With gold, silver, oil, and other commodities getting hit, today Michael Pento warned King World News that the world is about to fall into a terrifying deflationary crater.  Pento also discussed what he is doing with his firm’s money ahead of the coming chaos.

Pento:  “Eric, there was a crucial central bank action taken yesterday.  A surprisingly hawkish Fed decided at its October meeting to end QE and keep a mid-2015 outlook for the first rate hike.  But here is the crucial part:  The Fed statement included the language, ‘The likelihood of low inflation has diminished.’  So since the last policy statement, they are ignoring the deflationary signals that abound everywhere….

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“They did not address falling commodity prices such oil prices falling from $100 a barrel to $80.  There was no acknowledgment of the 10 percent equity selloff that we briefly  experienced, and there was no acknowledgment of the falling money supply growth.

The Fed also did not comment on falling home prices, which has taken place for the past four months in a row.  They also bypassed commenting on subpar economic data such as the weak Durable Goods Orders, which fell 1.3 percent.  So the truth is that the deflation, which is associated with ending QE, is now the prevailing force.  But the Fed is completely missing the whole picture.  They believe that they can end the extraordinary monetary stimulus with impunity.  And this is where the big opportunity will come for patient investors who go against that grain.”

Eric King:   “Obviously we are seeing continued pressure on gold, silver, oil, and other commodities.”

Pento:  “Two weeks ago all of the major averages were down on the year.  Then the market turned around on the promise of lower rates for an extended period of time, and what seemed like a credible threat to continue QE.  I am referring to James Bullard’s comments.  He said that QE could be extended. 

The stock market then rallied and the Fed ended QE.  But ending QE has been very damaging to equities in the past.  The Dow is only up trading higher today because of VISA — they reported some decent earnings.  But every time QE has ended, within three weeks the market has started to plummet.  The difference this time is that QE is ending at the same time the Fed is promising to raise rates.  And the stock market is in a much bigger bubble than it was in March of 2010 when QE1 ended, and in June of 2011 when QE2 ended.

Now, deflation is not good for gold, but the gold market has already largely priced in the end of QE and rising real interest rates.  People have to ask themselves:  ‘What has the gold market been doing for almost 3 years?’  So I am not sure what bad news is left for gold.

Even if nominal rates go up slowly, who cares?  Real rates will still be down.  And it is much more likely that rates go up in nominal terms, but you get crashing real rates in a 2008-style scenario.  But here is the key:  The abrogation of the Fed’s support of markets will cause a a sharp deflationary reaction in asset prices such as stocks, housing, etc., and this should happen very soon.

But after an 80 percent drop in gold mining shares, I want to be around for the violent rebound once the illusion of prosperity, coming from government-induced debt and money printing, comes crashing down.  So my strategy to play this has been to short the yen and the Russell 2000.  We also hold a tremendous amount of cash here at Pento Portfolio Strategies.  And I am going to watch the market fall apart and with our huge cash position to pick up the pieces.  

But I want to say to KWN readers around the world that the Fed’s next move will not be to raise interest rates.  I believe that the Fed’s next move will be to do more QE.  This is because our central bank has it backwards.  But from an investment standpoint, my investors are well-positioned to profit from its mistakes.”

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

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UPDATE – KWN has more interviews being released today.

The audio interviews with Bill Fleckenstein, Rick Santelli, Rick Rule, Michael Pento, Paul Craig Roberts, Andrew Huszar, Andrew Maguire, MEP Nigel Farage, John Mauldin, Egon von Greyerz, Michael Belkin, and Marc Faber are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf — to listen CLICK HERE.

Eric King
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