The United States is far overdue for a recession and the coming economic downturn will be “much worse” than average, warns Michael Pento, the president and founder of Pento Portfolio Strategies.
“A recession has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one — we are overdue,” the author of the book "The Coming Bond Market Collapse" wrote for CNBC
“Most importantly, the average market drop during the peak to trough of the last 6 recessions has been 37 percent. That would take the S&P 500 down to 1,300; if this next recession were to be just of the average variety,” Pento
explained. “But this one will be worse.”
Highlighting his list of reasons why:
- “A major contributor for this imminent recession is the fallout from a faltering Chinese economy,” he says. He said the renminbi (or yuan) currency's plunging value, tumbling stock prices (down 40 percent since June 2014) and tumbling rail freight volumes (down 10.5 percent year over year), “all clearly illustrate that China is not growing at the promulgated 7 percent, but rather isn't growing at all.”
- Expect more stress on multinational corporate earnings as global growth continues to slow because China accounted for 34 percent of global growth.
- American equity prices and real estate values can no longer be supported by incomes and GDP. "Because the Federal Reserve's quantitative easing and zero interest-rate policy have ended, these asset prices are succumbing to the gravitational forces of deflation. The median home price to income ratio is currently 4.1; whereas the average ratio is just 2.6," he said.
- The long-term average of the market cap-to-GDP ratio is around 75, but it is currently 110. "The rebound in GDP coming out of the Great Recession was artificially engendered by the Fed's wealth effect. Now, the re-engineered bubble in stocks and real estate is reversing and should cause a severe contraction in consumer spending," he said.
- Businesses, the federal government and the Federal Reserve have taken on a humongous amount of additional debt since 2007. "Business debt during that time frame has grown from $10.1 trillion, to $12.6 trillion; the total national debt boomed from $9.2 trillion, to $18.9 trillion; and the Fed's balance sheet has exploded from $880 billion to $4.5 trillion," he said.
- The federal government's debt has now soared to nearly 600 percent of total revenue. "And the Fed has spent the last eight years leveraging up its balance sheet 77-to-1 in its goal to peg short-term interest rates at zero percent."
“This inevitable, and by all accounts brutal upcoming recession, will coincide with two unprecedented and extremely dangerous conditions that should make the next downturn worse than 2008,” he predicts.
“First, the best the Fed can do now is to take away its 0.25 percent rate hike made in December,” he said.
“Second, the federal government increased the amount of publicly-traded debt by $8.5 trillion (an increase of 170 percent), and ran $1.5 trillion deficits to try to boost consumption through transfer payments," he warns. "Another such ramp up in deficits and debt, which are a normal function of recessions after revenue collapses, would cause an interest-rate spike that would turn this next recession into a devastating depression,” he said.
“It is my belief that, in order to avoid the surging cost of debt-service payments on both the public and private-sector level, the Fed will feel compelled to launch a massive and unlimited round of bond purchases,” he said.
But it all could be a classic case of “too little, too late.”
“The ability of government to save the markets and the economy this time around will be extremely difficult, if not impossible. Look for chaos in currency, bond and equity markets on an international scale throughout 2016. Indeed, it already has begun,” Pento said.
Meanwhile, Robert Wiedemer, co-author of "Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown," told Newsmax TV
that while the nation might come close to plunging into a recession, it could actually avoid such a cataclysmic fate.
“I'm not sure we're actually going to go into recession, but there certainly are some indicators that it's going to slow down and get close,” he told “Newsmax Now.”
“Mostly if you're looking at transportation, manufacturing, obviously the oil industry, all of those are the kind of things that are forcing the economy to slow down,” he said.
“We haven't seen it in jobs yet, I know, but certainly the manufacturing and oil industries are pushing us down. We never had very good growth to begin with, so it's not that hard to push us down to near zero.”
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