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QE5 Is Right Around the Corner as Recession Risk Rises: Pento


In the movie, Field of Dreams, the tagline was, "If you build it, they will come." Similarly, on the street of dreams, the new vibe seems to be, "If you seek bad news, you will find it." How better to describe the global heartburn that has ensued following the release of the minutes from the FOMC's January meeting. The 16-page recount was filled with positive commentary and anecdotes that are anything but troubling, such as: "In general, participants indicated that, relative to the recent past, more business contacts reported an improvement in confidence and some cautious optimism about the economic outlook."

However, at a time of heightened concerned about an over-extended bull market, rising interest rates and unsettled fiscal matters in Washington, investors chose to drill down on the committee's discussion about the effectiveness of its open-ended program of bond purchases.

"Many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability."

While the Fed has agreed to further study the risks and rewards of QE3, many investors are simply nervous and looking for a reason to sell. Add in the fact that with one negative quarter of GDP already in the books, we are halfway home to officially plunging back into recession and some market watchers see a damned-if-you-do, damned-if-you-don't scenario for the Fed.

"I believe that you have tremendous headwinds [hitting] the economy in 2013," Michael Pento, the President of Pento Portfolio Strategies says in the attached video. They include increased taxes, rising interest rates and record gasoline prices for the winter driving season. "If you add all that up, it's easy to understand why the Walmart customer has pulled back."

If he's right and we, indeed, see growth slow further, Pento says that Federal Reserve Chairman Ben Bernanke would never just "sit on his hands and do nothing" while the economy implodes and unemployment rises. In fact, he says, should the double-dip become a reality, then he's certain Bernanke and the Fed would once again take the easy way out and "increase the amount of monthly debt purchases" from the current $85 billion to perhaps as much as $150 billion.

It would certainly be a controversial move. However, it's one Pento considers to be "the most likely course of action," given the Fed's history of taking the painless route — at least for the short-term.

That's because, despite Bernanke's assurances that he will be able to manage the biggest deleveraging in history, the Fed chief "doesn't understand that his balance sheet is unshrinkable." Pento adds, "Bernanke's devotion to inflation is deadly for the economy."

To be fair, the Bernanke doctrine of endless intervention has, so far, not stoked inflation. However, Pento says "the minute he stops purchasing [bonds], interest rates will skyrocket" and the yield on the 10-year Treasury would jump to 3.5%.