The market will drop more than 20% - and other predictions

In 2015, nearly every asset class failed to provide returns. The S&P 500 has flatlined for the past 400 days, with hundreds of stocks well off their 2015 highs. The 30-year Treasury bond has fallen over 2.0 percent, cash in money market accounts have returned just +0.11 percent (so after taxes and inflation your return was solidly negative), and the CRB index is down nearly 25 percent. So what should investors do with their money when nothing is working?

First, let me briefly explain why nothing has worked for so long. The global economy has become debt disabled and market prices have been massively distorted by governments and central banks. The free market has been eviscerated and supplanted by money printing and deficit spending on an unprecedented scale. The bottom line is that there is now a historic and humongous gap between stock prices and economic fundamentals. And a gigantic gap between fixed income yields in relation to the underlying credit quality.

Globe with market prices
Paul Bradbury | Getty Images

So here are a few of my predictions and trading strategies for 2016:

• The S&P 500 falls more than 20 percent as it finally succumbs to the incipient global recession.

Janet Yellen states in the first half of 2016 that the Fed will not increase the federal-funds rate any further and hints at another round of quantitative easing before year end.

• The inability to normalize interest rates is taken as a tacit admission by the Fed that it has utterly failed to save the economy from the Great Recession, and as a result the U.S. dollar crashes below 90 on the U.S. dollar index.

Gold and the miners will be the major winner next year as they will be the primary beneficiaries from continued low nominal interest rates, negative real interest rates and a watershed turn in the value of the US dollar — the yellow metal reaches a high of $1,250 next year.

• The 10-year Note yield falls below 2 percent by June on pervading recession concerns.

• Continue to short high-yield debt and buy put options on high-flying Nasdaq momentum stocks that are trading at monstrous price to earnings ratios and whose prices should collapse given a deceleration in the U.S. economy.

• Finally, after the dust settles from this anticipated huge sell-off, there will be a tremendous opportunity from owning high-divided paying foreign stocks, which have already been mercilessly beaten down during the commodity bear market of the last few years.

Why will 2016 bring about the long overdue equity bear market? It is not just because the Fed has finally started to raise interest rates and will continue to slowly do so until the U.S. economic recession fully manifests. But also the catalyst for this imminent recession is that debt levels and asset prices have increased to a level that can no longer be supported by incomes and underlying economic growth. Any additional increase in the cost of money will only expedite and exacerbate this condition. Fourth-quarter 2015 gross domestic product growth is predicted to post a reading that is barely above 1 percent, according to the Atlanta Fed model. Therefore, we don't have much room left below before the economy enters contraction mode and the trend is solidly in that direction.

I cannot stress how important this watershed change in U.S. monetary policy will be for markets in early 2016. The major markets (meaning currencies, bonds and equities) have been anticipating a graceful exit from quantitative easing and the trillions of dollars' worth of deficit spending that have been deployed since 2008. In other words, global capital markets have been banking on the success of central banks. In the vanguard of this belief has been the universal carry trade of going long the U.S. dollar and equities, while shorting precious metals.

I believe in realities not fantasies. I'm betting that you cannot solve the debt crisis evident during the Great Recession by taking on a record amount of debt. And that you cannot fix the asset bubbles evident during the Great Recession by artificially pushing them to record high prices through QE and zero interest- rate policy. It is this reality that will take its vengeance in 2016. And it is the unraveling of this delusion that is the basis of Pento Portfolio Strategies' investment model and is the opportunity we are prepared to profit from.

Michael Pento produces the weekly podcast "The Mid-week Reality Check,"is the president and founder of Pento Portfolio Strategies and author of thebook "TheComing Bond Market Collapse."