Wall Street Is Chasing Ghosts

Of course, the world is full of emerging market economic basket cases like; Argentina, Venezuela, Turkey, and South Africa as well. This condition is the opposite of the recently enjoyed globally synchronized recovery, and it is putting extreme downward pressure on US multinational earnings.

Which brings us to the other ghost Wall Street is chasing…the Fed. Along with a handshake between Trump and XI, those Carnival Barkers are also cheering on the Fed’s move towards a dovish stance on monetary policy. But it is ignoring with alacrity the reasons why the Fed has paused with its rate hikes. The Fed inverted the yield curve on the 2-5 year spread late last year and, at least for now, it is still destroying $40 billion worth of assets each month. How is it that investors are so sure the Fed hasn’t already gone too far; just like it always has done in the past?

US GDP growth has dropped from 4.2% in Q2 last year to display a 1% handle in Q4 2018, according to the Atlanta Fed. Earnings growth has plunged from 20% in 2018 to a negative number at the start of this year. Real estate is in a recession, and equity prices lost 7% last year. It is highly likely the Fed turned dovish too late. Remember, the Fed stopped raising rates in 2006 and began to cut rates aggressively in 2007. But that didn’t stop the global economy from imploding a year later. The Fed also began cutting rates in January 2001. But the S&P 500 still fell another 37% by March 2003. And keep in mind, the Fed is still tightening rates by selling off its balance sheet.

As the global economy waxes towards recession investors are jumping into the relative safety of sovereign bonds. The Japan, 10-year bond, went negative once again and pushed the number of global bonds with a negative yield back up to $9 trillion. Yields are falling here in the US too, despite the fact that the National debt just hit $22 trillion and total global debt hit $250 trillion.

This begs the question: if global economic growth was about to turn around sharply to the upside based upon dovish central banks and an end to the trade war, then why do global bond yields continue to fall?

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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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