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By Michael Pento of Pento Portfolio Strategies

May 17 (King World News) - It’s Far Worse Today Than At The Beginning Of 2008 Collapse

Each year since the recession officially ended in the summer of 2009, Wall Street and Washington have tried to dupe investors into believing that a second half recovery was in store for the stock market and economy. But this promise has failed to be fulfilled each year, as annual GDP growth has not reached north of trend growth (3 percent) since 2005. But with the hope that investors have a perennial case of amnesia, these cheerleaders are yet again trumpeting the illusion that economic growth is about to surge.

The year 2014 didn’t start off so well for those who desperately want investors to be convinced that the economy has healed from the Great Recession....

Continue reading the Michael Pento piece below...


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After posting annual GDP growth of just 1.9 percent for all of 2013, which was much lower than the 2.8 percent growth experienced during 2012, this year started off with annualized GDP growth of only 0.1 percent for Q1. This means GDP growth for Q2 has to be near 5 percent just to produce the same 2.5 percent growth pace experienced back in 2010. 

But the recent retail sales report for April showed an increase of just 0.1 percent from the prior month -- so much for a strong rebound from the winter’s weather -- and not good news for those who need investors to believe in the fantasy of robust growth in order to keep them supporting stock prices at these levels. 

The sad truth is that this year’s GDP growth won’t produce results any better than those years following the credit crisis. The reason being that our leaders don’t understand where growth comes from and/or are unwilling to take the painful steps necessary to achieve it. 

Unfortunately, most of those who inhabit D.C. are economic illiterates; and Wall Street enables Washington with alacrity in order to keep the party going. They fail to realize that U.S. GDP growth is stuck in neutral because an economy needs low and stable tax and interest rates and benign inflation to generate productivity and strong growth. This is the only foundation from which sustainable and healthy growth can be built. And those conditions are virtually impossible to maintain when the U.S. economy is carrying a debt level equal to 330 percent of GDP -- the exact level it was at the precipice of the Great Recession. 

For an economy to grow it needs savings and investment to enhance productivity. The savings rate in the U.S. was well into the double digits before the abolition of the gold standard in 1971. It has now cratered to 3.8 percent, which is 1.3 percentage points away from an all-time low and very close to the same level it was leading up to the credit crisis. 

Indeed, many conditions are eerily reminiscent to those that led up to the collapse of the economy in 2008. Spreads between corporate bonds and Treasuries are razor-thin once again and yield-starved investors, backed by a put from global central banks, are willing to own even a 10-year Greek bond that now yields just 6 percent. This is happening even though the Greek 10-year yielded near 40 percent just two years ago; and after the nation subjected owners of these bonds to over a 50 percent reduction in the principal. 

But history and fundamentals don’t matter when investors are convinced, now more than ever, that money printers around the world stand ready to guarantee that asset prices won’t be allowed to fall -- at least not very far. 

Of course, one thing -- the really important thing -- is much worse now than it was at the start of the Great Recession. Debt levels have exploded across the globe. For examples: Chinese government, corporate, and household debt is now about 250 percent of GDP, up from around 145 percent in 2008. And U.S. debt has soared by $7 trillion since the Great Recession began. But what else would you expect to occur when governments have the hubris to believe that they can repeal recessions by endlessly borrowing massive amounts of money from their central banks? 

An economy just can’t become more productive when the savings and investment dynamic is broken. And the way it breaks is when investors become aware that tax levels must significantly increase to help service debt, interest rates face extreme upward pressure because inflation risks have soared, and when investors understand that the currency’s purchasing power will destroyed in an attempt to reduce the nation’s debt. Under this unfriendly economic environment, investment in capital goods dries up and productivity rates fall. This is why productivity during Q1 of this year fell at a 1.7 percent annual rate. 

Those are the genuine reasons why robust growth has been a phantom for the last six years. And the economy will continue to disappoint until governments allow a healthy deleveraging to take place in both the public and private sectors. Asset prices need to fall, bad debts need to be restructured, and central banks need to allow the market to set interest rates.

Until then we will struggle with huge volatility in tax and regulatory policies, interest rate levels, and currency valuations. This is also the main reason why April’s labor force participation rate for Americans between the ages 25 to 29 hit the lowest level since 1982, when the Bureau of Labor Statistics started tracking such data. Old people can’t afford to retire and young people are dropping out of productive society -- that’s the sorry truth behind the decline in the labor force. 

However, another phantom recovery this year will be especially troubling for U.S. equities. Stock prices didn’t care so much that GDP was anemic when the Fed was expanding credit at a trillion-dollar annual pace. But in just a few months the Fed’s QE program will hopefully be finished. And asset prices may finally start to undergo a painfully necessary correction. 

For instance, perhaps by allowing free-market forces to work, first-time home buyers may once again be able to afford a new house rather than being constantly outbid by hedge funds. Case in point: A study was recently done by real estate researcher Trulia that showed that only 25 percent of homes for sale in the New York area are affordable to middle-class buyers. Shockingly enough, the recent response from government to this second bubble in real estate in the last six years is to force Fannie Mae and Freddie Mac to expand lending in the housing market! It seems that all we have learned since the 2008 economic crisis is how to make the same mistakes as before, but to a much greater extent. 

Nevertheless, investors need to take advantage of this moment of sanity from the Fed, because it should not last very long. The Fed’s tapering of bond purchases should provide an excellent opportunity to acquire assets at a significant discount to the bubble-like valuations seen today. Unfortunately, the economy is now completely addicted to zero interest rates and the endless expansion of Fed credit. Once Fed Chairman Janet Yellen realizes that the Fed’s No. 1 enemy (deflation) will be the result of ending QE, get ready for an inflation quest the likes of which America has never endured before.

To learn more about Michael Pento’s financial management services CLICK HERE.

© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

UPDATE - KWN has more interviews being released today.

The audio interviews with Stephen Leeb, William Kaye, Bill Fleckenstein, Andrew Maguire, Eric Sprott, Art Cashin, Rick Rule, Dr. Paul Craig Roberts,  Felix Zulauf, James Turk, Victor Sperandeo, and Dr. Philipa Malmgren are available now. Other recent KWN interviews include Dr. Marc Faber and Jim Grant -- to listen CLICK HERE.

Eric King

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