By Michael Pento of Pento Portfolio Strategies

August 31 (King World News) - “Cash & Gold Are Kings This Fall”

After being bullish on equities for most of 2013, back on July 16th I warned on KWN that the U.S. stock market was due for a significant correction.  Since then the S&P 500 has dropped about 5%.  Unfortunately, it is my view that the damage has just begun....

Continue reading the Michael Pento piece below...


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“Allow me to briefly expound on why another 15% selloff in the averages is highly likely from now until the end of October.

It was announced this week that the nation of Japan has finally produced the highest annualized rate of inflation that it has seen in the last five years (.7%).  Therefore, it makes no sense that their 10-Year Note now offers the same yield as their inflation rate—especially given the fact that their government wants inflation to increase significantly from current levels. 

No sane investor would loan money to a regime that has promised, and is delivering, a higher rate of inflation than what can be garnered from owning its debt going out ten years.  This means the only buyer of JGBs at the current rate will be the BOJ (Bank of Japan).  The sad truth is that Japan is very close to experiencing extreme chaos in its bond market and economy.  This chaos will send shock waves throughout the globe.  Investors should take heed.

Adding to the downward pressure coming from Japan is the chaos happening in emerging markets.  Many of these formerly booming economies have recently suffered falling growth rates, equity market debacles, and currency collapses, which have gone virtually unnoticed by most of the developed world up to this point. 

For example, a rapidly slowing Indian economy has helped send the Rupee down 22% verse the USD; and the BSE (Bombay Stock Exchange) SENSEX down 10% in the last three months.  Other countries such as Thailand, Turkey, Brazil, Indonesia, and the Philippines (just to name a few), have suffered the same fate or even worse.  The U.S. markets cannot continue to ignore the carnage taking place in the emerging world for much longer. 

The civil wars in Syria and Egypt, and the imminent involvement of the U.S. military must not spill over into Iran, Iraq, Saudi Arabia, Russia, Jordan and Israel.  This would cause oil prices to spike higher than the current $108 per barrel and remain there for a long duration.  Rising energy prices are already putting pressure on consumers. 

But consumers are already suffering from falling real incomes and a job market that mostly offers part-time work.  Higher oil prices will further crimp consumer spending and bring down GDP.  It would be improbable to expect corporations to meet earnings expectations under this scenario.  Look for earnings and multiple contractions to be the result if oil prices remain elevated. 

Political gridlock in Washington D.C. has to be resolved within the next 60 days.  The debt ceiling must be raised and government agencies need to have funding authorized through a Continuing Resolution by mid-October, or the U.S. government will be effectively shut down.  The last time this situation arose was the summer of 2011.  During that time, the Dow Jones shed 2,000 points in just 30 days.  It would be prudent to anticipate a similar result from another round of government gridlock. 

Finally, the Fed still believes the size of its balance sheet determines interest rate levels.  Therefore, it may start to gradually bring down the level of its monthly asset purchases toward zero beginning next month.  However, the mere threat of tapering bond purchases has already caused long-term rates to spike over 100 basis points. 

The 10-Year, which is now yielding 2.77%, helped send business spending and home sales crashing.  Durable goods dropped 7.3%, and capital spending fell 3.3% in July, while new home sales plunged 13.4% in the same month.   A significant reduction in the Fed’s asset purchases will send the benchmark 10-Year Note towards 4%, which will cause the economy to fall back into recession.  

Investors must realize that any one of the number of factors listed above could send this over-valued stock market much lower.  Nevertheless, Wall Street continues to promote the fantasy of a second-half economic rebound, and is currently pounding the table on stocks and saying, ‘stocks are headed higher.’  In sharp contrast, I recommend going into cash and owning physical gold and silver as insurance against the imminent turmoil and chaos which is going to take place in global markets.

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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