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Michael Pento to Moneynews: Governments May Fall in Coming Bond Market Collapse

By David Nelson and Dan Weil   |   Sunday, 12 May 2013 10:42 AM

The bond market is headed for a meltdown, and that collapse may bring down the governments of Japan, Europe and the United States, says Michael Pento, president of Pento Portfolio Strategies.

The U.S. government was about to collapse in 2008 until the financial system was bailed out, he tells Newsmax TV. "We took on $7 trillion of new debt and took interest rates to zero percent," says Pento, author of "The Coming Bond Market Collapse."

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"What's the next trick? When the bond market bubble bursts, what will the government do?" The housing market already has been bailed out by the state," he says.

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"Now, when the state gets in trouble and the state becomes insolvent, what do they do?" asks Pento. "Take on more debt? Does the United States call the IMF, of whom we are the primary contributor? It can't happen."

Looking at Europe, austerity is the only answer to its debt crisis, Pento says. "And austerity is what we need here in the United States before we reach the point, the epiphany, the watershed moment of Greece," says Pento.

"So now is the time that we, as a nation, have to balance our budgets. ... We have to strengthen our currency as soon as possible. We have to unwind this blatant and fallow inflation that's sitting at the Federal Reserve."

The banking system will have $4 trillion of excess reserves by year-end, Pento says. "We already have inflation in the bond market. We're re-creating bubbles in the real estate market and in the equity market. And the biggest bubble of all is the bond market. Let's stop that now."

So what will make the bond bubble burst? "It could be Fed-induced or market-based," Pento says. "The Federal Reserve has an inflation target of 2 percent. If they achieve their inflation target, they're going to not only achieve it but exceed it. They can't nail an inflation target of 2 percent.

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At that point, the Fed can decide to either continue or abandon its massive easing program.

If it opts to continue the easing, "that would be an inflationary collapse of the bond market," Pento says.

"In that case, you want to own precious metals, base metals, energy, agriculture, and you want to short bonds, of course, because high yield, sovereign debt, municipal bonds would all collapse."

If the Fed decides to halt its easing when inflation hits 2 percent, "that would be the right move to take, but in the short run would you buy a bond knowing that the Fed stopped QE?" Pento says.

"In that case, you'd still short bonds, but it would be a deflationary collapse of the bond market, [so] you want to short precious metals, you want to short industrial [stocks]."

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