Pento:  “We all knew that the Fed suffers from acute schizophrenia, but let’s take a look at what their statement really said today.  Of course there was no change in the amount of bond purchases.  They are still doing $85 billion every month.

But the Fed downgraded the outlook for inflation.  The outlook was for 1% inflation for the totality of 2013.  At the Fed’s last meeting in March, the outlook was for 1.5% inflation.  So they lowered their outlook for inflation which is half of their mandate.

They then said, ‘The risks to rising unemployment have diminished.’  They made that bold claim even though the unemployment rate was up last month....

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“So the Fed is suffering from acute schizophrenia.  Half of the Fed wants to meet and exceed the inflation targets.  The other faction of the Fed wants to start attenuating QE right away.  But they can’t even agree on how to do it, what to do, or even on the data which is being produced.  So it’s a Federal Reserve in complete disarray.  

Bernanke will continue to be data dependent going forward.  He wants to lower the unemployment rate while he is increasing the rate of inflation.  I think that guarantees us $85 billion every month until he sees significant improvements in both of his metrics.  I can tell you that the inflation target is likely to be breached before their unemployment target is breached, which is 6.5%. 

Just to give you a little color on what the Fed is doing, the Fed’s balance sheet is now $3.45 trillion and everybody knows it’s going to grow by $85 billion each month.  Here is an interesting fact for KWN readers:  The Fed’s balance sheet is up 16% year-over-year, and by the end of December it will have jumped a staggering 30%.  Again, that’s the size of the Fed’s balance sheet expanding 30%!

So when the people in the mainstream media repeat like parrots, ‘Where is the inflation?’  The inflation is here, Eric.  Inflation has come into the size of the Fed’s balance sheet.  This means that inflation has been directly infused into the bond market.  This also means that when these banks have their assets purchased by the Federal Reserve, from freshly printed credit, those banks buy stocks, bonds, and real estate.  This is why we are reigniting the stock bubble and the real estate bubble.  Of course the biggest bubble of all is the bond market. 

Meanwhile, the price of oil is basically back to $100 a barrel.  In the Federal Reserve’s mind, the rising price of oil doesn’t count in its inflation metric because it is stripped out the headline CPI reading—along with food.  And, Mr. Bernanke believes the process of re-inflating asset prices; like stocks, bonds, real estate and commodities into their bubble formation is tantamount to deflation, which is absolutely insane. 

Specifically, the Fed believes that having the price of oil go from $25 to $30 a barrel, which is where it was in the 1980s, 1990s and early 2000s, and then printing money until it once again approaches $100 per barrel, which it reached in 2008, is a sign of stable prices!

So again, the Fed is completely in disarray.  They are also confused on what they want to do and how to get there.  But what we do know is that they are counterfeiting $85 billion every month, and investors should be hedged against this prospect of ever-rising inflation.  In that environment, the ownership of hard assets is still mandatory, especially as gold and silver prices are ending their cyclical bear phase.

Right now the gold market is consolidating at lower levels from its nominal high of just over $1,900 an ounce.  The reason gold is consolidating here is because the entire world is waiting for the exit of Ben Bernanke and his record balance sheet of $3.45 trillion.

The gold market, and in particular the mining shares, have already priced in this exit, but this exit is not going to occur to any degree that is currently anticipated.  So the risk in the gold market is now to the upside, and the risk to the downside in the mining shares is negligible at this point because they are pricing in the draining of the Fed’s balance sheet which is not going to occur.”

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

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

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