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Second Half Recovery Predictions Fail Again

August 9, 2013

Each of the last five years Wall Street pundits have predicted, and our government has promised, that a second half recovery in the economy will occur.  Since 2009, they have come up with different reasons why GDP would boom in Q3 & Q4 of that year; and that this time a different and better outcome is in store.  This year, the reason we are supposed to believe in a second half recovery is because the damage from the Sequester cuts will wear off starting in…drum roll…July.

But the truth is there hasn’t been any significant damage to the economy from the Sequester.  This is because cutting government spending leaves more money in the hands of the private sector. Also, the Fed has continued to pump $85 billion into the economy even though there has been a small contraction in the deficit. So there hasn’t been any drag on GDP from which we will rebound. However, what is news is that there has been a surge in bond yields and oil prices, which will crimp consumers’ ability to spend. But those cheerleaders choose to ignore these facts.

The release of the NFP report for July is already dashing hope of a second-half rebound. There were only 162k jobs created last month. What’s worse is that more people left the workforce, aggregate hours worked fell and average hourly earnings declined. These aren’t numbers that would even hint that the economy was going to rebound from the pitiful 1.4% growth rate experienced in the first six months of this year.

Of course, the answer we get from government is to do more of the same thing that isn’t working. More debt, more money printing and a further extension of asset bubbles are the solutions they provide.  It doesn’t matter that five years of zero percent interest rates and QE have failed to spur real growth. Their prescription only leads to a zombie economy that limps along because it is based on creating consumption through rising equity and home prices and not through sustainable income growth.

The strategy deployed by government prevents the economy from undergoing a genuine healing. Deflation (which has now become the archenemy of the Fed) is the real solution. We must allow our total debt—which stands at 350% of GDP—to contract to a more sustainable level (somewhere well below 200% of our economy). In order to bring aggregate debt levels down to size, we must first let the free market set interest rates, shrink the money supply and allow asset prices to fall. This would bring about real and lasting growth because it would not only ameliorate our debt burden but also; stabilize the dollar, keep interest rates low, reduce our tax burden, and eliminate the threat of runaway inflation. Those conditions are the only real progenitors of a healthy economy.

Unfortunately, since this real solution would also include a short but nasty depression, politicians won’t allow it to occur. Instead, our government and Fed would rather continue to promulgate, to a Wall Street community that is more than willing to believe, that a recovery in GDP is just around the corner. And that it would be foolish to stop borrowing and printing money now that growth (in their opinion) is about to achieve “escape velocity”—whatever that means.

More debt and more inflation are constantly being shoved down our throats without our consent. Nevertheless, the market always trumps government interventions…and eventually it will eschew our debt and currency. This means investors must protect themselves by owning PMs from the inevitable economic chaos that is sure to come soon.


Michael Pento - President - Pento Portfolio Strategies

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(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 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 Licenses. Michael Pento graduated from Rowan University in 1991.

The periodic symbol for gold is AU which come from the Latin for gold aurum.
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