Pento:  “I find it interesting that after years and years of being told that the Japanese and the Chinese had no other alternative other than to continue to pile into our Treasury market, the data just showed that they are net sellers of scores of Treasuries in the last month.

That shows me that the Chinese and the Japanese are very aware of what is now unfolding.  They realize that the threatened removal of an $85 billion per month bid in mortgage-backed and Treasury bonds is not an incentive for them to continue buying.  And they will sell to protect their position. 

That further exacerbates the tremendous amount of record-setting pressure that exists on interest rates, and downward pressure on bond prices.  You have a Fed that has, for decades, manipulated the price of bonds, and they raised that intervention exponentially when the Great Recession started in 2008....

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“They have also said that they are going to buy $85 billion each month indefinitely.  And when they indicated in May that they may not do that forever, the people who buy bonds thought, ‘Hey, not only are they going to stop buying bonds, but the Fed has a $3.35 trillion balance sheet that must be unwound.’

By my calculations, $2.7 trillion of that $3.35 trillion balance sheet is going to have to be unwound if they want to take the Fed funds rate back to a normalized level, and drain the amount of excess reserves from the banking system.  So a significant amount of latent and fallow pressure on inflation is already there. 

When the money-multiplier effect kicks in, you are looking at rapid growth in money supply and inflation.  And if the Fed is going to threaten to start fighting that, you have a powder-keg -- an explosion of interest rates.  That’s the condition of the bond market right now.”

Eric King:  “Michael, obviously we started to see stocks tumble this week, and gold and silver surged dramatically, especially silver.”

Pento:  “The gold market has been saying for the past two years that the Fed’s next move is going to be to drain their balance sheet and start raising interest rates because the economy was going to get better.  And the gold market had been selling off in a protracted fashion during that period.

But now we have a watershed event, because now I believe the gold market is saying, ‘The economy isn’t going to get any better, and now the free market is taking interest rates higher.  And we are so close to the Fed being cognizant that they cannot raise interest rates, and that the economy is 100% addicted to artificial interest rates and quantitative easing.

It is my strong belief that we are only months away, and perhaps only weeks away, from that occurring.  When the gold market is fully aware that the Fed has become cognizant of the predicament they are in and their hands are tied and they can do nothing about draining their balance sheet or ending quantitative easing, because if they do the economy will fall apart, when that watershed moment happens I am looking for an explosion higher in the mining shares, along with the price of gold and silver.”    

Eric King:  “Michael, as you know the month of August is normally a quiet period for markets, but this has been anything but a quiet August.  We have seen incredibly wild trading action in global markets including bonds, commodities, stocks, as well as gold and silver.  I wonder if this has to do with what you were just warning about, which is we are getting close to some type of watershed event?”

Pento:  “That is exactly right.  You have to remember that according to the NBER, the recession ended in the summer of 2010.  And we have been living in this ‘Fool’s Paradise’ for the past few years.

The belief has been that the Fed could actually continue on with QE forever, and that the Fed would continue to keep interest rates low so that the economy could recover.  Then the Fed would stop buying the bonds as the economy would hit ‘escape velocity,’ whatever that means.

This massively incorrect assumption is now being proven totally false.  I strongly believe that in the September/October time frame, when the Fed actually starts to taper, and it’s going to be about a $10 billion or $20 billion tapering, I want KWN readers to understand one thing -- the free market isn’t waiting for the taper.

The free market is already taking interest rates up from 1.4% on the 10-Year, to 2.8% today.  The free market is ahead of the Fed.  And that rise in interest rates is already affecting the labor market, the real estate market, and this week it started to affect the stock market.  As it becomes apparent that the Fed is in fact trapped it will shock market participants, and this is when there will literally be an explosion to the upside in gold, silver, and the mining shares, and it is just a matter of weeks away.”

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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