By Michael Pento of Pento Portfolio Strategies

February 1 (King World News) - Global Chaos In 2014 Will Rival That Of The 2008 Collapse

Wall Street cheerleaders like to claim that the tapering of Fed asset purchases is not equivalent to the tightening of monetary policy.  But the markets are clearly telling investors something different.  Year-to-date the S&P 500 is down about 4% -- not horrific for one month but stocks are certainly not following last year’s upside performance.  The economic data such as durable goods, initial jobless claims, personal income, and housing sales have all shown a distinctive weakening trend....

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The reason why tapering is tightening is because the Fed had been in the habit of taking away $1 trillion worth of higher-yielding bank assets per year and offering them just .25% in return.  Banks then needed to purchase a new asset such as bonds, stocks, or by creating a loan, which served to expand the money supply.  However, going from $1 trillion worth of asset purchases to $0 of QE, can hardly be offset by the amount of excess reserves held in the banking system.  In other words, the banking system isn’t any more compelled to increase its assets and expand the money supply if the Fed’s balance sheet is $5 trillion, rather than when it is $4 trillion.  Not understanding this represents a critical misunderstanding of the QE process.

Nevertheless, the Fed continues to promulgate the fallacy that ending QE will not have an adverse effect on asset prices, money supply and the economy.  And the majority of the investment public has accepted that nonsense as gospel truth.  However, the global turmoil in equities and currency markets are great evidence that the reflation game has changed.  Further proof of this is the fact that Treasury yields are falling into the teeth of the Fed’s taper of asset purchases.  The only reason this counterintuitive trade would occur is if the market was convinced the overwhelming forces of deflation and recession are going to supersede the falling demand for bonds from the Fed.

The chaos in emerging markets is just one of the destructive ramifications of addicting the world's reserve currency to 5 years of ZIRP and $3.3 trillion of money printing.  Because of the Fed's massive manipulation of interest rates and money supply, investors piled into emerging market countries searching for higher-yielding investments denominated in rising currencies.  Those foreign central banks had to print local currency to keep it from appreciating too rapidly.  That created inflation, which further exacerbated the move higher in asset prices.

Then, at the beginning of this year the Fed started to reduce the monthly amount of QE, forcing investors to panic out of emerging market currencies and equity markets and back into their domestic currencies.  The currency market turmoil also forced those emerging market central bankers to raise interest rates in order to quell inflation and support their currencies.

For example, Turkey hiked its overnight borrowing rate to 8%, from 3.5%.  Just imagine what would occur in the U.S. markets and economy if the Fed Funds rate was raised from 0%, to 4.5% in one day!

This is just one example of the unintended consequences resulting from governments’ efforts to bring the global economy out of the Great Recession by massively increasing debt levels and having debt purchased by central banks.

To be clear, I turned bearish on the markets in 2014 precisely because of the implementation of the deficit-busting Affordable Care Act, soaring interest rates and crumbling currencies in emerging markets.  Also, the Fed’s taper of QE, which will cause asset prices to tumble, and yet another debate and debacle regarding the debt ceiling.  Expect global chaos this year to rival that of 2008, at least until the new Fed-head Janet Yellen re-institutes a protracted and substantial QE program.”

IMPORTANT - KWN will be releasing interviews all day today. 

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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