Michael Pento Exclusive: A Depression Is Coming, Whether It Be Hyperinflationary or Deflationary…

“Why keep money in the bank w/ guaranteed loss of principal AND guaranteed loss of purchasing power?”

Mike Gleason Mike Gleason
Interview with: Michael Pento
February 26th, 2016 Comments

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll welcome back Michael Pento 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 released some 2016 financial market predictions a couple of months ago, and they are ALREADY playing out right before our eyes. I’ll ask him what he sees ahead for the markets now and what he sees for gold, so don’t miss this tremendous interview with Michael Pento, coming up after this week’s market update.

Panic is in the air. You can see it whenever you turn on a cable news channel.

No, I’m not talking about a panic in the stock market. The Dow Jones is up more than 300 points this week as an upbeat report on durable goods and surging crude oil prices calm investor nerves over a potential economic downturn.

Market jitters may be subsiding for now, but panic is setting in throughout the political and media establishment over Donald Trump’s march toward the Republican nomination. Trump scored a resounding win in the Nevada caucuses on Tuesday. And the Trump Train now threatens to roll to a multi-state sweep on Super Tuesday coming up next week.

Donald Trump has defied all the pundits and political consultants and managed to put together a broad coalition of supporters who are fed up with conventional politicians. Trump is trying to win over fiscal conservatives by blasting irresponsible debt spending and railing against the latest budget deal that establishment Republicans in Congress insisted on giving to President Obama.

On Monday, The Donald made a pitch to monetary reformers. He said, “It is so important to audit the Federal Reserve.”

The Fed orchestrated a successful lobbying effort to defeat the Audit the Fed bill in the Senate last month. Perhaps this November’s election will give the Audit the Fed movement a political boost. We shall see.

In the meantime, gold and silver will continue to serve as a hedge against the Fed’s propensity to print money. This week the gold market is pretty much unchanged. As of this Friday recording, gold prices come in at $1,225 an ounce, down 0.2% on the week. Just as my podcast guest Dan Norcini said last week, if gold were to take a breather from its early year rise and give us some sideways price movement and consolidation that should be viewed as a GOOD thing, and that is exactly what we’ve seen so far this week.

Silver prices, meanwhile, are lagging once again. Silver dipped to test the $15 level early in the week before bouncing off what could turn out to be an important support level. However, silver has dipped below $15 here on Friday and now trades at $14.88 per ounce, down 3.1% for the week.

Turning to the platinum group metals, platinum looks lower by 2.1% this week to trade at $922 an ounce. Palladium is off by 2.6% to trade at $488.

So far this year, palladium is flat-lining and is the only precious metal not posting significant gains. Gold is leading the way, outperforming all conventional asset classes, not just the other precious metals, so far in 2016. Gold bullion is being outshined only by the gold mining stocks, which are putting together another strong rally this week.

The miners are notoriously volatile. The booms and busts in this sector are more extreme than in any other. Yes, it’s possible to make fortunes during an up cycle for mining. But investors also risk being completely wiped out during down cycles. Mining stocks simply aren’t suitable as long-term buy and hold investments.

In fact, the HUI gold stocks index has lagged badly behind gold spot prices over the past 20 years. Gold prices are more than three times higher today than they were 20 years ago. Yet the HUI actually trades lower today than it did in 1996.

Mining stocks are inherently speculative. If you want to speculate in mining stocks, you could do well in a bull market for gold if your timing is good. But don’t confuse owning shares of a company that mines for gold with gold itself. There is no substitute for physical gold and silver as a hedge against risks in the financial system.

Here at Money Metals Exchange, we practice what we preach by offering low-premium bullion products – not speculative “rare” coins with heavy mark ups above melt value. We recently added some new bullion products to our inventory, including a number of different gold bars made by well-known refiner PAMP Suisse featuring the beautiful Lady of Fortuna design, the one-ounce Canadian “Predator Series” Silver Cougar, and the newest version of the stunning 5-ounce America the Beautiful silver coin.

The latest coin in the America the Beautiful series from the U.S. Mint depicts the Shawnee National Forest and contains 5 troy ounces of .999 fine silver. The U.S. Mint launched the America the Beautiful silver coin series in 2010. It releases five designs every year, each representing a place of beauty for each of the 50 states. The limited series is set to run until 2021.

And guess what… you can even get one of these 5 ounce beauties FOR FREE if you make any purchase from Money Metals totaling $10,000 or more. And even if you place an order of just $500, we’ll ship and insure your order for free. These special offers are in effect between now and the end of March, so don’t miss out. Just call 1-800-800-1865 or visit MoneyMetals.com to lock in your order.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Mike Gleason: It is my privilege now to be joined by 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 who ascribes to the Austrian School of Economics, and has been a regular guest on CNBC, Bloomberg, and Fox Business News, among others. Michael, it's good to talk to you again, thanks very much for joining us and welcome back.

Michael Pento: Thanks for having me back on, Mike.

Mike Gleason: Well to start off here, Michael, I want to get your thoughts on what we're seeing here in the early part of 2016 and why you believe we're getting the type of market reaction that we've had, because you wrote a great piece for CNBC.com, just as the new year began, where you made some pretty dire 2016 predictions for the economy, the value of the dollar, and the financial markets as a whole. And all of that appears to be playing out right before our eyes here, during the first two months of the year. So talk about what you were seeing there before the year began, and what you continue to see that makes you very concerned about the economy and the prognosis for growth.

Michael Pento:When I made those predictions back in late December, I didn't realize that they would all be coming true, pretty much in January, one month later. I predicted that the dollar would fall, because Janet Yellen was going to be unable to execute on her threatened four rate hikes in 2016. She got one off the table in December of 2015. I think she's pretty much done, maybe she has one more. That's very bearish short term for the dollar, because the dollar had priced in four aggressive rate hikes in 2016. That's clearly not going to happen. I predicted that the 10-year note was going to from I think it was 2.25% to 1.5%. I almost got that done, in the pocket, in 2016, the early part of it.

I predicted that gold was going to have a major rally, that has occurred. I also predicted that the U.S. Stock Market was going to have a 25% to 30% correction, and the median average price of the S&P 500 is down 25%. It looks like all the predictions were manifested, except I didn't think they were going to be coming true in January, but they all are. And that's indicative of how bad the economy is on a global basis. Look, this is worse than 2008, and the reason why it's worse than 2008 is because in 2008 we had an over-leveraged consumer and banking system. And everybody knows that now, we had an over-leveraged consumer, they had too much credit debt outstanding, mortgage debt outstanding. These loans went bankrupt, and of course, banks were rendered insolvent.

But today, banks are a little bit better off. They have a 6% capital instead of 3% capital, but while private banks may be better off, every central bank on the planet is insolvent, and governments across the globe are insolvent. Now, is it better to have an insolvent U.S. banking system, than it is to have insolvent central banks and governments across the world? I say no, and that's why I believe this next recession is going to happen in 2016. It's epicenter is in China. It's metastasizing across the globe. But what makes it worse is that central banks are completely impotent to fight this next wave of recession and deflation. They cannot lower borrowing costs to consumers, there will be no debt service relief, and budgets, budget deficits are going to soar this year.

And when budget deficits soar, there are no buyers left of that debt, other than central banks. So I'm predicting we're going to have a protracted bout of stagflation, or recess-flation, whatever you want to call it, the likes of which we have never seen before in the world.

Mike Gleason: I want to talk to you about inflation here for a minute, because I know you got lots to say on that subject. Now, we had Steve Forbes on our program about a month ago, and he said it's really a travesty that you have someone like Janet Yellen, the head of the Fed, sitting there and making a decree that 2% inflation is somehow the perfect number, and that the notion that she has the authority to raise the cost of living on an American family household making $50,000 a year and increase their expenses by $1,000 every year is just simply ludicrous. So why is a little bit of inflation so good in the eyes of these central bankers, because as you've stated before, inflation is nothing more than a loss of confidence in the purchasing power of our currency… so talk about the myth of inflation being a good thing and why you disagree with this idea.

Michael Pento: Okay, so first of all, growth comes from productivity increases, and from an increase in the labor force. That is the only way you can engender GDP growth. So now, what gives the central banks of the world, and by the way, they've all mysteriously adopted this ethereal 2% inflation target from where, I don't know, but can tell you why. The idea that these central bankers really believe, that somehow, 2% inflation is a magic number and 2.5% would be really bad, but 1.5% would be really bad as well, and god forbid we had stable prices, that's really much worse. I don't know where that comes from, and I don't know why the public has accepted that myth, that specious logic, with such alacrity. There is nothing in economics and mathematics or philosophy that would dictate that a 2% degradation in the purchasing power of a currency is better than zero, because there's nothing about inflation that would increase productivity or labor force growth. It doesn't increase population, and it doesn't lower taxes and spur on the entrepreneurial spirit of the citizenry.

There's nothing about a 2% inflation rate is magical. I'll tell you what, why I believe, I'm convinced why they're doing it. These central bankers are aware that under a deflationary scenario, tax bases would erode significantly. And if tax bases erode significantly, and asset prices are falling in tandem, there is no way to pay or service the debt outstanding. And if that's the case, they have to find a straw man, or an artificial excuse as to why they're pursuing an inflation target. So in the case of Japan, which I wrote about recently, instead of paying 15% on their publicly traded debt, the cost of servicing their debt, if interest rates just were to normalize back to where they were prior to 2008, which is about 2% on the belly of their yield curve, they'd be paying 60% of all federal revenue, just to service the debt.

Now when you get to 60%, that's not only devastating to the economy, it probably means that the buyers of that debt will know that you can never pay back the principle, and then it'll be a carnage, a debacle, in the bond market. That is what global central banks are doing. That is their motive, that is their impetus, and that is their rationale. They have to find an excuse to constantly lower debt service costs. They do that by perpetual QE, and even in the United States, even though QE ended, we are still maintaining the size of the Fed's balance sheet, which is about $4.5 trillion, which means we're rolling over debt constantly. Why? Because if central banks stepped away, bond prices would collapse, yields would soar, and the entire financial system would collapse in a very short amount of time.

Mike Gleason: We have news coming out of both Europe, and now in the U.S., where there's a call to eliminate the larger paper money denominations as a way to dissuade criminal activity, which I'm sure we both agree is a bunch of hogwash. But that very idea, I think, sort of lends itself to the notion that the central planners around the world are working in concert with one another. So with that said, and I'll ask you to comment specifically on the war on cash here in a moment, but first off, is it possible that the U.S. Fed could somehow not enact a negative interest rate policy while the rest of the western world is?

Michael Pento: I think that's unlikely, Mike. I think there's sort of a zeitgeist group think that is predominant among central bankers. They know each other, they talk all the time, they meet in Davos, they work closely with Madame Lagarde and the IMF. So it's a concerted effort to do the same thing, and that's why I never bought into the idea that Ms. Yellen would be able to raise interest rates while the rest of the world was still highly engaged in QE and expanding their programs. So the truth is that the reason why we are going to have a negative interest rate in the United States is the same reason they have one in Japan, and in Europe, and why 25% of all sovereign debt displays a negative yield.

Even in Japan, which a bankrupt nation, which has an inflation target of 2%, which has a quadrillion Yen in debt, which is 250% of their GDP. Their sovereign note yield going out ten years, which means for every year going out ten years, you have agreed to pay the government a negative yield. You are going to lose money in nominal terms, and especially in real terms, going out ten years. Why are they doing that is because, as I said, they cannot afford to service the debt in any other regard.

Now, why are we going to have a war on cash? For this reason: If you have negative interest rates in the bank, and suppose it's negative 0.01 or negative 0.05, it's not such a big deal. Yes, you're losing principal, but it's not an earth shattering condition.

But to get their odious inflation targets, in order to achieve those targets, they're going to seek negative interest rates. If they're going to push interest rates minus 10% or more, they have to outlaw cash. It has nothing to do with, they call this the, "Bin Laden Hundred Dollar Bill." Somehow, that enabled the Twin Towers to fall, by having hundred dollar bill in currency in circulation. This is ridiculous. It's ludicrous. They want to ban cash so you have no choice but to keep your money in the bank or to spend it. That will escalate the velocity of money, it will induce people to borrow more money, and they will get their much beloved inflation target.

However, and I wrote this as well, not too long ago, once central banks achieve this goal of 2% inflation, inflation's not going to stop on a dime, they're not sticking the landing at 2%, it's like landing a jet airliner on a driveway, as I like to say. You can't just stick an inflation target at 2%, it's going to go from two, to three, to four, to five, to six, and eventually, double digits. In order for them to stop that inexorable climb in the rate of inflation, they have to change policy, and that means that all of these central bankers will at least, hopefully, stop their QE and negative interest rate policy. But think about the disaster that's going to incur.

When you so much warped the yield curve artificially low, and when you have warped asset prices far beyond the underlying economic fundamentals, when they make that announcement that they're going to start to fight inflation, they're going to go from deflation fighters to inflation fighters, then you're going to have an economic calamity, the likes of which we've never seen. So here's the problem, either we're going to have a hyper-inflationary depression, or a deflationary depression, but unfortunately, a depression is where all this is headed.

Mike Gleason: Obviously, we've seen the metals do quite well, one of the few bright spots among the financial assets so far this year. So has the rise in gold, and also gold stocks, in the face of all the stock market volatility perhaps confirm the notion that gold is the ultimate safe haven, or perhaps, that maybe people are viewing it as a safe haven once again?

Michael Pento:Well, much to the chagrin of Jeff Curry, who has, I think he still has like a $1,000 price target... Goldman Sachs is the most horrific firm, they really have no clue what's going on, though they try to manipulate and dominate markets, they really are clueless. Gold is not a chaos hedge so much, it is not a risk asset. It is what it always has been, it is a hedge against negative, real interest rates. Now, I will tell you this: If you're starting out, if you're starting point is negative nominal rates, and as I said, 25% or $7 trillion worth of global sovereign debt fits that category. Nominal rates are already negative. And then, when you subtract inflation, you're highly negative. So you have negative real interest rates that are falling, they're negative and getting more so.

That is the reason why gold has caught a bid, and these mining shares that have been beaten down mercilessly for three or four years on the notion that the U.S. economy was going to be healed, and that Janet Yellen, or whoever's head of the Fed, was going to be able to raise interest rates with impunity, without any economic mal-effects. That myth has been completely shattered. And that is why you're having such a huge rebound in gold mining shares. And the more negative nominal rates pervade across the economy, and the more we continue to see central bankers, and you'll see this about two weeks from now, Mario Draghi is going to increase QE, and he's going to expand the array of sovereign debt that he can buy from his member countries. He's going to lower the covenants, he's going to do everything he can, as well as Shinzo Abe in Japan, and Janet Yellen will also join in that inflation fight. She's in it now, and she'll step up her attack against deflation. As these central bankers continue to pursue inflation, and lower nominal interest rates, gold will continue to shine.

Mike Gleason: Expanding the point a bit, I've heard you say in the past how highly uncertain economic times are usually a perfect environment for gold and metals prices, so it sounds like you still feel that way, and you envision all the turmoil that you're predicting this year and next year potentially really providing a lot of fuel for the gold market?

Michael Pento:I do. And as I said before, the rocket fuel for gold is the same as it's always been. It's a lowering of the value of the purchasing power of a currency, and there's nothing better to accomplish that than negative nominal rates and falling real rates. That's exactly what we have. You have to remember, inflation isn't about a Phillip's Curve function where people are working and producing and causing prices to rise. That's the Janet Yellen and every central banker is following is a Phillip's Curve model of inflation. Inflation is all about this: It's when the market loses faith in a currency's purchasing power. That is almost always due to its dilution. So you dilute the currency, you lower nominal rates to zero, you take them negative, you expand QE, you expand the monetary base, you pursue an inflation target, and of course, what are you going to do in that situation? Are you going to keep your money in the bank, and guaranteed to lose principle, and guaranteed to lose your purchasing power? Or, just lock it in, take you whatever ounces of gold you have, and know that that will always be there for you.

Mike Gleason:Well, Michael, as we begin to close here, there's obviously a lot of turmoil, a lot of uncertainty. For those that are concerned about what they're seeing here, what kind of advice do you have, because I know you see a lot of potential in these sort of environments. Talk about that as we begin to wrap up.

Michael Pento:Well, I record a podcast. I offer it for $50 a year. You can come to the website, it's PentoPort.com. You can subscribe to that, I give people actionable advice on a weekly basis. I actually run money here at Pento Portfolio Strategies. Currently, we are about 20% short the market, we've got about a 20% position in gold, we have maybe 5%. 10% in an oil service sector, and we have a lot of cash. Because you're going to get a chance to pick up this stock market at a 30 to 35% discount from where it is today, in my opinion. I really feel that 2008 is going to be relived in 2016/2017. You're going to get a chance to buy internationally diversified dividend stocks at a huge discount, so I would hold a lot of dry powder and be waiting and watching for this to all unravel.

Mike Gleason: Well, excellent stuff, Michael. We always appreciate your insights, and thanks for being so generous with your time. We're big fans of yours, and really enjoy your commentary. Thanks for joining us, hope we can catch you again soon, and have a great weekend.

Michael Pento:Thanks for having me, Mike.

Mike Gleason: Well, that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more information, visit PentoPort.com. You can sign up for his email list, listen to the mid-week podcast that he talked about, and get his fantastic market commentaries on a regular basis. Again, just go to PentoPort.com.

And don't forget to tune in here, next Friday, for our next weekly, Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and have a great weekend, everybody.

Mike Gleason

About the Author:

Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.