Michael Pento: The Market Is Running On Empty

Stocks are "running on fumes" & at risk of a 30-80% correction

Federal Reserve Chair Jerome Powell testified in front of Congress this week to defend his current monetary policy.

He said he’s now seeing the kind of disinflationary path for the US economy that he's wanted to.

This of course has Wall Street salivating again that rate cuts are near at hand.

Are they?

For perspective, we're fortunate today to talk with money manager Michael Pento, president of Pento Portfolio Strategies.

Michael warns that we have the most overvalued stock market ever, and the liquidity that drove it to today's extremes is starting to run out.

In his words "We're running on fumes". And stocks are at risk of correcting 30-80% from here.

For all the details why, click here or on the image below:

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Adam’s Notes: Michael Pento (recorded 7.9.24)

EXECUTIVE SUMMARY

• Michael warns we have the most overvalued stock market and real estate market in history.

• He warns that today’s high asset prices and economic headlines present a deceiving facade of prosperity, with significant underlying issues. Specifically, the bottom 80% of the population has seen their purchasing power eroded by the post-COVD spike in cost of living. In contrast, only the top 20%, who own the vast majority of assets, are faring well. Indicators like the equal-weight S&P 500 and the broader Russell 2000 index reveal stagnation, contrasting sharply with the gains seen in a few high-profile stocks like Nvidia.

• The period from 2008 to 2022, characterized by negative real interest rates, fueled massive borrowing and led to asset bubbles in stocks, bonds, real estate, and credit. This extended duration of negative real interest rates, a deliberate policy move, created significant economic imbalances, leading to skyrocketing home prices and equity valuations. For instance, home prices rose 47% in the last four years, and the total market cap of equities has reached 195% of GDP.

• The nation now faces a $2 trillion deficit and $1 trillion in interest payments. Unlike in previous decades, the U.S. is now an insolvent nation, where liabilities exceed assets, handicapping the Fed's ability to use its traditional tools to stimulate the economy.

• The Federal Reserve's projected schedule of small interest rate cuts will not significantly relieve economic pressures. Instead, Michael suggests that significant rate cuts of around 200 basis points may be required to re-liquefy the banking system. But to have the air cover to make cuts that big, the Fed will have to wait until things are really starting to break (= pain for investors and households). And should it indeed cut rates that substantially, such actions could lead to rising commodity prices, higher import prices, and further inflation, exacerbating the current economic instability.

• The yield curve is deeply inverted, marking the longest inversion in history. If this continues, it could lead to significant banking issues by 2025, when assets held under the Bank Term Funding Program (BTFP) are returned to banks. Currently, banks are strained, with their assets yielding lower returns (around 3-3.5%) than their cost of funds (around 5%), squeezing their net interest margins and potentially destabilizing their financial health.

• Michael predicts a possible market crash with a significant decline in stock prices (potentially around 40%). He anticipates that