• 370 days Will The ECB Continue To Hike Rates?
  • 370 days Forbes: Aramco Remains Largest Company In The Middle East
  • 372 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 772 days Could Crypto Overtake Traditional Investment?
  • 777 days Americans Still Quitting Jobs At Record Pace
  • 779 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 782 days Is The Dollar Too Strong?
  • 782 days Big Tech Disappoints Investors on Earnings Calls
  • 783 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 785 days China Is Quietly Trying To Distance Itself From Russia
  • 785 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 789 days Crypto Investors Won Big In 2021
  • 789 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 790 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 792 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 793 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 796 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 797 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 797 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 799 days Are NFTs About To Take Over Gaming?
Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

Michael Pento

Michael Pento


Michael Pento produces the weekly podcast "The Mid-week Reality Check", is the President and Founder of Pento Portfolio Strategies and Author of the book "The…

Contact Author

  1. Home
  2. Markets
  3. Other

QE III Game of Chicken

Most investors and market pundits continue to misdiagnose the reason behind the worldwide economic malaise. The underlying problem isn't "uncertainty" or any other platitudes Wall Street and politicians like to offer. The truth is that massive sovereign debt defaults (if central banks allow them to be written down honestly) are very deflationary in nature.

Debt defaults destroy the assets of non-bank investors and also wipe out the capital of financial institutions. Without adequate capital, these banks are unable to make new loans and expand the money supply, causing bubbles to burst.

For a good while Wall Street was holding on to the ridiculous idea that the U.S. and China would be spared from a meltdown of the second largest economy on the planet. However, last week's data should have put a dagger through the heart of that notion....

The Non-farm Payroll report showed that the U.S. produced just 69k jobs in May, while the unemployment rate rose to 8.2%. However, the most alarming part of the report was that America lost 15k jobs in the all-important goods-producing sector. GDP posted an anemic 1.9% growth rate and home prices continue to fall--down 2% YOY. China's PMI fell sharply in May, dropping to 50.4, down from 53.3 in the prior month. And Eurozone PMI came out at an alarming 45.1 in the same month, which is well below the line of economic expansion.

Global markets are sounding the alarm of rapidly intensifying deflation. Commodity prices such as oil and copper are in free fall, while equity prices are hurting as well. Japan's Nikkei Dow lost 10% in May alone, which was its worst monthly loss in two years? But Japan isn't alone. The Chinese Shanghai composite is down nearly 20%, Spain's IBEX is down nearly 50%, Italian stocks fell 45% and Greece is down over 60% from the year ago period.

The only market yet to succumb to the carnage is the U.S., whose averages are roughly unchanged for the year. However, the S&P 500 has lost nearly 10% over the last 30 days, and is now in full catch up mode with the rest of the world.

It is simply undeniable that the global economy is closely interconnected. Emerging markets depend on Europe to support their export driven economies and the U.S. depends on foreign economies to support the earnings of S&P 500 companies -- forty percent of S&P revenue and earnings are derived from overseas.

In truth, the real reason why global markets are melting down is because the recession in the Eurozone is quickly turning into a deflationary depression.

For example, take a look at the direction Portugal is headed. This country had negative GDP growth and a 10% unemployment rate in 2010. At that time their 5 year note was just 3%. Now their unemployment rate is 15% and GDP has been down for 6 straight quarters. Their economy cannot possibly survive now that the 5 year note has been in the 15% range for the last year!

The carnage all began when Irish and Southern European banks became insolvent due to non-performing real estate assets. Then the sovereigns borrowed so much money, in order to bail out the banks, that their economies have become insolvent. Now banks find themselves insolvent once again ... this time because they own the debt of bankrupt countries that were shoved down their throat by the ECB's LTROs.

So we now have a situation where insolvent nations are trying to bail out insolvent banks by proposing to borrow more money, which will cause the countries to become even more insolvent. Then, of course, banks are asked to lower their country's borrowing costs by buying more of the debt issued from insolvent nations. Doesn't that sound like it will work out well?

If you can believe it, that is the proposed magic bullet to save Europe.

It's simply a game of counterfeiting chicken. Central Bankers have been on a money printing hiatus, pretending and hoping that the global economic bubbles didn't need their money printing to keep them inflated. However, each and every worsening piece of economic data brings us closer to the eventuality of more central bank intervention. That is the reason why gold soared $65 per ounce on Friday. Gold is now signaling the helicopters may be just over the horizon.


Back to homepage

Leave a comment

Leave a comment