The end of quantitative easing (QE3) in the next few months, could lead to a drop in asset prices followed by yet another QE round, more debt and a further devaluation of paper currencies.
The QE economy —which started in 2009 and has continued through 2014 — saw the banks buying stocks, bonds, and real estate, while loaning money to Wall Street, which sparked an asset bubble. That economy is coming to a halt.
The crisis in Ukraine, pro-Russian rebels in Ukraine shooting down a passenger airliner and the conflict in Syria have not affected asset prices. No matter what happens globally, people go out and buy stocks. Even bad economic news, such as negative GDP in the first quarter and the addition of $7.5 trillion in publicly traded debt since 2008, has not affected the stock market. Investors need to get out of cash because cash pays zero.
QE is going to end within the next three months and this could be the transformational point, which nobody on Wall Street is prepared for.
Fund Manager Activity
What is Michael Pento, founder and president of Pento Portfolio Strategies, doing with his fund’s money? Pento has raised 60% cash and is expecting “at least a 20% pullback” in stocks. He said there was a 13% reduction in asset prices after QE1 ended, a 17% reduction in the S&P 500 value after QE2 ended, and “we’re much higher now.” He said QE3 will end by the end of October, after which he expects “at least a 20% correction within 90 days.”
Pento said the Fed believes that inflation is caused by wage growth. He disagrees. He argues that “inflation is a persistent and pervasive fall in the purchasing power of paper money.” Therefore, he said, “I believe the Fed is going to be behind the inflation curve for years.”
Given his views on inflation, Pento has been underweight gold from 2012 until the start of 2014, when his fund has “gradually increased…exposure to gold.” Why? Because, he said, gold is the “only asset not a victim of the Fed’s bubble.” He said stocks, real estate, and fine art are all in a bubble.
Now, that the artificial recovery is ending. The belief that we can achieve strong growth with low inflation is a fantasy created by Wall Street and Washington. In fact, we have experienced the exact opposite. We have anemic growth with inflation.
What Could The End Of QE Mean?
The end of QE3 could bring about a huge correction in asset prices and a deflationary spiral in the economy. How will the Fed respond to a drop in asset prices? He said, The Federal Reserve” are going to lower the interest paid on excess reserves to zero or even into negative territory and launch yet another round of QE. In the past, every time the Fed ended QE, asset prices fell and the Fed came back with another package of printing money and credit creation. When the Fed does that again — It’s 1999 all over again… with much deeper repercussions.
Global Debt
Central banks around the world are trying to protect the value of bonds. For example, the Japanese 10-year note is trading at .55%. This is for a nation with a 242% debt-to-GDP ratio and inflation at a 30-year high. Yet the government and the Japanese central bank are trying “to convince people to own a sovereign debt instrument going out 10 years that yields half of one percent. The problem is — nobody wants to buy them anymore.
Fixed Income
With record levels of debt, central banks on “an inflation quest” and asset prices setting records, Pento asked, “Why on earth would you want to buy a fixed instrument from this government? It’s ridiculous.” The only entity left who wants to buy this debt “is the money printers, the central banks.” Therefore, Pento said, the central banks are “forced to never stop buying sovereign debt.” Unfortunately, he said, “The other side of that is massive inflation…the destruction of the middle class…[and] the insolvency of the nation state.” Even worse, he predicts, the “Runaway destruction of these currencies.”
Safe Haven
With such a global economic situation, investors need to take physical possession of precious metals. Gold and silver are the only asset class not affected by the asset bubbles created by the central banks and should retain their value as paper currencies and other assets plummet.
Related Reading
Bernanke’s Bubble: Setting Up The Next Bear Market by Steve Miller
