Despite Today’s Rally, More Carnage Ahead For Global Stock Markets And The U.S. Dollar

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With some wild trading action that saw the Dow end up 200 points higher while gold surged $25 and silver rose 5 percent, today one of the top economists in the world sent King World News an incredibly powerful piece warning that despite today’s rally there is more carnage ahead for global stock market and the U.S. dollar, but gold and silver will shine.  Below is the fantastic piece from Michael Pento.

More Carnage Ahead For Stocks And The U.S. Dollar But Gold & Silver Will Shine

The September non-farm payroll report came in with a net increase of just 142,000 jobs. The unemployment rate held steady at 5.1 percent and the labor force participation rate dropped to the October 1977 low of 62.4 percent. Average hourly earnings fell 0.04 percent and the workweek slipped to 34.5 hours. There were significant downward revisions of 22,000 and 37,000 jobs for the July and August reports respectively…

Just as important as today’s NFP report, but mostly overlooked, was the Challenger’s job-cut report released on Thursday. It showed the September layoff count jumped from 41,186 in August to 58,877. The total layoffs year-to-date is 493,431, which is already higher than all of last year and is on a trajectory to be the greatest number of layoffs since 2009.  

The tenuous state of our economy has led to an unskilled and unproductive labor force. According to the Bureau of Labor Statistics (BLS), an employed person constitutes anyone who worked for pay during the survey week. So if you provided one Uber ride around the block the BLS considers you employed with the same economic relevance as a full-time brain surgeon. In fact, our part-time low-paying job market is the reason productivity growth has averaged a meager 0.45 percent annually for four years.

So Where Does This Lead the Fed?

The real issue is despite Federal Reserve Chairwoman Janet Yellen’s recent nod to a slowing global economy, the Federal Open Market Committee remains obsessed with the relatively low unemployment rate. This is because of the mistaken belief that too many workers will suddenly hyper-inflate our deflating worldwide economy. 

While Yellen and Co. busily tinker with their Phillips Curve models — in a fatuous attempt to determine how many Americans they should allow to find work — the Fed is missing the crumbling economic fundamentals all around it. The flattening yield curve, plummeting commodity prices, and weakening U.S. and international economic data all illustrate that the asset bubbles created by central banks have started to pop.


Despite today’s disappointing jobs report, the Fed continues threatening to commence a rate-hiking cycle in the misguided fear of inflation emanating from a meaningless U-3 unemployment rate. What Keynesian central bankers fail to understand is that inflation becomes manifest only when the market loses faith in a fiat currency’s purchasing power, not from more people becoming productive. Nevertheless, the Fed’s models stipulate that a low unemployment rate breeds intractable inflation and the liftoff from ZIRP is set for the end of 2015 — unless the U-3 unemployment rate turns around and starts heading north. 

However, in this go-around the Fed will be raising rates into a yield curve that is already flat in historic terms and becoming narrower, and with credit spreads that are already blowing out. Yellen will be hiking rates into falling long-term Treasury yields, falling Core PCE inflation data, slowing global GDP growth, and tumbling equity and junk bond prices. The only good news here is that the Fed is moving toward a free-market interbank lending rate. In the long term this is great for markets and the economy. But in the short term it will resume the cathartic deflation of asset prices and debt that was short-circuited back in 2008.

Carnage In Stocks

More than 100 of the S&P 1500 stocks have fallen more than 50 percent and 600 are down more than 25 percent from the high. The S&P 500 dropped nearly 8 percent in Q3 and is down two consecutive quarters. The Dow Jones Industrial Index finished down three quarters in a row. Meanwhile, the manufacturing numbers in the United States are in freefall and the Atlanta Fed forecasts growth of just 1.8 percent during Q3. The International Monetary Fund is set to lower its overall forecast of global growth again next week from its already anemic 3.3 percent.

On top of the slowing global growth and hawkish-sounding Fed, we find stock market valuations that are still the second highest in history. For these reasons I believe the S&P 500 is going to trade down to the low 1,600 area in the next few months before possibly stabilizing. Exactly how low we end up going depends at least in part on how long the Fed blusters about normalizing interest rates. However, with the gravitational forces of deflation getting stronger, the FOMC will not be able to get far off the zero-bound range.

U.S. Dollar Will Plunge Creating Strong Bid For Gold & Silver

Hence, the next big prediction of mine is that the Fed will soon change to an easing monetary policy stance and cause weak-dollar investments to rebound, as the U.S. dollar falls back toward 80 on the Dollar Index. 

Pento Portfolio Strategies has held 40-50 percent cash since the end of 2014 in anticipation of the current bear market and recommends holding only those investments that will profit from a turn in Fed policy away from a hawkish position. While more ZIRP and QE may not rescue the overall market or economy, it should at least supply a bid for the beleaguered precious metals sector.