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Trump troubles could trigger 5% correction. But here's how it gets worse

  • Trump's mounting troubles may bring about a 5 percent correction.
  • But global central banks, including the Fed, are going to have a far greater impact.
  • The bull market has been fueled by a record breaking pace of central bank money printing and an unsustainable accumulation of global debt.
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Donald Trump's economic agenda has become further delayed by what seems like daily leaks from the White House. This may finally bring about the long-awaited equity market pullback of at least 5 percent. However, what will prove to be far more troubling than Trump's ongoing feuds with the FBI and the press, is the upcoming market collapse due to the removal of the bids from global central banks.

The markets have been feeding off artificial interest rates from our Federal Reserve and that of the European Central Bank and the Bank of Japan for years. In addition, the global economy has been stimulated further by a tremendous amount of new debt generated from China that was underwritten by the People's Bank of China. After it reached the saturation point of empty cities, China is now building out its "Belt and Road Initiative" that could add trillions of dollars to the debt-fueled stimulus scheme that has been spewed out over the world-wide economy.

Adding to this, the New York Fed just informed us that households are spending like its 2008. In fact, Americans are now in more debt than they were at the height of the 2008 credit bubble – a new high of $12.7 trillion - exceeding debt loads right before the entire financial system fell apart. In fact, total U.S. debt has now reached 350 percent of GDP.

The perma-bulls on Wall Street argue this willingness to take on debt demonstrates optimism among banks and other lenders about economic growth. Consumer spending accounts for nearly 70 percent of all economic activity in the United States.

But the truth is the bull market in equities has been fueled by a record breaking pace of central bank money printing and an unsustainable accumulation of global debt that has reached $230 trillion, or 300 percent of GDP.

"This extremely complacent and overvalued market has been susceptible to a correction for a very long time. But just like Trump, it has so far behaved like it is coated in Teflon."

Right now, the daily leaks out of the White House are sucking all the oxygen out of the room. But worse, they are delaying what Wall Street really needs to sustain the illusion of economic viability...a massive corporate tax cut that is not offset by eliminating deductions or reduced spending. After all, the market is in a desperate need to justify these valuations now that the Fed has abandoned Wall Street—at least for the time being.

But the truth is this extremely complacent and overvalued market has been susceptible to a correction for a very long time. But just like Trump, it has so far behaved like it is coated in Teflon.

North Korean Atomic bomb tests, Russia election interference, Trump's alleged obstruction of justice, an earnings recession, gross domestic product with a zero handle; who cares? As long as a tax cut could be on the way and global central banks keep printing money at a record pace, what could go wrong?

It is still unclear if Trump's latest scandal provides an opportunity to yet again overlook these salient facts and simply view this sell off as just another buying opportunity. However, in the longer term the inevitable exodus of Central Bank interest rate manipulation is going to bring chaos to the major averages, as it blows up the asset bubbles that have been underwritten by a mountain of new debt purchased by these same banks.

The Fed has ended its quantitative easing programs, for now, and is marching down the dangerous path of interest rate normalization. And the ECB will be forced to follow shortly. It is then that these bankers will realize that the record amount of debt they sponsored requires a record low level of debt service payments to keep the solvency illusion afloat.

Once this bond bubble pops it will prove devastating for those investors who have been inculcated by central banks for decades that every single down tick in stocks is a buying opportunity, along with the mistaken belief that active investing should have gone extinct long ago.

Commentary by Michael Pento, the president and founder of Pento Portfolio Strategies. He is also author of the book, "The Coming Bond Market Collapse," and produces the weekly podcast, "The Mid-week Reality Check."

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