dcsimg
Thu Sep 20, 2018 00:52
Login Password    Forgot password?    Member's Privilege  
 Advanced Search
   FEATURES:
   Oceanwide IR
   Gazette
   Learning
   Newsletter
   Info Center
Keith Weiner | Michael Pento | Kam Hung Yu | Jean Li | Liz Kim | Laurent Ettedgui | OilPrice.com | 黃韋皓   | Chloe Luo
Michael Pento
Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check”, is Host of The Pentonomics Program and Author of the book “The Coming Bond Market Collapse.”
Click here to toggle text size
Trump to Declare War on Fed in 2018
06 Mar 2018

We are only a little over one year into the Donald’s Presidency and what we know most for sure is that our new President loves debt. Not only did debt and deficits get the cold shoulder in the recent State of the Union, Trump played “Let’s Make a Deal” with the Lords of the Swamp Mitch and Chuck to increase government spending by 13% over current levels. We also know that he prefers a weaker dollar, which he hopes will engender balanced trade—along with trade tariffs it now seems. But most of all, he loves as a rising stock market that he views as a report card for the administration and his success.

But, interest rates have already begun to rise due to the soaring National debt. The Treasury is also borrowing about $1 trillion in this fiscal year--nearly twice the amount from the year before. And, the Fed goes full throttle into Reverse QE come this fall to the tune of $50 billion worth of asset sales per month. Therefore, as rates rise the risk premiums on equities are shrinking fast, all these headwinds will cause the stock market to head lower; and that storm has already begun.

Losses are now piling up across the fixed income spectrum. And companies on the margin, known as Zombies, will be the first casualties from a decade of cheap credit that has become paramount for their survival.

The Bank for International Settlements defines Zombie companies as having ten years or more of existence, “where the ratio of EBIT (earnings before interest and taxes) relative to interest expense is lower than one.” In other words, a company that perpetually needs to restructure debt to survive, and is unable to cover its interest expense with operating profits.

Today it is estimated that 10.5% of firms are in the Zombie category. According to Moody’s and Standard and Poor’s, “debt repayment capacity has broadly weakened globally despite ultra-low rates and ample liquidity.”

UBS research analysts are anticipating economy-wide interest payments will rise by 7-8% in 2018, requiring an equivalent increase in EBIT to offset the increasing costs. If significant top-line growth doesn’t pan-out, the Banks who finance these “Walking Dead” companies will likely be stuck with the tab.

This is the real reason behind the increased market volatility.

Two investment products linked to the Volatility Index, or VIX, imploded recently. In a day that saw the Dow Jones industrial average down 1,700--its biggest single-day point decline in history--the VIX spiked 84%.

But the blow up in the inverse volatility index is just a small fisher in the dam. Structural cracks are starting to appear in the broader averages brought on by rising interest rates.

Much of the economic recovery was predicated on a wealth effect from asset bubbles that is now headed into reverse. The Fed is projected to raise rates 2-4 times this year and will be dumping $600 billion worth of Mortgage Backed Securities and Treasuries at an annual pace come October.

All this will cause stock market volatility to increase and then to fall precipitously. Donald Trump will then be in a desperate search for someone to blame. And the likely scape-goat will be new Fed Chair Jerome Powell. There is a myth that the Federal Reserve stands as its own entity--devoid of any and all political pressures.  But the truth is the Fed will eventually acquiesce to anything a President desires; or those dissenting members will be replaced. Throughout history some leaders have tried to flex their influence more than others.

For instance, in 1968 Richard Nixon appointed Arthur Burns as Fed chair and gave him the directive to grease the wheels to ensure another victory in 1972.

In the early 70’s Nixon couldn’t enjoy the satisfaction of instantly bullying political appointees through a Twitter storm. But Tricky Dicky always had something up his sleeve. When Burns resisted the Whitehouse’s bid for easy credit, Nixon planted negative press about him in newspapers. He also proposed legislation to dilute the Fed Chair’s influence on monetary policy and increase that of the Executive Branch. Eventually, Burns and other Governors finally complied.  And we all know how this ended…faith in the U.S. currency plummeted and a run on gold ensued. In haste Nixon was forced to close the gold window, and the American economy suffered through a decade of stagflation.  

As the equity market continues this volatile cycle and interest rates rise unabated, expect Donald Trump to start a tweeting campaign demanding the return of QE and calling for the Fed to put a cap on interest rates.

He may also claim bias at the Fed towards Democrats in that Chairs Bernanke and Yellen provided Barack Obama with near zero percent interest rates for nearly all of his eight-year tenure. Trump will, ironically, claim this institutional favor exists despite appointing Mr. Powell himself.

We have a President who viscerally understands the power of low rates and ever-increasing asset prices—despite the lack of supporting fundamentals. In addition, Trump thoroughly enjoys breaking with protocol and is not at all reluctant to call out government officials when he stands to benefit.

For a brief period of time look for an epoch battle between our “independent” central bank and the Executive Office.  As long as the Fed wins the battle for independence, look for deflationary forces to prevail. However, sooner rather than later, I believe Mr. Powell will join forces with the President as they both battle the severe loss in assets prices that lies just around the corner. This may include another massive QE program, negative nominal rates, universal basic income and the banishment of physical currency.

This renewed alliance between the President and the Fed should, unfortunately, engender a stagflationary outcome that would even make Richard Nixon blush. The time has arrived for incredibly chaotic swings between inflation and deflation. Is your portfolio prepared?

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

Disclaimer: The above views are the opinions of the author or his/her company and do not represent the views of Quamnet.
Share :TwitThis   Facebook   LinkedIn       Forward to a friend
Reality Check Now in Progress 18 Sep 2018
Turkey is Not Contained 21 Aug 2018
Anatomy of Hyperinflation 14 Aug 2018
Trump Declares War on the Fed 01 Aug 2018
Tariffs “Trump” Tax Cuts 16 Jul 2018
Is this the Most Hawkish Fed Ever? 03 Jul 2018
Catalyst for the Next Financial Crisis 05 Jun 2018
Inverted Yield Curve: It’s Definitely Not Different This Time 23 May 2018
Universal Basic Income to the Rescue? 16 May 2018
Global Synchronized Slowdown 08 May 2018
Market Update
Watch List
Quamnet Research
China Longyuan (916): 2Q18 results were lower than expect 19 Sep 2018
Quammentary: Residential property situation for the New territories 19 Sep 2018
Conquest Fund: Position adding 19 Sep 2018
First Comment: Timing for China Everbright International (257) could be coming 19 Sep 2018
The “worst” sector could sometimes be the best short-term performer 18 Sep 2018
Quamnet:

Help  |  Sitemap  |  About Us  |  Contact Us  |  Advertise with Us  |  Disclaimers  |  Privacy     
China Tonghai International Financial Limited:
A founding member of:
MyQuamnet members get:
[Free Real Time Stock Quote] [Stock Charting Analysis] [Chart] [Hong Kong Stock Chart] [Industry Analysis] [Hong Kong Stocks Information] [Warrants] [CBBC] [Depositary Receipt] [Financial News] [Hong Kong Stock News] [US Stock News] [HKEx News] [New Stock] [Hong Kong Stocks Analysis] [Stocks Watch List] [Portfolio] [Finance Seminar] [Investment Seminar] [FOREX] [FX]
Quamnet Financial Services:
[Hong Kong Equity] [Hong Kong Stock] [Hong Kong Stock Quote] [Stock Quote] [Bid] [Ask] [Last Price] [Open] [Previous Close] [Board Lot] [Market Cap] [P/E] [P/B] [Real Time Price] [Past Prices] [Day High] [Day Low] [52 Week High] [52 Week Low] [Buy Ratio] [Sell Ratio] [Volume][Turnover] [Warrants Quote] [CBBC Quote] [Finance] [Stocks] [Investment] [Block Trades] [Chart Analysis] [Technical Indicator]
[Hong Kong Listed Companies Information] [Hong Kong Stocks Analysis] [HK Stock Quote] [Prospectus] [IPOs News] [Market Move News] [GEM] [Hang Seng Index] [HKCEI][Shenzhen A, B Index] [Shanghai A, B Index] [Hang Seng China AH Premium Index] [Forex] [Commodities Futures] [Gazette] [Commentary][Financial Columnists] [Fund House Report] [Shenzhen Stock Market] [Shanghai Stock Market] [Hong Kong Islamic Index] [Stock Trading Strategy] [Stock Monitoring Tools] [Commerce & Industry] [Financial] [Telecom, Media & Technology] [Conglomerates] [Healthcare] [Transportation] [Energy] [Property] [Utilities] [Global Alliance Partners] [Asset Management] [Securities Brokerage] [Personal Financial Advisory Solutions] [Futures] [US Stock] [ETFs] [HSI Futures] [Options] [Japanese yen] [US dollar] [Euro] [Pound sterling] [Australian dollar] [New Zealand dollar] [Canadian dollar]

Quamnet Subscription Services:
[Quam Research Main][Quam Research][Ask Quam][Columnists][Quam Wise][Market Move Signal] [Warrant Monitor][Investment Tools] [Quam Stock Monitor] [Stock Quote Ticker][Smart Database][Metastock][Quam Radar][Stable Growth Portfolio] [Aggressive Growth Portfolio][Fund Analysis][Wealth Management][Market Analysis] [Investment Base][Red Chip][H Stock][Bond][Mid - Short Term Stocks Investment Recommendations][Mid - Short Term Investors] [The Daily Perspective] [The Macro Perspective] [Economic Review] [Investment Monitoring List] [Paul Pong] [Global Market Analysis][Weekly Market Analysis][Virtual Stock Portfolio][Virtual Fund Portfolio] [Strategy updating] [Investment Strategy] [Infinity Profit] [Starman] [Knight of Stocks] [ Fong Sun Hop ] [Witty Minds] [Leon Mui] [Small-cap Sniper] [ValueNavigation][Helen Lee] [StockKing's Edict][StockKing Hui] [Thunderstock] [Roy Lau] [Trading Universe] [Vincent Luk] [Simon Choy] [Inverse Trading] [Alvin Lai] [Felix FX] [Felix Man] [Unique Option] [Wealth Double-up] [Hilton Yuen] [The Second] [Thomas Poon]