Michael Pento continues:  

“Not only has the Chairman of the Federal Reserve guaranteed that current bond holders will get destroyed once the sovereign debt bubble bursts, but he has also begun to inflate yet another massive bubble in U.S. equity prices.

In the summer of 2007, just before the start of the Great Recession, the Fed Funds rate and the 1-Year T-Bill were both trading north of 5%....

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“Then, starting in September of 2007, the Fed began to aggressively lower its target rate on interbank lending.  Global investors were put on notice that bond yields, which were already at low levels, would soon go down to unchartered territory.  Both the Fed’s target rate and the 1-Year T-Bill would be near zero percent by the end of 2008, and smart investors made a fortune taking the toboggan ride down Bernanke’s yield slope.

But now we find the central bank doing something it has never done before.  Something that will guarantee the Fed will prick the very bubble it worked so hard to create.  The Fed has adopted an inflation target.  In other words, a minimum rate of decline in the purchasing power of dollars—a rate that once achieved by official government metrics, will be much greater in the real world.

Leave it to the government to do exactly the wrong thing at the exact worst time; while all along claiming to have the country’s best intentions in mind.  First, our central bank created a housing bubble in order to increase home ownership, which led to an over-leveraged consumer and banking industry. Then, when the housing market toppled on top of the private and financial sectors, the government bailed them both out by taking on an unprecedented amount of debt.

This was done to prevent a depression.  So much debt, in fact, that the Fed had to artificially peg interest rates at zero percent just to keep the country from going completely bankrupt.  So what’s the absolute dumbest thing a central banker could do now?  Put sovereign creditors on notice that the Fed will continue to print money until inflation is well entrenched into the economy.

Inflation is the bane of any bond market.  A sustained increase in aggregate prices along with a currency that is losing its purchasing power will cause yields to rise faster and higher than any other economic factor.  Investors were already aware that there is little room for yields to fall any further. 

But now are being told by the Fed that they will continue to lose an ever-increasing amount of money, as real yields are guaranteed to go further and further into negative territory.  Therefore, any new money created by the central bank is no longer going into government debt, but is instead rushing into stocks and commodities.

I expect this condition to intensify greatly this year and cause equity and commodity prices to soar substantially.  Of course, the move higher will not be due to a booming economy.  Just think about the negative Q4 GDP print and the rising unemployment rate reported last week.  However, strong money supply growth and the passing of fixed income as the preferred repository of new funds will cause commodities and equities to boom.  This huge move higher—especially in commodity prices—will remain in place until the Fed begins to raise interest rates.

Nevertheless, since a depression and a bankrupt nation awaits us on the other side of the Fed’s bond bubble, I expect it will not be until inflation becomes a serious and undeniably-painful condition for the economy that Mr. Bernanke begins to change his mind.  And any change that does eventually occur will be slow and gradual at best.  Investors would be wise to add to their gold positions before chasing a rising gold price becomes an extremely arduous task.”

Michael Pento: President & Founder of Pento Portfolio Statagies and the author of

The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market

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