be annulled. The Fed can increase the program by buying more bonds and annulling them. Obviously you cant cancel bonds owned by anyone other than the central bank, Read more carefully!

        2. If you do what you said, all confidence will be lost and dollar becomes worthless, no one will loan you money. Hyperinflationary. Confidence only thing backing dollar. You should work at the fed. And maybe study some reality instead of working at Goldman and living in virtual world

          1. For the main program, the money is ALREADY in the system. It is deficit neutral. Once the Treasury or Fed injects the new funds it may be inflationary, but 4-6 trillion in the face of this slowdown is nothing. $24 oil will take the steam out of prices like nobody’s business.

            I left Goldman years ago and advise major real property owners. I live in a very real world. We were <10% long equities going into this.

        3. I’d be good with it, but it’ll never happen. They’ll sell off americans to work as slaves in China to pay off debt. What was it Hillary said? It was “we’ll give them a red state.” Chinese don’t want a red state, they want California. They’ll likely get it, too, just before it plummets into the ocean.

    2. Debt Cancellation. Just like the Jubilee Year in Leviticus. Just like the Debt Cancellation that launched W. Germany’s Cold War economic miracle.

      Debt is property that the national government can take, subject to just compensation (sic), per the Fourteenth Amendment, which overrides the Contracts Clause in Article I.

      See Michael Hudson’s book, “And Forgive Them Their Debts” to see how debt cancellation has an historical basis that became a biblical commandment.

    3. Hi Nivea,

      I am very curious about what you mention here. Could you please elucidate? How could this happen? Not doubting that it could. I would just like details, something to study/research in order to understand what you are talking about.

      1. Interesting. But the Fed can simply materialize all the money it needs to by one keystroke. The Fed and Treasury have no administrative structure, branches or personnel to handle consumer or business lending. This needs the infrastructure of banking. It’s creative but I think Commercial banks need to be lending out not in. The Fed can provide a credit backstop for bad loans. That’s what it does best, buy bad assets.

    4. The FED buys up all the debt for cash and then sets the physical price of gold to $500K/oz or you can exchange the old currency for the new US dollar at 100 for 1 Everyone is now has 1/100th debt they had in real purchasing power terms. All currency is an incomplete transaction until its converted into something real or money.

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