Transcript Below:
Mike Gleason: It is my privilege now to welcome in Michael Pento president
and founder of Pento Portfolio Strategies and author of the book The
Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market.
Michael is a money manager and who ascribes to the Austrian School of Economics
and has been a regular guest on CNBC, Bloomberg, Fox Business News, and also
the Money Metals podcast.
Michael, it's great to have you on with us again, and thanks so much for joining
us today. Welcome back.
Michael Pento: Thanks for having me back on Michael, and great to be
on with Money Metals.
Mike Gleason: Well the last time we had you on was right after the
election back in November, and a lot has happened since then in terms of the
Trump administration taking shape. Now on that front I want a zero in on the
monetary policy side of things here first off.
Now we've been hearing Trump and his Treasury Secretary Steven Mnuchin make
lots of little comments lately about wanting a weaker dollar. Now we used to
hear US officials talk up a strong dollar even though we never really believed
them. It sounds like you don't believe them this time around either.
You've written at least if you look at the policies they're pursuing, despite
saying they want a weaker dollar, they seem more likely to get a stronger dollar.
At least vs the other world currencies. Am I understanding it correctly, and
why do you think that?
Michael Pento: Well, first of all just to be clear, no fiat currency
regime ever wants stronger currency because in the modern Keynesian group think
they believe you grow through exports. How you engender exports is by crushing
your currency. You grow the stock market, you grow wealth by ruining your currency.
Completely antithetical and illogical, but that's what they think.
But why do I think the dollar should be strengthened? By the way, the dollar's
up to a 14-year high. I’ve been long the dollar, and I've been right. The reason
I believe the dollar should strengthen here for a while longer is (because)
you have a more aggressive Fed. You look at interest rate differentials, you
look at where the U.S. 10-Year, it's at 2.45% as opposed to Japanese bonds
and German bunds and European bonds... there is more value here in the United
States, that flows into the United States and the U.S. dollar.
You have different monetary policies; the Federal Reserve is on record saying
they want two or three or four rate hikes depending on who you talk to. I even
heard five this morning from one of the governors. You have a rate hiking mode
here the United States as opposed to the continuation of QE, albeit from 80
billion euros to 60 billion euros in the Euro zone.
Of course, Shinzo Abe and Mr. Kuroda in Japan, they're stuck at printing money
forever. They can never even hint at stopping because the market would collapse
and the economy would collapse. In addition to that and those reasons I just
gave you, we just heard this morning from Larry Kudlow, and a friend of mine
who is very well connected into the White House that the border tax adjustment
is back on the table. So that's the strategy they're going to go with in the
Trump White House.
They're going to border adjust taxes. So basically, domestic revenue minus
domestic expenses. It encourages people to sell things overseas and to source
things here in the United States. So that would in theory lower the trade deficit
in the United States and that should be dollar friendly. At least the trading
algorithms are programmed to buy dollars when they hear that.
That's what I see happening for the immediate future. I'm not saying go long
the dollar and then go on vacation. What I think is going to happen is that
I believe that Mr. Trump, as well intentioned as he may be, is going to fall
into the meat grinder of Congress.
He's not going to be able to get through all of his policies, and that I believe
while that is occurring, the Federal Reserve will slowly be behind the inflation
curve, but slowly raise interest rates. What I think is going to happen in
our near future, in the next several quarters will be a flattening of the yield
curve and a recession in the United States. And that is when the dollar is
going to absolutely tank.
Mike Gleason: Isn't all this business about a strong dollar vs a weak
dollar a bit of a red herring? I mean when you look at real things, whether
it's real estate, gold, food, whatever. It seems pretty clear that the purchasing
power of all currencies has been steadily falling over time, although it does
happen at slightly different rates.
Why is it that people have seemingly no clue about what's going on the Federal
Reserve Note, Michael, and really all of today's world currencies for that
matter?
Michael Pento: Well, I guess it's a lack of education. I mean, I can't
speak why people are so ignorant about what's going on with the Federal Reserve.
You look at the Fed's balance sheet, what do they control? They control, and
all central banks control, base money supply.
That's physical currency, and central bank credit. If you grow that base money
supply, you're going to get inflation. If you look in Germany. Their inflation
just was reported this morning. Up 2.2% year over year. That was the highest
level in 4 and half years. Even in the Euro Zone as a whole, 1.8% year over
year. In the United States, 2.5% year over year CPI - Consumer Price Index.
So, they're getting their inflation as crazy as it is. These central bankers
have pursued inflation targeting fervently. They're so enamored with their
own prowess to engender inflation that they think they can actually engender
the exact 2% inflation target, and that it will just stop there. They're completely
in for a shock when they come to realize that they cannot hit an inflation
target and stick the landing right on the head.
So, they're going to get 2%, they have achieved that as they just showed you.
And it's going to wax higher and higher and I believe that's where they're
going to have their real problem because if you have inflation that sits on
top of record low interest rates, and record high levels of debt, they're going
to bring about - global central banks - are going to bring about a crisis much
greater than what we experienced in 2007.
Mike Gleason: Getting back to interest rates. We're continuing to hear
the Fed talk more about these small hikes. You said four, maybe even five this
year. Do you think they'll follow through on several of these different rate
hikes?
Then how do you think the Fed's moves over the next year or so will impact
things like precious metals and mining stocks, real estate, and even conventional
stocks.
Michael Pento: I like to say what's kryptonite for gold, what's the
bane for gold? Rising real interest rates. So, if you have nominal rates that
are rising and if they are rising higher than the rate of inflation is increasing,
how fast inflation is increasing. You're going to get a rise in real interest
rates. And that's the death of gold.
Now, I believe this is a very truncated situation. You're going to see probably
two, maybe three rate hikes and in that timeframe, that will probably take
us sometime around the full or the end of 2017. At that time, you are going
to get resolution to Mr. Trump's policies.
If he gets everything through that he wants, perhaps real interest rates will
not be rising. But if he cannot, then you'll see real interest rates fall.
And if real interest rates fall, the yield per flattens, breakeven spreads
start to contract, and that is when you bring about your next recession.
And that is when you want to pile into precious metals and go short the U.S.
dollar.
Mike Gleason: We had Jim Rickards on a couple of weeks ago. He talked
about how Trump may end up appointing up to five of the Fed governors over
the next year or so. He's talked about wanting a weaker dollar. Do you think
we're looking at a lot of doves on the Federal Reserve board before long?
Michael Pento: Well, the Donald Trump campaigned through his whole
campaign, his mantra was - the Fed is quote-unquote "doing political". So,
they weren't raising interest rates because they wanted to elect Hillary Clinton.
That's what Janet Yellen was accused of doing.
Now that Trump is in office, he's championing, as he said, the stock markets
up because they're enamored with Donald Trump, and that he really doesn't want
interest rates to go higher. He really wants a weaker currency.
As I said, all of his policies, if they come to fruition are dollar positive.
Stronger growth, trade wars. There's a conflict. I tell you for myself, I'm
very interested in seeing who he appoints. Because who he appoints... does
he want a rules-based, John Taylor like appointee to the Federal Reserve?
In that case, I know he wants interest rates to go up and he wants a stronger
dollar. If he appoints more people like Janet Yellen, then I would assume that
what he says about a stronger dollar and what he does is going to be totally
different. Then I will be absolutely assured he wants a weaker currency if
he appoints more doves. So, I'm very much interested to see who he appoints
at the Fed.
Mike Gleason: Is the bond bubble you've been writing about in the process
of bursting? Or will the seemingly bad effects of rising rates trigger another
rate cutting campaign, another QE, and another leg up in bond prices?
Michael Pento: Well right now, today the 10-Year note is soaring. So
today it's working out. The bond bubble is bursting. Yields are up from I think
1.37 on the 10-Year in July of last year, so we have had a significant increase
in nominal interest rates.
The question is, is this the real bursting of the bond bubble? I contend we
have one more leg down in yields. Again, let me paint this picture again for
your audience. I believe the Fed is going to buy into their own mantra that
they can raise interest rates with impunity. They do indeed flatten out the
yield curve, at that point we have a recession sometime later in 2017.
At that point, we're probably going to go into not only lowering of interest
rates, because don't forget, if we're having a recession the yield curve is
probably going to flatten out the 2-10 spread. Probably flatten out around
2%. If that's the case, then you only have 200 basis points... figure the Fed
funds (rate) will be almost about, we'll say, 1.75, 2%... then you only have
200 basis points to remove of accommodation.
So, they removed those 200 basis points, that does nothing to relieve the
stress of the recession. So, they probably return to QE. Maybe even helicopter
money, and it's at that point when we launch helicopter money, we'll have helicopter
money in Japan, Europe, China, and the United States concurrently.
At that point, I think you get intractable inflation. And that will surely
blow up the bond market. When I say blow up the bond market, I mean the 10-Year
yield going back to where it was, and even higher than it was in the 1970s.
So, we're talking about 15-20% or higher on the 10-Year note.
That's probably what's in store for the United States sometime in our near
future. And that's what I'm really really afraid of.
Mike Gleason: Talking about getting back to a situation where they
have to cut back on those rate hikes, reduce rates again. What about negative
interest rates? What about the war on cash ramping up again, where do you think
we're headed there?
Michael Pento: Well, you hear more and more about the Keynesian elite,
Illuminati global central planners who want to abolish physical currency. Why
do they want to do that? They want to do that so you have no choice but to
either keep your money in the bank, or to spend it.
If you keep your money in the bank and you can't take cash out of the bank
and stuff it in your mattress, it's abolished. What happens then? They, and
I mean they by governments and central banks, can make the interest rate as
negative as they want and force you to spend money and destroy the purchasing
power of your savings if they want to.
That's where I think we're headed. Unfortunately, I think that's where we're
headed because as I said, the next recession, because we have record amounts
of debt, and record low interest rates, those things cannot exist when they
interface with inflation targets.
So, if you have inflation that's rising, and interest rates artificially pushed
down to 0 and below. At one point, we had 14 trillion dollars’ worth of negative
yielding debt. And you have total debt in the world at $230 trillion, which
is 300% of global GDP.
You're going to have a problem like you've never had before. A worldwide recession/depression.
That's going to be met with unprecedented stimulus from governments. And by
stimulus, I mean negative interest rates, negative nominal rates, forget about
real. The banning of cash, helicopter money, and massive fiscal intervention.
So, that's where we're headed and if you're not watching this and planning
for this, and have a plan to protect yourself from this you're going to be
in deep trouble. And you can't just have a plan that says, "I'm going to own
precious metals forever and short the market". What I do here at Pento Portfolio
Strategies, is I model when it's appropriate to overweight precious metals
and to go short the market, and when it's appropriate to just buy the stock
market in general.
I'll say this. I'll caveat. You should always have, in my opinion, always
have 10-20% of your money in precious
metals and mining shares. Always. That minimal level could be increased
to as high as 80-90% of your assets once this helicopter money and next depression
hits.
Mike Gleason: Looking at Europe real quick, what are you expecting
there later this year? We’ve got some key votes coming up, the nationalist
parties are gaining some momentum. Do you think the EU is going to last, Michael?
What are you expecting over there across the pond?
Michael Pento: Well we see the ECB balance sheet has increased from
about a trillion euros to 4 trillion euros since Mario Draghi took over. And
the reason why he's done this, let's be clear, Europe is (full of) insolvent
nations. Look at Greece in 2012, their 2-year note went to 350%. Let me say
that again. The 2-year note yield in Greece, 350%.
That's when their national debt went to 170% of GDP. Well look, if the ECB
was to ever stop their quantitative easing program, what would happen to insolvent
Italian banks? Who owns all that Italian bank debt? It's the ECB and the member
central banks. You're talking about bankruptcy insolvency all over Europe.
Then you have this surge of nationalism which started with the Brexit, then
it moved over here in America with the ascendancy of Donald Trump. Now we have
Marine Le Pen in France. So, you have the surge of nationalism and this growing
tendency towards greater and greater involvement of fiscal and monetary policy
that cannot be removed. That's especially true in Japan and in Europe.
So, you asked me if I think the Eurozone can exist in its current construct,
which is a monetary union without a fiscal union, and I have to say no.
Mike Gleason: So, bottom line here Michael as we begin to close, how
much longer do you anticipate the euphoria in the stock market and in the U.S.
economy to continue, and what in summary do you see some of the greatest potential
risks, and also opportunities that people should be looking out for as we move
throughout the year?
Michael Pento: Well the enthusiasm over Donald Trump is surely key
to the success in the stock market. If you look at the stock market's valuation,
it's absolutely off the charts. If you look at the total market value of stocks
in relation to GDP, it has never been higher than it is today.
If you look at other metrics like price to sales or the cape ratio or the
Q ratio. These metrics prove that stock market is way over its skis. It's at
very extreme valuations. If Donald Trump cannot push through significant, and
I don't mean tax reform that's just superficial, I mean cutting the rate from
where it is today to 15% and a huge infrastructure package, he has to push
through everything. The repeal and replace of Obamacare, he has to get all
these things done and he has to get it done by the August recess.
And if these things don't happen by August, and as I've said I have my doubts.
The stock market is going to roll over, long term interest rates are going
to start to fall, the Fed is going to run smack into a flattening yield curve,
you're going to have a recession and then all hell and chaos is going to break
loose on a global scale.
So, you have to have a money manager that's watching this that can switch
from an inflationary bias to a hedge against deflation. We're going to swing
wildly between those two things. And if you intend on making money in the good
times like we have today, and preserving your purchasing power when things
switch, you have to be cognizant of these changes.
Mike Gleason: Well excellent stuff Michael, it's always great having
you on and I know you're traveling later today, so we certainly appreciate
you making some time and being so generous with that time today.
Now before we let you go, on that last point you made there, talk about how
people can learn more about your services there, your firm. How they could
potentially become a client if they're so inclined. And also, how they can
read and hear more of your market commentaries, because those are just fantastic
stuff that I strongly urge people to check out on a regular basis. Tell them
how they can do all that.
Michael Pento: Thank you so much for saying that Mike, I appreciate
it. So, the website is PentoPort.com, you
can email me at pento@pentoport.com and
the phone number here for the office is 732-772-9500. I enjoy putting my commentaries
out, you can subscribe to my podcast, you can order my book The Coming Bond
Market Collapse.
We won't bite here. Pick up the phone, call the office and speak to me. Learn
how you can best make money when the wood is green and when it turns dark.
Because, by the way I'll tell you, what appears to be ostensibly a period of
prosperity and global exuberance will not last, I can assure you of that. Unfortunately.
Mike Gleason: Well put, and great stuff Michael. Thanks so much. Safe
travels, enjoy your weekend and we look forward to having you back on before
long, take care.
Michael Pento: Thank you very much, Michael.
Mike Gleason: Well that will wrap it up for this week. Thanks again
to Michael Pento of Pento Portfolio Strategies. For more information just visit
PentoPort.com. You can sign up for his email list, listen to the midweek podcast
and get his fantastic market commentaries on a regular basis. Again, just go
to PentoPort.com.
