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Michael Pento on Full-Blown Bond Market Crisis in 2012 & Gold

With continued turmoil in global markets and gold remaining firm in the mid $1700s, today Michael Pento, of Pento Portfolio Strategies explains for King World News readers globally why a full-blown bond market crisis is coming in 2012 and how investors should prepare, “The European debt debacle continues to unravel and yet many investors fail to recognize the profound ramifications of taking the largest economy on the planet offline. EU 27, which has a GDP north of $16 trillion, is the largest export destination of some of the world’s fastest growing economies.”

Michael Pento continues:

“In fact, Bloomberg reported last week that Chinese exports rose at the slowest pace in almost two years in the month of October as the deepening debt crisis crimped demand. Can there really be any safe haven country when global GDP is on the precipice of a sharp decline? The truth is that Europe, and quite possibly Japan and the U.S., face a recession in 2012 due to a full-blown bond market crisis.

But the mechanics behind what is occurring is actually very simple to understand. And once you grasp the fundamental dynamics behind what causes a sovereign default, investors can reach a very clear conclusion as to what action they need to take.

History is replete with examples that indicate once a nation reaches a debt to GDP ratio of between 90-100%, two pernicious conditions begin to appear. First, International bond investors start to become concerned that the tax base cannot support the amount of debt outstanding.

This concern is precisely because economic growth rates screech to a halt, as most of the available capital is diverted from the private sector to the government. It is at this point that interest rates begin to climb inexorably....

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“Two recent examples of this can be found in Greece and in Italy. Neither country is growing and their debt to GDP ratios have soared well above 100%, and their bond markets are now in full revolt. The sad fact is that their debt levels have become so intractable that both bond markets have now been placed on the life support of the European Central Bank.

However, regardless of central bank intervention, interest rates rise to a level in which most of the country’s tax revenue must be used to service the interest payments on the debt. It is at this point where investors fears become a mathematical reality and the country finds paying down the principal of the debt an impossibility.

At this juncture only two default options exist. The country can declare bankruptcy and default on the debt outright—which is the smartest route to take. The other option—and the one that all fiat currencies take—is to monetize the debt. However, this default by means of inflation doesn’t solve the problem, it only extends and exacerbates the default process.

Since it has been made clear on both sides of the Atlantic that an inflation led default will be deployed, it makes sense to avail yourself of the best protection against the ravages of a crumbling currency. That is why gold is a buy, especially when you are fortunate enough to get a pullback.”

To Learn more about Michael Pento’s financial management services CLICK HERE.

If you missed Michael Pento’s most recent KWN interview, it was truly one of his best and you can listen to it by CLICKING HERE.

Eric King

KingWorldNews.com

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