Transcription
We're on the other side of that. So, I'm buying minors and I'm buying gold right here. Right? Not the right thing to do today, but in the next few weeks I think it's going to prove a very smart trade.
Mr. War was, you know, he he took the realm realm of the head a couple of weeks ago, but the Fed's balance sheet's growing by $14 billion a week. Total business debt, total non-financial business debt as a percentage of GDP is the same today as it was leading up to the global financial crisis. Same level, same percentage.
The next collapse instead of, you know, going down 50% taking 5 years to get back to even, it could go down 50 to 80% and then take a decade or more to go back to even.
Okay, ladies and gentlemen. So, today we have Michael Pento back on the show, the founder of Pento Portfolio Strategies. And today we will cover a whole range of different topics. We will look at the Iran war, stock market, commodities, three simultaneous bubbles, and many other very interesting topics. So, Michael, thank you so much for being here.
Thank you for having me, Vladislav. That is love. I want to get it right. That is love. Got it.
Yes. Thank you so much for your time, Michael. So, if we could start by looking very quickly at this Iran war. So, you know, in a way, some people are saying that that's finished. Others believe that we could get some more escalations. What are your view on that?
I I think it's, you know, clear to me that both parties, especially the United States, just just want the strait open. It benefits both parties. So, we're bending over backwards here. Um, my own personal opinion is that Trump really didn't want to get into this war. He was convinced to go into battle with Iran. Um, he always I mean, he's he's he avowed that he wanted to go into Iran. But when he became president, I'm sure they warned him that that, you know, there was a reason why we never went into this battle before. Cuz Iran has the ability to control that straight with very very primitive weapons. I mean, you know, rocket launchers and drones. It's very easy. Mines. You didn't You didn't need sophisticated equipment or a dominant military to block that straight. So, they decided not to do it. Trump mistakenly went in there and now to his credit, he's trying to make up for his mistake and he's getting that straight up no matter what he has to do. So, oil's flowing. That's what the market cares about. Uh energies and commodities are going through the straight. I don't see that I don't see that uh function turning around because Mr. Trump wants to save the midterms as best he can. He doesn't want to be a lame duck in his last 2 years of his presidency. And towards the end of his life, he's got a lot of big things he wants to do. Right or wrong, you might agree with him or not, but he wants to do big things. He wants his face on Mount Rushmore and he can't do it being a lame duck. So, I I I Look, listen. I have a 20 a 20-point model. I've now I've whittled it down to the 12 most salients components. Looks at the second derivative of inflation in the context of growth. And we can talk about the Federal Reserve, too. This is very key. Everybody now is panicked about inflation and uh the Fed hiking rates and it it's just rearview mirror stuff. You can't invest money that way. Inflation is coming down. We're We're having a a pretty significant disinflation going to occur over the next few months. Growth is going to probably slow. Not Not a recession, but slow in growth. So, uh everybody is is now piling into inflation hedges when they should be worried about um a a disinflationary portfolio.
Okay, that's very interesting. Before we go into that, if we could look at the energy and oil, so what does that mean for energy, Michael?
Well, it's just Is that where I'm invested? I would I was invested in energy leading up to the war. Uh and I held it for the first, you know, you know, first few innings of the war, but now we're out of energy. We're out of a lot of those commodity plays that we were correctly allocated for. Simply because look you know, look at the five-year five-year forward inflation uh expectations. It's it's rolling over pretty sharply. It's part of my model. Look at the CRB index. It's rolling over sharply. Energy prices rolling over sharply. So, um Yeah. We're not invested there anymore. I'm not saying oil's crashing back to, you know, you know, $50 a barrel, but I think it hovers around, you know, in the 70s for a while. Um wouldn't surprise me. So, it's not where my money is right now.
Right. The last time I think you said that you like uranium. So, would you be out of uranium as well then?
I am I'm out of uranium as well, yes. So, I don't have a I'm not a stop clock, you know, kind of like, you know, uh this is what I believe in and I'm wait for the market to to to to join my philosophy. You know, I look at the what the market is going to what what it is doing and what it's going to do. So, sometimes I'm long commodity, sometimes I'm out of commodity, sometimes I'm long bond, sometimes I'm short bond, sometimes I'm long stocks in certain sectors and sometimes I'm short then. Sometimes I'm long precious metals and sometimes I'm out of them completely. I'll tell you one thing, Vladislav, um for the first time in a very long time I'm buying gold miners here.
Why would you might Why would you Why would you do that when Here's Here's Here's Here's the scenario for you. So, the gold and precious metal metals complex peaked right at the start of the war in February, late February. And the reason why that happened is because everybody believed that the Federal Reserve was bringing in a dove and the dove was going to cut interest rates a couple of times this year. Everybody thought that way. But a funny thing happened on way to that, we had a the the the break out of the conflagration in the Middle East, energy prices soared, commodity prices soared, and inflation went from 2.4% year-over-year to 4.3%. So, pretty significant increase in headline CPI. And and so, gold the gold complex precious metals complex had dropped by well over 30% in that timeframe because the market was was overpricing Fed rate cuts. So, now fast forward to that today. It it's rearview mirror investing. We've got Kevin Warsh comes in, he doesn't cut interest rates, he doesn't raise interest rates either, by the way. Um but he's now saying inflation is going to be going back to 2% no matter what happens, and inflation's hot, as I just mentioned, 4.3%, and everybody's now pricing in two rate hikes this year, which aren't going to happen. I mean, it'd be crazy to think that the Federal Reserve is going to hike interest rates cuz the next few months is going to show a a fairly significant decline in the rate of inflation and also in the pace of growth, economic growth. So, what if they didn't if not one member of the FOMC vote dissented from not to not raise interest rates, the Fed did nothing, they stayed on the sat on their hands. Why are they going to start hiking rates as the economic data starts to come in favoring rate cuts? So, while every everybody's piling into the to to the inflation trade and the rate hiking trade, we're on the other side of that. So, I'm buying miners and I'm buying gold right here. Not right not the right thing to right not the right thing to do today, but in the next few weeks, I think it's going to prove a very smart trade.
That's very interesting. And is that Michael because you want to use them as a leverage on precious metals or is it also because you see them undervalued compared if you look at the financial reports, they're printing cash right right now.
It it's it's so it's surprising to me Vladislav that you look around this market, where is the value? Like even even Walmart's trading at 40 times earnings. But if you look at the the components of the GDX are trading at 14 times earnings. And energy, which is a big input to the cost of pulling gold out of the ground is crashing from $120 a barrel to 70. So I I can't see the earnings getting a lot worse in that scenario. So and no one and no one wants to hold gold and especially not gold miners because inflation's going out of control and the Fed's going to be hiking rates like like lunatics. I'm you know, there's no guarantees in this world, but I I'm I'll take the other side of that trade.
If and would it be just gold miner stocks or silver well and how do you view silver at the moment?
Uh I'm mostly I do own some silver, but I'm not in the silver miners at at this point. Silver has a very high volatility profile and it's also um very much dependent on the health of the economy. It's not just a precious metal, it's also an industrial metal. So I'm less enthused about silver silver right now as opposed to gold.
Yes, uh you have mentioned Kevin Warsh Michael
What?
What puzzles me is you know, Trump was very negative about Powell. He wanted interest rates to go lower and then he appoint he appoint someone like Warsh who's very well, at least he founds hawkish. Uh could you help me um understand that?
Well, I was hoping you can help me. I don't
So Kevin Warsh So Kevin Warsh was was a I I actually am a fan of Kevin Warsh. Um at least I was. I I to I hope to continue to be a fan of Kevin Warsh. He understands a lot about the economy that most Fed chairpersons had no idea. So, most most of the Federal Reserve Open Market Committee, FOMC, they're composed of Phillips curve uh philosophers who think that inflation comes from growth. And so, when the unemployment rate is low, there's a lot of demand inflation. Which is these things these things don't exist that is law. This is a make up uh philosophies from stayed and arcane text textbooks. Inflation is a monetary phenomenon and and it's a choice, as Mr. Warsh points out. So, if the Fed's balance sheet goes from $800 billion in 2007 to $9 trillion in 2022, duh, that's where your inflation came from. So, um and paying people to stay home and and not produce and giving them a ton of money to consume, that's called helicopter money, that's another reason why we had the inflation. So, it was a choice. Um so, Mr. Warsh knows that inflation is a choice. And if the Fed stops expanding its balance sheet, then we're not going to have a problem with inflation any longer. But, here's the here's the here's the twist in the what I just said. So, Mr. Warsh was, you know, he he took the realm realm of the head a couple of weeks ago, but the Fed's balance sheet is growing by $14 billion a week. So, he said that he there's these these committees, these these task forces that he's going to form to find out what to do about the balance sheet. Mr. Warsh has been this involved in the financial industry for decades, multiple decades, and he was a former member of the FOMC. He doesn't need a task force or a committee to find out what to do about his balance sheet. Stop its damned increase. Stop it. And you'll you'll the banks of their gambling money. They won't have all these excess reserves which which they can buy buy bonds with and make and and that reserves are the backing for loans. You can't have a big big money supply growth M2 M3 money growth without the liquidity. Can't happen. So it does cause and lead directly to inflation. The it's called the monetary base or high-powered money. Stop growing that balance sheet. But he has not hasn't done it so far. I don't know why. Doesn't need a committee for that. Just stop it. So we'll see.
Yeah, I suppose we will see. Um so the last time we spoke, Michael, you mentioned that you believe we have this triple bubble. Uh and you know, I've been hearing mainly two camps. So one camp believes that, you know, dollar's dead, the system's going to collapse, need to buy bullets, tuna cans, etc. Then the other side pretty much believes that, well, the Fed has our back, everything's going to be good, they will increase the money supply, that money will go to the wealthy, and the markets will do well forever. Uh where do you stand, Michael, between these two camps?
Well, let's just touch on the triumvirate of bubbles that we that hasn't gone away. I mean, we have the most overvalued stock market in the history of of the of the United States, and by a lot, by by leaps and bounds. It's just my favorite statistic is the total market cap of equities to GDP, 230 over 230% is where it stands right now. And the the you know, average of that metric's around around 90%. So that that's how extremely overvalued we have. But then we have the credit bubble, too. You look at the bubble in private credit and private equity. Total um total business debt total non-financial business debt as a percentage of GDP is the same today as it was leading up into the global financial crisis. Same level, same percentage. It's around 70 uh is it is it about 70%? So, um and then of course you have the the real estate bubble. So, what what I'm afraid is what's going to hap- what's going to happen is that we're going to have a a correction, sharp correction in the stock market. Um as a result of a credit implosion or recession, the the Federal Reserve has not uh abrogated the business cycle. You're going to have it at some point. And when that happens, the the the deficit is going to go from where it is today, $2 trillion, to around $5 trillion automatically cuz the automatic stabilizers that kick in, unemployment insurance, SNAP programs, tax receipts. It There's no act of Congress that has to get passed. You're just going to have deficits skyrocket. And then if you have universal basic income, another round of helicopter money, or you know, a TARP program, something like that, deficits can go to six, seven trillion dollars, but we're already starting you know, last time we had the global financial crisis, the the national debt was like 63% of GDP. Now it's 123%. So, we don't have this we don't have the we don't have the balance sheet of the government any longer that can bail us out innocuously. And we also have intractable inflation. Inflation's been above target for well over five years. So, the next time the federal government tries to save the day of collapsing asset prices and and and trying to boost the economy, and the government goes well into debt by trillions of dollars, and the Fed monetizes it all, interest rates might rise instead of fall as they have done in the past. So, that's that's the real problem that I'm worried about. Um but I have I have I'm pretty much convinced that Mr. Powell shall have no choice but to try to monetize all of that debt. Because if Listen, we just don't have the savings. If the annual If the If If you have a a $40 trillion uh national debt and it's 720% of revenue to service that debt, 720% of revenue. And then deficits go from 2 trillion to 6 trillion. And the Fed does nothing. Well, then interest rates are going to soar. And if the Fed monetizes it all again, interest rates will rise anyway and very very high likelihood because of the inflation and insolvency that we already have. The confidence in the dollar and the confidence in our sovereign debt markets will be completely um eviscerated. So, the next collapse instead of, you know, going down 50% and then taking 5 years to get back to even, it can go down 50 to 80% and then take a decade or more to go back to even. I That me and my clients have want no part of that that that that trip.
So, um yeah, it we could be in a situation we have multiple multiple years of stagflation. And that's where I think we're headed.
Okay, um so I spoke with um Melody Wright recently about the house and um house and market. And you know, she sort of estimated how low real estate prices should go if we if we look at the average salary and look at it from affordability perspective. But if you look at the stock market, is it Well, what would normal valuations look like, Michael, in your opinion? Is it 40%
So, before I Before I answer that question, I'm a fan of Melody Wright. My calculation shows that we have to we have In real estate, we have to go down around 25% just to start to make home prices a little bit more affordable. What did she What did she come up with? What was her figure? I didn't hear it.
Around 40 in average, I think.
Uh 40?
Yeah.
Okay. So, she's she's I'm much more optimistic saying 25%. Um but she's probably more correct than I am. And but even a drop of 25% would would be catastrophic for this economy in the short term. It would be great It's It's It would be a salve. It'll It'll be part of the amelioration process. So, home prices become become affordable again. Um but it would be a disaster for banks. You know that, right? And the consumer. Um for the stock market, it would You would need a drop of at least 50% assuming the denominator doesn't drop, too. So, um and that would just put it back to uh uh the the long-term average of that ratio. So, 50% would be a minimum for to just to bring it back to a a normal relationship with uh GDP.
All right. Um thank you for that. If we could talk a little bit more about gold, Michael. So, you mentioned that you believe that the interest rates could go higher. And you know, when people hear that, they get worried about gold straight away. But you know, interestingly enough, in the 1970s, we have seen that the exact phenomenon where interest rates were going higher and gold was also going higher. So, I suppose what I'm asking you, are you worried about gold for the next few years or would you still be bullish for the long term?
Okay. So, I didn't say interest rates are going to go higher. I said I said that I the Fed would be cut would would more likely to cut rates. And the free market, which controls the long end of the yield curve, is cutting rates now because they realize that inflation is falling. So, that in the very short term, z- excuse me, 0 to 3 months from now, interest rates could be falling. But in the long term, they could be rising. And you mentioned what happened in the '70s. Gold loves this more than anything else. So, remember this. Gold loves falling real interest rates. Okay? So, nominal rates could rise, but as long as inflation is rising faster than the nominal rates are increasing than gold does fantastic and that's what it that's what happened in the 70s. But gold really loves it when nominal rates are falling. And the Fed is printing money money like mad. Think about um you know 2009 after the liquidity crisis. So think about it from 2009 2010 where gold just ripped. Why? Because nominal rates were being held down at zero and inflation because of all the money they were printing was going higher. That means real interest rates are plunging and gold loves that. So as long as nominal rates aren't rising faster than inflation and especially if nominal rates are falling which I expect them to be doing over the next few months, gold loves that which is why I'm buying gold right now.
And the minor.
Yes. Uh if we could talk a little bit more about portfolio structure Michael if possible. So what would be some of the other assets that you like and I suppose how if we could talk about you know balancing the structure portfolio in the current environment?
So we're about 50% short-term. We have no long we have no long-term bonds at this moment which is something I'm looking to change so it'll be all short-term. Um and that was that's been the right trade though up until like a few days ago. Like maybe one day ago. Avoid duration. Um so we're short short duration on the bond on the bonds uh spectrum so far. And uh we own um aerospace and defense. We own utilities. We own health care. Um and um we have some uh long a long short strategy. We have um an S&P 500 equal weight. Um so we're you know we're we're not in that so it's not that is long it's not that we're in to a deflationary situation where growth is crashing. If that were the case, I wouldn't own any I wouldn't own any longs at all. I'd be short the stock market, only long only long bonds, treasuries, and um cash in the dollar. That's all I would own in that situation. I'm talking about inflation going to say some some say some 4.3% to around 3%. And growth falling real growth falling from around 3% to around, you know, 1 and 1/2 2. That's all I'm So, that's not a catastrophe for the stock market, but that it does necessitate you change from being long reflation to disinflation. And those are different sectors. So, you want to get your, you know, some people are buying real estate. Uh I'm not one of them, but I You want to buy um uh dividend stocks, health care, utilities, things that are not economically sensitive, but but but give you a nice uh return during disinflation, which is what I see happening in the in the near future. Not long term because if they did if the disinflation becomes uh a recession and you get deflation, which is falling prices and negative economic economic growth, then you're going to then you're going to have the the Fed ramp up the printing press and you're going to have in the in the out years stagflation for a very long time.
Are you, Michael, worried about this recent almost a parabolic run in in S&P 500 and general stock market? So, do you think there's a quite high possibility that that we could be getting very close to that ultimate top?
Well, you know, it the market's extremely overvalued. That's that's for sure. I I I the move in the S&P hasn't really been parabolic. The parabolic move has been in um AI the AI sector Um the S&P and it's itself is not parabolic. Um and I think I think the over investment in AI is going to lead to a situation like we had in 1999. Not that the internet was wasn't a productivity boom, it was. Um and artificial intelligence intelligence is extremely beneficial to productivity. Um that doesn't mean that all the multiple hundreds of billions of dollars and and even trillions of dollars that's being raised is all um capital that's being spent appropriately. So it's over investment, malinvestment. Um that's where I think is going to be the nucleus of the next collapse which is going to be um in the credit markets. And when that happens it'll bring the stock market and the real estate market down of course by definition also the bond market. And that's where the trouble lies. Uh but that's not a situation for for this moment.
Yes, uh we covered a lot Michael. Is there anything else that you would like to mention that we haven't covered but that you believe is important at this moment?
Well, I I think it's uh self-evident that you need active management because holding a static portfolio you know, 60% stocks and 40% bonds or some mixture like that's target date portfolio which has like you know, every every every duration of bonds and and and a balanced portfolio, it's not going to work for you. Um first of all, you're going to miss out on the appropriate investing as far as are we in disinflation, are we in reflation? That's important but but the most most important thing that you have to avoid is the big declines in your portfolio. The 30, 40, 50, 80% declines in your portfolio which has happened many times in the past and could and should happen again. We talked about, you know, Melody Wright talked about 40% or 50% reduction in home prices. I I think it's at least 25. Um but the stock market should drop at least 50% to get somewhere near normalcy. So, you have to avoid that because if you go down 50% you need 100% to get even and and nobody who's in retirement or close to retirement wants to wait 5 years to get back to even. They can't do it. And as I said, this next iteration of the business cycle collapsing is is probably something that's not going to be easily ameliorated. Easily turned around by the simple function of printing money and borrowing money. Cuz that in itself will destroy the the construct of the Treasury com- complex. And that's been the salve for every other recession in our past. So, it could take instead of 5 years, a decade or longer, maybe 15, 20. Look at And before you you think that's crazy, look how long it took Japan, 35 years to get back to their all-time high. We're still waiting in in China. China's Shanghai Exchange pe- peaked in 2007. They're nowhere near it. And And that's, you know, 20 years ago. So, um it could ha- It's happened before. It happened here in the United States in in 1929, too. So, it it took many years to get back and it was like early '50s, right? That we got back to even. So, um it happen It's happened before. It could happen again. Multiple decades where you're not making any money. You're just hoping to get back to even. You have to avoid that. You need active management.
And do you think Michael higher yields in Japan could be a problem for US markets because of the young carry trade?
Yeah, of course. That it's part of the the construct of the of the illiquidity that you would you would get from that. There's a lot of you know, you borrow in Yen and you you go out and you buy other currencies and buy their stock markets and buy other bonds and then if the Yen starts strengthening you have to unwind that carry trade. Which actually strengthens the Yen more and causes more illiquidity in the system. So, that's all things that my my model monitors which is one of the components of it is the Yen carry trade. Uh right now it's it's you know, it's flashing yellow but not red. So, we're going to you know, we're not going to I'm not going to tell the market what to do. I'm going to watch with the I call them the oligarchs or the plutocrats the handful of individuals that actually run this planet what they're doing. They know when there's going to be a war and when there's going to be peace. A quick example did you know, when when when Trump was saying on social media that Iran's civilization was going to end you know, oil was going down. And you say, "Well, this is stupid. This is a great buy. Let me buy some oil." Well, but the people who actually knew what was going on knew that that was just was a it was posturing. It was a bluster. It was a ploy to get them to the negotiation negotiating table because Mr. Trump smartly knew that he didn't want to destroy the energy infrastructure there and have and have and have WTI go to $200 a barrel. So, uh understand what they're doing and you'll get be you'll be on the right side of the trade. Positively or negatively. You know, during bull markets and bear markets cuz they know as they did in 2007 when the you know, the mortgage-backed security market was was going to melt down. They knew before it was headlines anywhere else. So, I'm going to follow them legally.
Great great points. If people would like to follow your work, Michael, where could they find you?
So, the website is real port.com. p e n t o p o r t dot com I publish a midweek reality check, which is 10 minutes, 15 minutes of me talking about the salient data points of the week and talking about the portfolio at a very high level. And if you have $100,000 to invest and you are a US citizen and you qualify for a long short strategy, I will manage your money myself in the inflation, deflation and economic cycle portfolio.
Yes, and I will have the link in the description below for those who are interested. So, Michael, it was a pleasure like always and thank you so much for that.
Thank you, Vladislav.