Authored by Michael Pento via PentoPort.com,

The labor market is clearly weakening. But in reality, this is what needs to happen.

Short-term pain is needed to reconcile the great imbalances created by decades of free money. The alternative is intractable inflation that renders the middle class into penury.  

Recession or not, the truth is there is no chance the economy and earnings growth will live up to Wall Street’s expectations. EPS for the S&P 500 is projected to grow by 15% next year, and the forward multiple on those earnings is 21.0x, while the 10-year average is just 17.9. Current dollar GDP and earnings growth have a very high correlation. In a soft-landing scenario, nominal GDP growth should be around 4% next year (2% inflation target + 2% trend real GDP growth). How is it possible to get 15% earnings growth in a 4% nominal GDP world? You would need a huge corporate tax cut. But instead, tax rates are most likely going up. And even if you get that miraculous 15% EPS growth, the market is already overpriced for that aspirational growth rate.

There is credible evidence that GDP and earnings growth will end up being much lower in 2025, and were not just talking about the potential election chaos and the expiration of the massive Trump tax cuts scheduled for the end of next year. The ABC Presidential Debate lowered the odds of a red sweep, which is necessary to keep the tax cuts in place. Here is a list of conditions that lead us to the conclusion that earnings and growth will be anemic at best.

And don’t forget that this tenuous economic construct exists in an environment of record asset bubbles in real estate, equities, and credit.

I must point out Fed Governor Chris Waller’s response to the most recent jobs report, which was less than anticipated but far away from a disaster. After all, the unemployment rate fell, and the average hours worked expanded. He said, “the time has come to lower the target range for the federal funds rate at our meeting.” He also said he is open to a series of rate cuts larger than 25bps if the data weakens further.

Here are some more gems from Governor Waller’s speech given before for the Council on Foreign Relations in New York., “Furthermore, I do not expect this first cut to be the last. With inflation and employment near our longer-run goals and the labor market moderating, it is likely that a series of reductions will be appropriate,”

Waller added, “we will be open-minded about the size and pace of cuts…If the data suggests the need for larger cuts, then I will support that as well.”

Ok, so I’ll give you the real reason why the Fed is starting to panic.

The stock market recently had its worst week in about a year. Therefore, the Fed felt compelled to unleash its plunge protection team. It’s so sad, but the Fed proves over and over again that it is in the business of bailing out asset prices and banks; it only pretends to care about fighting inflation and defending the middle class.

Am I being too harsh on the Fed? Could it be that the FOMC is just concerned about too many people losing their incomes and wants to prevent the pain associated with job losses?

There are two problems with that line of thinking.

Instead, what we have is a Fed that is pouring gasoline on the inflation pyre, whose embers are still glowing white hot. This will intensify the trenchant and pernicious bifurcation between the rich and the poor. And will serve only to destroy the real incomes of those who manage to remain employed while further impoverishing the middle class in the foreseeable future.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check”  and Author of the book “The Coming Bond Market Collapse.”