Land Mines

When the market cap of equities reaches 183% of GDP and gov't bonds yield near 0% or even less overseas, the notion that one can just buy and hold a balanced portfolio is extremely dangerous. The minefield is not packed with IEDs, it is actually replete with tactical nukes.

One of those land mines would be the failure to keep the government open and pass more stimulus. I have no special insight here except D.C. is famous for brinkmanship but always opts to spend more money in the end. Another problem would be the failure to have a peaceful transfer of power come Jan. 20th. Also, the failure of vaccines to prove to be safe, effective, and long-lasting would blow the whole recovery mantra sky high.

But by far the most dangerous mine to watch out for would be the Failure of the Fed to cap long term interest rates. The Fed could make a move towards this action when it meets on Dec. 16th. Let’s assume that the vaccines work and the rate of inflation and growth begins to accelerate significantly come the 2nd quarter of next year—bade effects make that easier. At the same time, the Fed could then start reducing its purchases of corporate, municipal, and Treasury bonds. Hence, there would be a very good chance that rates would become absolutely unglued, sending bond prices cratering and yields soaring.

Dollar, Money, Cash Money, Business, Currency, Finances

Image Source: Pixabay

To get a better understanding of how greatly distorted and far into the twilight zone yields have gone, you have to understand that the average yield on the 10-year note from the '60s until 2000, which is before the fed started to embrace ZIRP; was north of 7%. That yield is now well below 1%. And, this is despite an avalanche of additional debt that has brought the ratio of debt to GDP from below 40% in the 1960s, to 128% today. What we have now created is a Treasury that is issuing debt at all-time record-low yields yet at the same time is also bankrupt. To make matters worse, we have for the first time in history a Fed that is targeting higher inflation, which is the bane of all fixed income. Indeed, the worlds’ central bankers are all aggressively seeking higher inflation in the context of $18 trillion worth of negative-yielding sovereign debt.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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