Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
New Data Shows Shopify Was a Godsend for Mom and Pop During Coronavirus - 18th Jun 20
Low Inflation Makes Powell a Dove. How It Affects Gold? - 18th Jun 20
Stock Market Waterfall Selling in S&P 500 Is Over Now - 18th Jun 20
NASDAQ: Some Historical Insights into Tech Stocks Mania - 18th Jun 20
XLF Financial Sector Stocks ETF May Break Below Price Gap - 18th Jun 20
REOPEN THE SCHOOLS! Kids Going Crazy in Lockdown Britain, Sheffield UK - 18th Jun 20
Stock Market S&P 500 ADL Predictions - 17th Jun 20
Silver is Going to have a Sudden, Massive Move to $50 that will Suprise Everyone - 17th Jun 20
Gold Stocks Investment Strong - 17th Jun 20
Silver Tops Gold in May, Setting up a Summer Surge - 17th Jun 20
Google - Investing in Best Artificial Intelligence Stocks for 2020 and Beyond! - 17th Jun 20
AMD Ryzen XT Refresh Very BAD Value for Money - 20% Price Hike for 2% Boost, 3900xt, 3800xt, 3600xt - 17th Jun 20
8 Rules for Forex Market Beginners - 17th Jun 20
The AI Stocks Mega-trend - Moores Law is NOT Dead! - 16th Jun 20
Gold Stocks Correction and Upcoming Opportunity - 16th Jun 20
Stocks Bulls Beware: A Dark Cloud Is Forming Over Oil Markets - 16th Jun 20
AMD Ryzen Refresh Bad Value for Money - 3800xt 3900xt 3600xt Specs - 16th Jun 20
How to Clip a Budgie / Parakeet Parrot's Wings Flight Feathers: Easy Steps! - 16th Jun 20
XLF Financial Sector Stocks Under Pressure and What It Means - 15th Jun 20
For History Unfolding To Stay Informed, Watch Less TV - 15th Jun 20
Black Lives Matter Protests to Trigger US and UK 2nd Coronavirus Wave - 15th Jun 20
Staying Cautious & Staying Prepared With You Stocks Trading Account - 15th Jun 20
Silver: How to Gauge the Crowd's Mindset - 15th Jun 20
When to Sell Your AI Tech Stocks Investments - 14th Jun 20
Gold and Silver Precious Metals Sector Correction Starts as Risk On and Seasonal Factors Weigh - 14th Jun 20
What Happens When Cars Can “See”? - 14th Jun 20
Rolex Watches — a Store of Value - 14th Jun 20
US and UK Black Lives Matter Protests, Riots and Looting To Trigger 2nd Covid-19 Wave Peak? - 12th Jun 20
US Dollar Cycle Points To New All-time Highs For Gold - 12th Jun 20
Will US Labor Market Recovery Sink Gold? - 12th Jun 20
Stock Market Shift Away from Safety Begins - 12th Jun 20
Gold Silver Ratio - 11th Jun 20
When Profits and Politics Drive Science: The Hazards of Rushing a Coronavirus Vaccine at “Warp Speed” - 11th Jun 20
Gold Sad Truth - 11th Jun 20
Silver’s Apparent Recovery - 11th Jun 20
Unnatural Distortions and the Precious Metals - 11th Jun 20
Perceiving Coronavirus as a Disruptive Technology Accelerating Quantum AI Mega-trend - 11th Jun 20
A 2020 guide to Business Opp Affiliate Marketing - 11th Jun 20
What Huge US Jobs Number Means For Your Market Positions - 10th Jun 20
New Stocks Bull or Same Old One? - 10th Jun 20
Inflation ‘A mirror image of the early 1980s’ - 10th Jun 20
Trump's Final Gamble: From Chinagate to Hybrid Wars - 10th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Money Printing is the New Mother's Milk of Stocks

Stock-Markets / Stock Markets 2020 May 07, 2020 - 03:28 PM GMT

By: Michael_Pento

Stock-Markets

My friend Larry Kudlow always says that Profits are the mother's milk of stocks. That used to be true when we had a real economy. But sadly, that is no longer factual because we now have a global equity market that is totally controlled by central banks.  To prove this point, let's look at the last few years of earnings. During the year 2018, the EPS growth for the S&P 500 was 20%; yet the S&P 500 Index was down 7% over that same time-frame.

Conversely, during 2019, the S&P 500 EPS growth was a dismal 1%; yet the Index surged by nearly 30%. What could possibly account for such a huge divergence between EPS growth and market performance? We need only to view Fed actions for the simple answer: it was the degree to which our central bank was willing to falsify asset prices.


During 2018, the Fed raised the overnight bank lending rate 4x and by a total of 100bps, and at the same time, it increased the amount of its Quantitative Tightening Program from $10 billion per month to $60 billion per month. In sharp contrast, Mr. Powell indicated one month before 2019 began that the Fed would stop raising interest rates; and by early '19 he indicated that the pace of balance sheet runoff was flexible and its termination was in sight. The Fed then announced in July of '19 that it would cease the selling of its assets come August. Most importantly, by the end of the summer, the Fed did a complete 180-degree pivot--it was once gain cutting interest rates and re-engaged with Quantitative Easing. The Fed ended up cutting interest rates by 75bps during 2019.

Hence, 2018 was a terrible year for equities despite surging EPS growth. However, 2019 turned out great for stock investors despite having virtually zero earnings expansion.

Turning to 2020, the S&P 500 EPS growth rate is projected by FactSet to decline a whopping 15.8% during Q2, and GDP is tracking to shrink by around 25-30% at a seasonally adjusted annualized rate. Adding to the misery, the unemployment rate is projected to reach a depressionary 17%. Nevertheless, the S&P 500 is down a very ordinary and pedestrian 10% YTD. How did the Fed pull off this magic trick yet again? Take a look at what its balance sheet has done so far this year.

Mr. Powell has committed to buying everything at this point except stocks. This includes junk bonds, issuing primary loans to businesses, and purchasing corporate bond ETFs. It has so far printed nearly $2.5 trillion in less than two months just to boost equities back to the thermosphere.

Because of these actions, the stock market is far more expensive today than it was prior to the start of the Wuhan virus crisis. This is because the ratio of total market cap to GDP has increased. Simply stated, the numerator is down just slightly while the denominator has crashed. Equity market capitalization is reported to be 138% of GDP as of this writing. This is down from the record high of 150% reached at the start of this year. Nevertheless, the current ratio is still extremely high, historically speaking. However, that figure is based on antiquated GDP data. As the new data is reported for Q2, expect the ratio to soar.

There are now over 30 million newly unemployed Americans who have lost their jobs in the past six weeks. We have now completely wiped out the 22.7 million new jobs created since the Great Recession ended in June 2009 plus another near 8 million. The damage to US balance sheets is immense, and that debt is accretive to the $71 trillion already oppressing growth. Tremendous psychological injuries have occurred to consumers and corporations, as they are forced to take on new debt due to a dearth of liquidity. For example, listed US companies took on an additional over $300 billion in new debt since March alone. At that pace of corporate debt accumulation—which was already at an all-time high both nominally and in terms of GDP pre-virus--will surge by nearly 25% in just one single year. But what else would you expect when the Fed is promoting more borrowing by providing a huge fat bid for businesses to sell all the debt they need…and more. 

The stock market has already priced in a "V" shaped recovery in the economy, but the rebound will most likely be of the insipid variety. The question is will stocks care even if economic growth doesn't rebound? It is my view that the economy and EPS will certainly not return to pre-Wuhan virus levels for a very long time.

Therefore, the answer to how stocks react to a sluggish economy even after the lockdowns are lifted can be found within the confines of D.C. Will the continued panoply of negative earnings news and economic data cause the Federal government to announce even more fiscal stimulus programs to bail out states and municipalities? And, will the Fed continue to monetize all that debt? I believe the answer to those questions is a resounding yes, but only after we see another crash in asset prices that results from a negative reaction to a failed reopening of the global economy. This is the salient risk during the mid-May through July time-frame. A failed opening can be defined as one in which consumers don't return to normal activities because of balance sheet, unemployment, and wealth effect issues. And, the virus makes a comeback in the context where there is no effective treatment or vaccine yet available.

One sentence from the Fed's meeting of April 29, which produced an unusually-horrific statement even for the FOMC, "The Committee expects to maintain this target range (of zero percent interest rates) until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.".  In other words, the Fed will be offering free money until the 30 million displaced workers find a job, and inflation runs well above its 2% target on its core PCE favorite metric, which removes all prices that go up—interpretation; expect ZIRP for another decade.

We continue to hold 20% gold-related investments, 15% invested in defense, healthcare, and clean energy, and 10% TIPS. Passive Index investing has become a sure way to lower your standard of living, and therefore, we will continue to actively trade the portfolio with a continued vigilance on the cyclical dynamics of growth/recession & inflation/deflation. Is your wealth manager monitoring these changes? Or are they just telling you to hang on to their brand of an index fund that is blindly and passively heading towards the slaughterhouse yet again?

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 Coming Bond Market Collapse.”

Respectfully,

Michael Pento

President

Pento Portfolio Strategies

www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.               

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance www.earthoflight.caLicenses. Michael Pento graduated from Rowan University in 1991.

© 2019 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.tssmoney.com - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules

两个人做人爱视频大全-两人做人爱费视频试看