Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up Michael Pento joins me for a tremendous interview on a range of topics. Michael goes through his checklist of data points and the events that, once taken place, will fuel the next big rally in precious metals. He also talks about the key warning sign that we can be looking for that will indicate when the economic bubble to end all bubbles is about to burst. So don’t miss another fantastic interview with Michael Pento of Pento Portfolio Strategies, coming up after this week’s market update.
Gold and silver markets are once again getting overshadowed by wild price moves in lesser known metals – in particular, palladium and rhodium. Both are used mainly in emissions control devices for automobiles. And both are in extremely short supply.
A liquidity crunch over the past few days has driven an explosive spike in rhodium to nearly $10,000 per ounce. That’s nearly $4,000 higher than where it started the year and ten times higher than where it traded just a few years ago.
The rhodium, palladium, and platinum markets are heavily dependent on South African mines for supply. But recurring power outages and other dysfunctions in the country are crimping mining output.
Palladium prices shot up to $2,500 an ounce mid week in volatile trading and currently come in at $2,425 – up 5.2% since last Friday’s close and up nearly 25% so far in the early going of 2020.
As palladium continues to set records, so does its rising premium over its sister metal platinum. Palladium now sells for nearly 2.4 times the price of platinum. The opportunity for it to narrow in favor of platinum appears good given that one can often be substituted for the other in catalytic converters. When that starts to happen in a big way is another question.
But the trade has become so lopsided that a powerful squeeze on the platinum market could be triggered at any time. As of this Friday, platinum trades at $1,011 per ounce and shows a weekly decline of 1.5%.
Gold is up now by 1.0% for week to trade at $1,574. And finally, silver is unchanged for the week at $18.11 as of this Friday morning recording.
So can gold and silver investors look forward to a massive price spike in the near future like the one playing out in palladium and rhodium? Very likely, their day will come.
As central bankers continue to monetize ever-growing sums of debt and pursue negative real interest rates, the value of paper currency will go down versus hard money.
It’s a point reiterated this week by billionaire asset manager Ray Dalio. In an interview with CNBC from Davos, Dalio declared that cash is not where he wants to be.
Ray Dalio: What do you jump into when you jump off the train? And the issue is you can't jump into cash. Cash is trash, because they're going to print money. What do you do? You get out.
CNBC Interviewer #1: So what do you do?
Ray Dalio: So what you have to do is you have to have a well diversified portfolio. I think that you have to have a certain amount of gold in your portfolio, or you have to have something that's hard. I know I'm going to come out of here (and everyone will be) like “Ray Dalio's wild on gold.”
CNBC Interviewer #2: I'm going to say “cash is trash” is your headline.
Ray Dalio: But cash is trash.
There is no doubt that cash will depreciate over time. What is less certain is which assets Federal Reserve notes will depreciate against the most.
In recent years, the stock market has fared well while most commodities have not. However, even as food and energy costs have been held down, healthcare, education, insurance, housing, and other costs of living continue to move relentlessly higher.
We can only imagine what things would be like for consumers if crude oil and grain prices were going parabolic like palladium is. Since palladium only represents a small portion of the total cost of an automobile, most consumers feel no direct impact.
But they would be wise to pay attention to what’s happening in the palladium market – because it may be a precursor to what will happen in other markets in the years ahead. Declining oil rig counts and chronic under-investment in copper mines, for example, could lead to supply crunches that put enormous upward price pressure on all manufactured goods.
A reemergence of inflation fears would, in turn, drive safe-haven investment for gold and silver. As we’ve said before, it will take more than a geopolitical scare to drive a major trend.
The big scare this week: the deadly Coronavirus in China. It has the potential to spread rapidly and perhaps even drag down the global economy if it is not contained. There is currently no vaccine for the virus. As investors weighed the risks of a possible global pandemic, the stock market experienced some gyrations.
Whether the Coronavirus remains a front page story in the weeks ahead remains to be seen. But long-term precious metals investors can benefit from focusing on the underlying drivers for gold and silver that the mainstream media isn’t yet covering.
Well now, for more on what the mainstream financial media isn’t covering because they’ve blackballed guests like the man I talked to this week, let’s get right to the week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome back Michael Pento, President and founder of Pento Portfolio Strategies. Michael's a well-known money manager, market commentator and author of the book, The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. He's been a regular guest with us over the years and we always love getting his fantastic insights.
Michael, thanks for the time again today, and welcome back.
Michael Pento: It's always a pleasure to be on with you. Thank you for inviting me back on the program.
Mike Gleason: Well, we're having a hard time seeing a big move higher in metals prices until one of two things happen. We'll start here. The first would be a pickup and safe haven demand. In our view there is too much investor complacency given the circumstances as has been the case for a while now, equity market valuations are sky high. Now we've got an election coming up, and there is at least some chance our next president will be an avowed socialist. This does not seem like the time for investors to be all in on risk trades, but we suppose the only thing that really matters is the Fed. They are going to do whatever it takes to keep the party in the stock markets going.
But what are your thoughts? Are we likely to see the markets get a wakeup call anytime soon or is the Fed likely to maintain complete control for the foreseeable future? Let's start there.
Michael Pento: What a great question. Geez, you hit me over the head with a, a big anvil. That's the $20 trillion question. I mean, can the market continue to defy gravity – and it is defying gravity, make no mistake about it. If you look at the total market cap to GDP, I look at the Wilshire 5000, that doesn't have 5,000 stocks anymore. I think it's like 3,500 but it's the widest measurement of stocks, their market cap, to the underlying economy. That ratio is now 155%. Outside of March of 2000 when it was 145 or 148 around there, it's never been near this. The average ratio is 0.8%... 80% or 0.8 in the ratio. So 155%, 1.55% above where the underlying supporting economy is. I mean it's never been anywhere near this outside of that epic bubble in the NASDAQ debacle where the NASDAQ lost 80% of its value.
So that is where we are. We have S&P 500, year-over-year earnings are going to be negative. Margins are shrinking. Four quarters in a row of negative earnings per share growth, and profit margins are shrinking. You have the most overvalued market on the planet, that the planet has ever seen, and yet you wonder how much longer can it go? Well, think about it. The Fed said they were going to raise rates in December of 2018. Do you remember Jerome Powell said, "Hey, we raise rates and we're going to 3.5% on the Fed funds rate, and we're going to continue to drain our balance sheet. We're going to continue quantitative tightening." How long did that last, Mike?
They did a panic about face, took rates down to 1.5% on the overnight borrowing costs for banks, and they went back into QE. They're doing $60 billion worth of money printing every month, and they have a repo facility on top of that. Hundreds of billions of dollars trying to keep the money markets liquid. So the Fed's balance sheet was going to be drained back to normal, it went from 400 trillion from 800 billion. It was supposed to go back down to 800 billion or around there, but guess what? It's now increased by a half a trillion dollars since mid-September.
So why is the market in a bubble? Why is the bubble getting bigger? Is because the Federal Reserve, and the ECB, and the Bank of Japan, and the Bank of India, and the People's Bank of China, they're all in a frantic to keep this artificial bubble alive. The only question I have is, you asked me, when is it going to end?
I'll tell you when it's going to end. I can't tell you the date but I have a model that lets me know when to short the market, and believe me when I tell you, this crash is going to be something like we've never seen before. It could even dwarf the NASDAQ debacle of 2000, from 2000 to 2002.
I'm looking for a bust in junk bond yields. When junk bond yields implode, because that's the nucleus of the crisis, that is when you'll see me go net short the market in my portfolio, in the inflation/deflation and economic cycle model. And when will the junk bond market implode? Whenever the U.S. enters a recession and/or, because it could be both, and/or inflation begins to run intractable. That is when the market will implode. That is when we'll have our reality check. That is when hopefully we make a lot of money for our investors while the chaos runs rampant around the world.
Mike Gleason: Sticking with the stock market theme here, you just published a note talking about Zombie Companies. What we're seeing in the stock markets is truly amazing. You talk about defying gravity. That's a great way of explaining it. You observed, in this piece, that stocks are at an all-time record highs, but at the same time we have 40%, nearly half of listed companies losing money. And 97% of CFOs in a survey published by Deloitte say a slowdown is either already started or will start this year. Talk a bit about the total and complete disconnect between stock prices and reality.
Michael Pento: Well, as you mentioned, there's a record number of IPOs that don't make any money. So, if you look at the trailing 12-month earnings, 40% of listed U.S. shares don't make any money. And if you go back, it's not just 12 months, if you go back three years, 30% of all listed companies haven't made a nickel in the last three years and nobody seems to care.
This is the truth… Central Banks on a global basis have the global economy and global markets in the ICU unit, and they are on the life support system of money printing. I'll give you an example. So, let's look at the global debt scenario. Global debt is now $255 trillion, Mike, that's up 50% since 2008. Government debt is up 80%, nearly 80% since 2008, the great credit crisis. But you ask yourself, what is the Portuguese, for example? The Portuguese 10-year note yields in this tsunami of new debt that's been issued?
You know, back in 2000 as well, the PIGS, remember the PIG countries, their debt, Greek debt, the yield was 40%, Portugal and they were up at double digits. Italy, Greece, Ireland, Spain. The Portuguese 10-year note yield is 0.4%. Now on what planet does that make any sense at all? I mean, let's just do a thought experiment for a second, Mike. Let's just say that you knew that tomorrow the ECB, the Bank of Japan, and the Fed were going to make announcement. The announcement is that we will be ending QE and we will not buy when the assets mature… we will not roll over any more of that debt, corporate debt, sovereign debt, all that will be rolled off. What do you think would happen to the stock market? I think that it would be lock limit down.
Circuit breakers would be hit for many consecutive days, shutting down the exchange eventually. That's what will happen. That's the truth. So central banks have no choice, they're trapped. They have no choice because, the world was ending in 2008, instead of taking our medicine then and allowing for a deflationary depression to wipe out all the imbalances, we levered up on everything. We increased debt on the government side by 80%, as I mentioned, $255 trillion, 330% of global GDP, total debt. We’ve created a massive corporate bond bubble, which I'd love to touch on in a second, unprecedented in the history of the planet. And interest rates, instead of being at five and a quarter percent like they were in the start of the crisis in 2008, they've gone to zero around the world, and in some cases negative, and have stayed there for a decade or more. And, of course, the consequences of that are massive intractable asset bubbles.
So, they're trapped, there's nothing they can do. They're going to keep on printing money because they have no choice until the market decides that fiat currencies no longer deserve our trust, that inflation will run intractable, and then the junk bond market will implode.
And when that happens, what are you going to say to the central bank? You've reached your asinine 2% inflation target, even though we're already there, that's not good enough for them. The way they measure it, they want it at three or four, then they'll be happy. Of course, by that time inflation will be running their double digits, and then they're going to say, okay, we have intractable inflation and bond yields they’re starting to go crazy. They're spiking uncontrollably. And the central banks are going to do what about that, exactly?
Are they going to print more money to combat an inflation problem? Are they going to then purchase every single fixed income asset in the globe? Corporate debt, municipal bonds, all sovereign debt. It doesn't make any sense. That's where we're headed.
So, the problem here is you have to be on the vanguard, very vigilant for a recession in the United States, or for inflation to run intractable, that is when this thing will end. And it will end, it will go supernova. It's not going to end in a quiet whimper.
Mike Gleason: Obviously the bigger the bubbles get the worse the bursting of that bubble if and when that does come, and it's probably more a matter of when, not if at this point.
How about metals? Michael gold had nearly a 20% gain last year. Silver lagged a bit but still was up about 15%. Do you envision 2020 being better or worse or what compared to 2019 in the metals?
Michael Pento: Well, you had a big rise in the dollar, about two years ago starting. And then we see it had a nice run in 2019, but it is starting to top out and rollover. When I look at gold, I look at three factors. I want to see rising debt as a percentage of GDP. Check. I want to see a dollar that is rolling over, or at least topping out. Check, you're getting that. And then, of course the most important thing is falling real interest rates. And usually these things are all part and parcel with a U.S. economy that is faltering. Right now I have 10% of the portfolio in physical gold doing very well, I'm happy with that. But you want to add miners to that when you see all those three things I just mentioned taking place.
So, the missing piece for me to get really heavy into miners, and even increase my position into physical gold, is I want to see the U.S. economy really take a dive to the South. So I'm going to need to see not only the manufacturing ISM, which is already plunging, I want to see the service sector ISM catch up with that.
I'd like to see that the initial unemployment claims spike above the 200,000 level where they've been for a long time. And that is when I'll know… and I have eight more components to my economic cycle model… but those type of things will let me know when it's time to not only get net short the stock market in the portfolio, but also to increase my exposure to gold and the miners.
Mike Gleason: Well, as we begin to wrap up here, Michael, any final comments? Some other things that you're looking for that you think investors ought to be thinking about and watching for? Let's hear some of that before we close.
Michael Pento: Well, I mean I just want to mention, the middle-class continues to be eviscerated. I don't think the central banks of the world quite are on their side. They're on the side of (JPMorgan chairman and CEO) Jamie Dimon, et al. So if you look at the combined assets and liabilities of the bottom, 50% of Americans, for example, it's now become negative. 80% of Americans now live paycheck to paycheck because they spend so much of their income on food, clothing, shelter, energy. But the richest among us get to enjoy multiple homes and big stock portfolios. So that's a trench in gap is getting wider and wider.
And I just want to say a couple of things about corporate debt. I mean, business debt surged by 60% since 2008. Triple B, the tranche of investment grade debt that's on the lowest rung, comprises 50% of all investment grade. That yield is just above 3%. It's never been this low in history. The construction of corporate debt, the record net debt as a percentage of EBITDA, so it's the worst composition of corporate debt. The amount has surged, the levels of debt has surged, and the yields have never been lower. So, that's the nucleus of next crisis.
Please keep in mind, if you're not with me as an investor… also, you know, you can become a podcast subscriber, so I'll let you know about a lot of this stuff on a higher level…. but please keep a close eye on the investment grade and junk bond corporate debt market, not only here in the United States but around the world. That is what you should be myopically focused upon, that'll be your warning sign. That'll be the canary in the coal mine to let you know when it's time to sprint for the very narrow emergency exit.
Mike Gleason: Well, we'll leave it there for today. Thanks so much again, Michael. We certainly appreciate the time and look forward to following these markets with you as we go through the year here in 2020. Now before we let you go, please tell people a little bit more about Pento Portfolio Strategies, where they can get the podcast, for instance, and follow you more closely.
Michael Pento: Sure. The podcast and my website is Michael Pento:. On that website you'll be able to avail yourself of a free trial, five-week trial of my podcast called the Mid-Week Reality Check. I give you a whole bunch of data that Wall Street isn't very proud of so they don't tell you about it. But it's all real, it's all there.
I give you some high-level functionality on that analysis so you can understand when you should be long stocks, and when you should be out of the market. And of course, if you have a $100,000 or around that, you can join me in my firm and I'll take care of your money personally. And my goal here is to participate in the bubble while it lasts, but most importantly to protect and profit.
I will personally make sure, and do the best I can, to make sure you're not only protected when this crisis comes, but you actually make money when the reality check comes. And believe me, for this great nation, the sooner this occurs, the better off it will be for all involved.
Mike Gleason: Yeah, very well put. Michael’s obviously got a fantastic handle on these markets and he's not one of these cheerleaders for the mainstream financial media. That's, I guess, the reason why they've blackballed him on places like CNBC, but we're very happy to have him on our podcast here on a regular basis.
Michael Pento: Mike, you probably have more viewers and listeners so, I'm happy to be with you.
Mike Gleason: Well we appreciate it. All the best to you in the new year, Michael, and thanks again. Have a great weekend, my friend.
Michael Pento: Thank you.
Mike Gleason: Well, that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more info please visit Michael Pento:. You can sign up for his free email list, get a free trial of his weekly podcast, and get his fantastic market commentaries on a regular basis. Again just go to Michael Pento:.
And don't forget to tune in here next Friday for 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.
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.