Congressmen File Fort Knox Audit Bill | Exclusive Michael Pento Interview

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Mike Maharrey: Greetings. I’m Mike Maharrey, a reporter and analyst here at Money Metals, and I’m joined once again today by Michael Pinto. He’s the president and founder of Pento Portfolio Strategies and a writer, author, analyst, and a man of many hats. How are you doing today, Michael?

Michael Pento: I’m doing fine, Michael. How are you?

Mike Maharrey: I’m doing well, and I really do appreciate you taking a little time this morning to chat with me. Want to start about just looking at the gold market. It feels like we’re in a little bit of a consolidation phase. We saw a $3,500 an ounce record in mid-April, and since then we’ve kind of been trading sideways, a lot of volatility, but kind of in a relatively narrow range. And I guess my first question is just kind of generally, do you feel like the bull market has some legs left or is this maybe a longer term consolidation, or could we even maybe see some selling in the near term?

Michael Pento: I think we’re definitely in consolidation phase. What drove it to all-time record highs was I think, twofold. It really had to do a lot with tariffs. So, the tariffs caused the global economy to weaken US economy, to weaken part of the global economy, and at the same time concurrently cause the dollar to fall.

Michael Pento: And the reason was is that, hey, listen, if you’re going to have sanctions and tariffs and you’re going to stop global trade, well then there’s a lot less dollars that need to be bought from a trade surpluses, and that means that there’s less treasury bonds to be bought, and that caused yields to spike. It caused people to eschew the dollar and the dollar fell. And at the same time, if you cut off global trade, you’re going to really hurt growth because trade is a big part of growth. So, stolen growth usually means that at least the Fed is going to not be raising rates. I think the fed’s on hold for a while here, but at least it gives the impetus to say, I’m not going to park my money into bonds long-term bonds because yields are spiking. I’m not going to park my money in stocks. They’re an overvalued bubble, and the economy is not going to have the earnings growth and the dollar’s weakening, so, I’m going to buy gold.

So, what we see now with the trade war kind of I guess temporarily on ice, or at least I think this Michael, I think Trump has realized that it’s a wonderful idea to rebuild the middle class and to have a manufacturing renaissance and to balance the trade deficit. All those things are wonderful aspirations, but when you’re in such a massive bubble in equities, bonds, and in real estate, when you cause some chaos like that, you put a big speed bump in the economy. It causes the stock market to crater, and most importantly, it causes chaos in the bond market. The credit markets freeze, so, you can’t have it both ways. You could say, well, okay, I really want to break the egg to make the omelet, but does Trump really want to cause the depression on the journey? And I think the answer is no.

He looks at the stock market assiduously, he considers it as his report card. So, the bottom line is my opinion is he’s going to do some marginal trade deals and call it a massive success and not much is going to change. It’s going to be status quo for the most part, but that’s why gold is in a consolidation phase. We were very long gold heading into the meat of the tariffs, and then we sold it off to, we have a 5%, and this is what I call liquid paper gold. So, it’s 5% that we’re trading. We hold that as a liquid asset, but we have always recommended you have 5% of your net worth in physical gold in your possession. Right. That’s my view on gold.

Mike Maharrey: Yeah, I noticed, actually, I didn’t notice, but one of the guys over at Money Metals noticed that you guys had sold some of your positions in, I think it was IAU in May. So, that all makes sense. Been really, I watched the kind of daily I’m sitting here working, so, you see the daily ticker, you probably do the same thing, and it’s like one day gold’s up 80 bucks the next day gold’s up down 80 bucks. And a lot of it does seem to be kind of focused on the trade war news. If it’s good news, then gold sales off stocks rally. If it’s bad news, the opposite happens.

What do you see though that maybe beyond the tariff issue, because I agree with you, I kind of feel like as you do, it’s going to be a lot of jockeying, but at the end of the day, they’re going to make some deals and it’s probably not going to be significantly different than it was before. What are some of the things that you’re looking at beyond the tariffs that you think are really going to be major factors with the markets as we go forward here?

Michael Pento: Well, we have $37 trillion in debt, and my calculations, which I looked very closely at the continuation of the TCJA tax cut and Job Act and the no tax on tips and overtime and the write off of interest on your car. I’ve done all the numbers and I predict given realistic numbers that we’re going to have 67 trillion of debt in the next decade.

Mike Maharrey: Geez, that’s amazing.

Michael Pento: And I think the only thing that you can say for sure when you have $67 trillion in debt is the Fed’s balance sheet is going to have to skyrocket because the fed’s going to have to own it all. Let’s not use hyperbole. You’re going to have to own a great portion of that increase in trillion dollars in debt in the next decade. So, it took 250 years of this republic, democratic republic to amass $37 trillion, and we’re going to do 30 in 10 years.

Mike Maharrey: That’s amazing.

Michael Pento: By the way, if we don’t have a recession and as if interest rates remain relatively quiescent, and I would bet that the latter is not going to be the case, and I would bet the former is not going to be the case either we average a recession every 6.5 years or something like that in this country. So, the fact that we’re going to have another decade of no recession is ridiculous. It’s ridiculous, especially given our starting point here. So, the fed’s going to have to be a big monetizer of the debt. And when you think about who the buyers are going to be, well, we just talked about how foreigners no longer have a lot of interest in holding sovereign debt and US sovereign debt denominated in dollars, not when you have sanctions and tariffs and confiscations. What’s the reason? What’s the purpose?

So, rather than park their trade surplus and their savings in US treasuries are going to park a lot of that in gold. That’s exactly what’s happening. So, the dollar is going to be weak. The Fed is going to be cutting interest rates. The Fed is going to be expanding its balance sheet. The economy does not grow very fast under that onerous amount of debt. Debt to GDP is still going to skyrocket. I’m a libertarian, so, I’m all four lower taxes. But you have to cut spending too. You have to do both. There is no will from Democrats and Republicans to really take on the entitlements. So, we’re going to have massive debt and deficits. It’s going to be monetized, the dollar’s going to fall, and I think gold’s going much higher in the long term. It’s in a secular long-term bull market. It’s just in a consolidation phase, and I’m an active trader, so, I fully anticipate buying more gold in the near future.

Mike Maharrey: Right, right. Absolutely makes sense. It makes me happy to hear you say that because I actually wrote an article last week talking about the fact that really the only path I see forward is debt monetization. There’s not demand for the amount, the sheer volume of debt that has to be issued to cover it.

Michael Pento: Michael, not at this price.

Mike Maharrey: No way. Exactly. Yeah, not at this price. I guess everything can work at some price, but then you look at the interest side of the equation and you look at the interest expense that the US is already having to fork out. And it’s obvious to me that it’s problematic, but why do you think that so, many people, when you start talking about these longer-term trends in the bond market, you talk about de-dollarization dollar weakness, I don’t know. It seems to me that most people that are out there that are just kind of walking through the mainstream are just kind of like, oh, it’s fine. There’re always going to be demand for US debt. The dollar’s always going to be strong. I mean, why do we have this perception that the dollar is almost like bulletproof, do you think?

Michael Pento: Well, let’s just touch on the fact what we just said about people say, well, the US is the most deep and liquid bond market in the planet, and it will always be demand for our bonds. And I guess maybe that’s true, but I ask this question to that person who I’m thinking of who always says that the bond market’s, the deepest and liquidous, the US bond market, was that the case in 1980? Was the US bond market the deepest and most liquid? And the answer is yes, it was interest rates went to 15% back then when we hardly had any debt to, there wasn’t hardly any debt to GDP, it was like 35% US national debt to GDP, not 130. It was 30 or 35 or 40%, somewhere around that neighborhood in that timeframe. So, even if we had a quiescent debt to GDP ratio, which we don’t, inflation could bring bond holders to demand a real interest rate of close to double digits. So, to me, that’s what’s going to happen again, but the next time we’re going to have a problem not only with inflation; we’re going to have a solvency issue too.

Michael Pento: So, interest rates could easily spike well towards 20% in the future. I have a theory. I wrote a book about it in 2013 predicting exactly this crisis.

Mike Maharrey: Well, yeah, I was actually going to bring that up. You did indeed write a book titled The Coming Bond Market Collapse. I was going to ask you if you thought maybe we were in the early stages of that collapse. I’ll go ahead and ask you that now since you brought the book.

Michael Pento: Yeah, we’re a hundred percent in the early stages of that collapse. It was going to be either, listen, at some point we were going to enter into a period of intractable inflation where the Fed would have to try to engage in some kind of yield curve control. But unless the Fed has sensed the buying every single fixed income instrument in the United States, which would be why more republic type kind of inflation yields are going to go much higher and the bond market’s going to collapse, there’s just no two ways to let it, because if the Fed doesn’t buy it, then there’s not enough natural buyers, especially now the foreigners have other alternatives, like for instance, Japanese bond holders, which are the largest foreign holders of US debt, they have an alternative. It’s called their domestic bond market. They don’t have worry about hedging the currency or anything like that. They just buy their own JGBs.

And if we rely on our own domestic demand, it just isn’t there. So, yields are going to go much higher because of the debt, just because of the debt, just the unbalanced amount and the tsunami of debt that’s being issued. And then you say, well, then the Fed will buy it all. Okay, well then we’re going to have hyperinflation, and that’s everything. The fed’s not buying to soar in yield unless they buy, I guess they could buy municipal bonds and they can buy corporate bonds and they can buy junk bonds. They can buy everything, I guess.

Mike Maharrey: Yeah. Well, there was some speculation that they were going to have to do that during the pandemic, and of course that was just a short term blip. That was a lot external factors there. You’re talking about fundamental things that are going on in the underbelly of the economy. I have a theory, I kind of want to run this past you. I just thought of it. I’ve talked about this with some other folks. I feel like that you and I are a little bit older. I mean, not going to say, I’m not going to say we’re old, but we’re a little bit older. I remember those high interest rates in the eighties. I remember my parents griping about particularly mortgage rates at the time. That was kind of the world that they were in. But I feel like a lot of people that maybe are in their thirties and forties don’t remember that they’ve lived almost their entire adult lives in this weird 0% interest rate environment. I think a lot of people think that’s normal. Do you think that’s kind of true, that there’s this little bit of a bias, recency bias in the way people analyze the markets?

Michael Pento: A hundred percent. So, I guess some people say it started after 1987 when Greenspan’s bailed out the October crisis, Black Monday. But went on steroids in 2000 and somewhere along the way and we’re doing 25 years after the NASDAQ crash. But I see it in all my friends, individual investors that all say the same thing. Don’t worry about anything. The Fed and the government have your back. If there’s a recession, the Fed has your back, they’ll cut interest rates to zero and print money. There’s a credit crisis. The Fed has your back. If there’s a problem in the stock market, a bear market, if there’s a deep recession, the treasury will issue trillions of dollars and send checks in the mail helicopter money. There’s no way the market’s ever going to go down. Well, I mean if that’s the case, maybe it won’t go down in nominal terms, but in real terms, it’s going to get destroyed

What they do, the fiscal and monetary policy, which is what my model is based on, what they do government does, affects how I’m going to invest. So, I have five sectors that my clients invest, five sectors that range between a depression or recession and deflation all the way to intractable inflation. There’s five bucks. And what fiscal and monetary policy changes there are. That’s going to dictate to me what stocks, bonds, currencies, and commodities that I own for me and my clients. And to me, Michael, it’s very clear that this is an stable situation. If you think about the decades of inculcation that the Fed and treasury have taught, investors, especially individual, not talking about institutions so, much anymore, it’s the individual investors that are piling into this market. You, these are passive flows that just keep on piling into the S&P 500 and pile into the highest cap weighted components of the S&P 500. You buy every dip because the government has your back and you just set it and forget it. Now, what we’ve created here is a monster where I think 70% of US assets are in equities,

Michael Pento: The highest it’s been ever, and the passive flows continue. So, what’s going to happen is, and by the way, a lot of the 70% of these people that own stocks are now approaching retirement or in retirement, not if when we have a bear market and we will have one and not if we have a recession. When we have a recession, stock’s going to drop 10. Okay, buy the dip. Twenty. Okay, buy the dip once. And this is my opinion, this is my feeling. I’ve been in the business 34 years now. So, my opinion does matters to some people. Once you hit 30% down, you’re going to get a tsunami of retirees and almost on the cusp of retirement, call up their 401k plan administrator and say, Hey, get me the hell out of stocks. Now my retirement is on the line, and I think you can easily go quickly from 30 to 50% down. By the way, if you’re down 50%, that just puts the total market cap of equities as a percentage of the economy back to a normal balance more like a hundred percent. So, the total market cap of equities would be a hundred percent, but now we’re about 200% of GDP — back to a hundred. It’s a 50% drawdown. Now, of course, you tend to fall below that. You don’t stop historically. You don’t stop exactly at a hundred percent because the average of that ratio is closer to 90. And that assumes the denominator doesn’t drop too.

Michael Pento: And he could and should and will drop when you have the kind of chaos. So, that’s, you’ll have a lot of potential energy that could go kinetic here once we have the recession. And yes, I do believe that we’ll have helicopter money. Yes, I do believe in arrears. I mean, after we’re down 20, 30%, you’ll have the Fed cut again to zero and ZERP and QE and all that happy stuff.

Mike Maharrey: Yeah, that’s the fork they know.

Michael Pento: But I have two things to say about that. Number one, well, maybe three, but we just get at least two. Number one, it’s going to happen after the fact. It’ll be X post the crash, and then what happens with inflation? How high does it go? And number three, what happens to long-term interest rates when the fed’s balance sheet, we were talking about that before, at least money printing. Let’s put some numbers on it. The fed’s balance sheet, which is the securities they hold used to be about 800, $800 billion. 800 billion. In 2008, it spiked to $9 trillion. It’s crazy. $9 trillion in the space of just over a decade. And now we’re down to about $6.6 trillion to the fed’s credit quantitative tightening. I think the next crisis is going to bring it well into the double digits, and it’s that inexorable trend towards that level 15, $20 trillion Feds balance sheet that’s going to wreak havoc on the dollar and wreak havoc in the bond market. That’s my prediction.

Mike Maharrey: I remember Ben Bernanke when he launched QE for the first time in 2008, and he was in front of Congress and he swore, this is not debt monetization. It’s an emergency measure. We’re going to sell all of these bonds that are on our balance sheet once the crisis has passed. And then you just mentioned we’re still over $6 trillion. So, after the 2008 crisis, they had it, I think, what $4 trillion at that point. So, we’re still not those bonds, were all still there, which is pretty big

Michael Pento: So, it went to the fed’s balance sheet. Best of my memory was four and a half trillion dollars going into COVID quickly went up to $9 trillion. Why are we not back at four and a half trillion is beyond me. Why can’t they do that? But the gamblers on Wall Street, love it. It’s more gambling money. So, what we’re talking about here, just to be absolutely clear, the Fed does print money. The people say the Fed doesn’t print money. The Fed doesn’t buy bonds. They use private banks as a conduit to buy bonds.

You flood the banking system. The primary dealers with credit fed credit, what they do with that credit is buy bonds, and they use it as backing for loans. By the way, fed credit can be converted to cash. That’s why it’s part of something called high powered money, which is physical coins and currency and circulation plus fed credit. That is the monetary base, high powered money,

Mike Maharrey: Which is interesting because that’s been going up for over a year now, which I point that out to people because there’s especially, I think, a lot of Trump apologists that are talking about, ‘Oh, inflation’s dead and he’s conquered inflation.’ Well, no, not really. I mean, prices aren’t going up as fast as they were, but we’re still inflating the money supply, and that has ramifications.

Michael Pento: And Michael, we’re inflating the money supply, but also we’re inflating the level of prices. I mean, prices went up 40%, 50% post after COVID. Home prices are unaffordable, the most unaffordable in history. It can’t be purchased from first time home. Buyers have been priced out of the market. Congratulations. Federal Reserve. They’re supposed to be in business to protect the middle class and down, but maybe not. But it’s the level of prices that’s already bankrupt. The bottom three or four Quintiles, only the top 20%. That’s keeping the economy going here.

So, prices are going up at two and a half, 3%, which is higher than the 2% target. And from an already unaffordable level, now you’re going to pile tariffs on tariffs or taxes. They’re paid by importers. Pay those price. So, it’s shared. The exporting country could eat a little bit, they can reduce their currency. The importer can eat a little bit. The corporations could reduce their margins, and then they pass along some of these prices. But some prices are going higher.

Mike Maharrey: Absolutely. I mean, it’s true of any tax.

Michael Pento: It’s a shared burden. But to say that it’s a tax only on the exporters is a lie. It is untruth. It’s mendacious.

Mike Maharrey: That’s a good word, mendacious. I like that. Before I get you out, I do want to ask every time, every guest, I ask this question because it’s a question that people ask me constantly. I want to talk a little bit about the silver market and the fact that the perception is silver is a laggard. We’re still seeing gold, silver ratios in the upper nineties. Do you think that silver’s going to catch up with gold as it has historically? Or are we entering into an era where maybe we have these wider gold silver ratios?

Michael Pento: Well, this is a money metals interview, right? It is. So, I would love to say I’m in love with silver and ag is going to catch up with au, but unfortunately, I can only be honest and tell you that. I mean, gold is the purest form of money that we have. Silver tends to do really well when we have a period of global growth and inflation at the same time because it does have an industrial component to it. So, I still favor gold over silver. I know silver’s, poor man’s gold, whatever. I mean, listen in times of chaos, and if you want a pure monetary alternative that doesn’t have the volatility component of silver, it’s gold. So, yeah, I could be wrong, but that’s where I stand.

Mike Maharrey: Well, I agree with that as well. Yeah, I’m pretty bullish silver personally. But no, I think that’s a very fair and accurate analysis.

Michael Pento: I’m not saying don’t buy silver. Yeah, buy silver, but I don’t think it’s going to catch up the gold. At one time, I had this discussion with my mother recently, and she was insisting that platinum was more expensive than gold because at one point, gold was much less expensive than platinum. And I told her, well, platinum is nothing compared to gold right now. I think gold is more than what is platinum now about a thousand dollars. And so, gold is almost like three times what?

Mike Maharrey: Yeah, platinum is around $1020 right now.

Michael Pento: Okay. Yeah. So, I’d say her, well, I said, ‘Ma, gold is about three times one.’ She goes, ‘No, it’s not. No, it’s not gold. Gold is platinum is platinum.’ But listen, gold is because the world needs another alternative currency besides the US dollar because you cannot trust us treasury bonds in an insolvent nation that or has a real intractable problem with inflation. You need another alternative, a big, deep liquid alternative. And gold is fulfilling some of that role, and it’s not silver.

Mike Maharrey: Yeah, absolutely. I agree.

Michael Pento: And it’s not platinum either, right? Maybe it will be some, but it’s not right now it’s gold because this gold is virtually indestructible and you can’t create it. I know you can create it for about two seconds. This, it was this meme going around, Hey, they can create gold. Gold’s going to crash just like they created diamonds. Well, you can create diamonds because diamonds aren’t an element. It’s compressed carbon. Gold is an element, and you can create it and it lasts for a couple of milliseconds, and you can’t create a lot of it, and it’s not really worth anything. If it goes back to being, I think it’s, I forgot the, forgot the element they use to create gold in atomic reaction. No, you can’t create it. It’s very beautiful. It’s portable, it’s di visible, it’s virtually indestructible. It’s beautiful. And it is money, not paper dollars. There is no fiat currency that exists on the history of planet Earth that has lasted as long as gold. They’ve all gone away.

Mike Maharrey: And I think that right there is the fundamental thing. And when you talk about the global aspect of it, what are central banks buying right now? They’re buying gold.

Michael Pento: You know why, Michael, let me just be very clear. Sometimes I’m a little obtuse. Let’s just say China has a trade surplus of the United States, and they used to recycle their trade surplus into treasuries, which are denominating dollars, and then say, ‘Well, if I offend the United States, or if the President doesn’t like me, they can confiscate my wealth. They can impose sanctions on me, and I don’t want to have my wealth, my sovereign wealth subject to a third party. So, I’ll just buy gold and keep it in my country.’

So, my wealth is my own. That doesn’t make a lot of sense in a world where interest rates are rising and they’re very high because you’re not making any money on your gold, any interest on your gold, but in interest rates are still relatively low. So, you don’t have that potential of losing your sovereign wealth, but the discretion of another country. So, gold is a viable alternative, especially in this era of relatively low nominal rates. And when real, by the way, real interest rates, I just want to leave you with this one point for most of our lives of investing lives, mine and yours, real interest rates were positive.

Michael Pento: But somewhere around 2007, that global financial crisis, we had a period where interest rates were not only negative in real terms, profoundly negative, like eight, 9% negative is never before happening. And in nominal terms, they were negative in Japan and Europe in nominal terms, interest rates were negative. So, you had to pay money to someone when you lent it to them. So, we have turned the, whereas there was one study done by some group, the Byzantine Empire, the 3000 years of recorded human history, at no point in time were interest rates ever negative in nominal terms. So, we’ve entered a world where we financialize the entire planet. We have bubbles in stocks and bubbles and bonds and bubbles in real estate. We’re going to have a grand reconciliation. I call it a grand reconciliation of asset prices. I have an actively managed fund that I created called the inflation deflation economic cycle model. It tries to participate in these insane bull markets, and it has a long history of doing that, but it also, tries to protect and profit from these crashes, which are going to happen with greater intensity and more frequency.

Mike Maharrey: Yeah, well, absolutely. Where can folks go to avail themselves of your wisdom and work with you if they’re so, inclined?

Michael Pento: So, it’s pentoport.com is the website, and on that website you’ll see a podcast called the Midweek Reality Check. It’s $50 a year and you get my 36,000 foot view of things. And if you’re a US citizen and if you’re qualified for the portfolio, you have a hundred thousand dollars to invest, I will personally manage your money in that paradigm IDEC strategy.

Mike Maharrey: Well, it’s fantastic. You’re one of the best people out there, in my opinion, of kind of backing up and giving that high level, broad view of what’s going on, because I feel like so, much of the analysis that’s out there is focused on whatever came across Twitter 30 seconds ago, and you really did a good job of giving folks a perspective of what’s going on in the underbelly that needs to be paid attention to among all the headlines. So, I really appreciate that.

Michael Pento: Thank you, Michael. That ability, just want to leave. Thank you very much for saying that. I just want to say that the stock market is trading at 22 times forward earnings growth of 14%. I don’t know how the heck you can get 14% earnings growth. When we just had reports out today that the service sectors and contraction in May, the Q1 was negative. So, I mean, margins are going to be definitely shrinking. So, you have a very, very expensive stock market and everybody’s in the same boat. Everybody’s long. So, if you don’t have an active manager who has a robust model that can get you out of harm’s way, when this thing really collapses, then I think you’re going to be very, very sorry you didn’t do that.

Mike Maharrey: I agree completely. Well, Michael, thank you so, much for taking time out of your busy day to chat with me. Always appreciate it. Always appreciate your insights, and I’m sure we’ll have you back as things unfold here moving into the future. So, thank you again.

Michael Pento: Thank you, Michael. Looking forward to it.