Michael Pento: “Central Banks Have Jumped the Shark,” May Even Buy Stocks

Governors Encourage Mass Protests While Keeping Others Locked Down

Mike Gleason Mike Gleason
Interview with: Michael Pento
June 5th, 2020 Comments

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

Coming up later in the program we have a conversation with Michael Pento of Pento Portfolio Strategies. Michael weighs in on the massive increase in the Fed’s balance sheet over the last several months, amounts that make the stimulative response to the Great Recession a decade ago look like chump change.

But with that said he shares why he doesn’t see the dollar collapsing – at least not against other fiat currencies – and also talks about the critical importance of ditching passivity when it comes to investing and how those that are passive will see huge portions of their wealth wiped out. So, stick around for a very informative and important interview with Michael Pento, coming up after this week’s market update.

A violent and chaotic week in America’s cities was met with little apparent concern on Wall Street. For the most part, the stock market continued on its merry way higher.

Precious metals markets, meanwhile, are giving back some of their recent gains. Gold prices are off 2.9% this week to trade at $1,686 an ounce.

Turning to silver, the white metal rallied up to nearly $19 intraday on Monday before retreating. Prices currently come in at $17.42, down 3.3% now for the week.

It’s no surprise that silver encountered some resistance at $19. In fact, on May 26th we had pointed to that very level being the next important target for silver in our weekly News Alert that we send out via email every Monday morning.

$19 was also the high point for silver in late February before the steep selloff began. So, this week silver essentially made up for all the losses incurred during the entire virus lockdown panic, although it has pulled back since Monday.

It was a quite a huge run in such a short amount of time though. From a low of right around $12 on March 18th, silver surged 60% up through this Monday before faltering.

This is very bullish long-term, as silver is showing some real strength and sector leadership. But we would not be surprised if more consolidation occurs in the days ahead before the market makes run to $20 per ounce and ultimately higher.

Turning to the other white metals, platinum is down 3.5% since last Friday’s close to trade at $821. And finally, palladium is essentially unchanged now for the week to come in at $2,018 per ounce.

As for the more widely followed U.S. stock market, its rally hasn’t been quite as breathtaking as silver’s but it has been impressive in its own right. Since bottoming off the panic selling spree that ended on March 23rd, the S&P 500 has put together a furious 41% advance.

The stock market also rallied 40% off the 1929 crash and into 1930 before crashing a full 80% over the next two years. We bring up that history as perhaps something of an ominous sign of danger ahead.

One threat now looming is that of a second wave of COVID infections and lockdown impositions amid mass gatherings of race protesters and Antifa supporters.

Liberal governors and mayors in many parts of the country have actively encouraged these deadly protests to continue even though they clearly violate their own social distancing directives that are still being imposed on everyone else.

It’s naturally impossible to socially distance at these illegal gatherings of hundreds and often thousands of people in close proximity who are yelling, chanting, kneeling, punching, throwing, and looting.

And obviously in instances when some of the protestors instigate bloody altercations – as has been happening on a daily basis – infections can more easily spread.

It remains to be seen whether a meaningful spike in cases will result. The virus has proven to be unpredictable. And nobody really even knows if the lockdowns were effective in the first place at reducing overall infections and deaths.

The so-called public health experts have really been winging it with respect to their guidance.

Some of the same “stay at home” scolds and mainstream media outlets who shamed barbers, churchgoers, and lockdown protestors for trying to carry on a normal life have now revealed themselves as total hypocrites. They are cheering on the agents of mayhem as they take to the streets and put countless numbers of people at supposed risk of an infection.

Maybe this was all just political for them from the beginning.

As investors contemplate these continually disturbing developments, they might want to consider de-risking their portfolios. If the economy locks down again, a Great Depression scenario could be back on the table.

Of course, our monetary system works a lot differently in 2020 than it did 90 years ago. Today, the Federal Reserve can inject digital dollars into the financial system on an unlimited basis.

Not only can it do so, but Fed officials have essentially vowed to do so. They have bought up trillions of dollars in government bonds and corporate junk bonds while providing liquidity for mortgages and small business loans and who knows what else.

We very much doubt that our monetary central planners will allow banks and capital markets to collapse or for deflation to take hold for any significant period.

The real question – and one few investors are asking right now – is how high they will allow inflation to go. While Fed officials tout a 2% target, they have also explicitly stated they are willing to let it run higher than that over an extended period.

There’s no telling how high and for how long. The economy, the stock market, and the U.S. government itself – which is running a record high budget deficit of close to $4 trillion – are now totally dependent on ongoing currency expansion. The Fed simply may not be able to cut off the flow of liquidity to its dependents even when policymakers would otherwise want to tighten in order to tame consumer prices.

In this turbulent and still dangerous environment for investors, owning gold and silver remains an absolute must.

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

Michael Pento

Mike Gleason: It is my privilege now to welcome back Michael Pento president and founder of Pento Portfolio Services. Michael is 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 it's always a pleasure to have him on with us.

Michael, thanks for the time again today and welcome back.

Michael Pento: Thank you so much for having me back on Mike.

Mike Gleason: Well, Michael, it's been a few months since we've had you on last and just a little bit has been going on in the world. COVID-19 has hit the states to say the least and caused major disruptions in the economy. Governors have instituted stay-home orders. Tens of millions of people have filed for unemployment. Now we're seeing major rioting and social unrest in many cities throughout the country over the police killing of a black man in Minnesota last week.

And in the face of all that, the markets are seemingly doing just fine. Stocks are still rallying and it doesn't seem like Wall Street is all that concerned about any of this. So, let's get your take on what's going on there, Michael, because it's pretty hard to connect the dots between Wall Street and Main Street these days. Help us out there.

Michael Pento: Yeah. So nothing is going on that much this year at all, right? It's been pretty boring. The divide between the rich and the poor, which was already humongous coming into this year has grown exponentially. And you have to ask yourself the question, gee, if GDP, according to the Atlanta Fed is going to drop in the second quarter by over 52%, that is a seasonally adjusted annual rate, Mike. GDP is going to be cut in more than half during the second quarter of 2020, how in God's name could it be possible that stocks are close to all-time record highs? And by evaluation metric at all-time record highs. There are about over 150% of GDP.

Well, here's a statistic for you. It took seven years for the Fed's balance sheet to grow by $3.7 trillion. So that was from January 2008 or December 2007… the very start of when the NBER decided that we had the beginning of the great recession through January 2015. That was the great expansion in the Fed's balance sheet, seven years, 3.7 trillion.

In the last 10 months alone, it is up by $3.4 trillion. So, what's happened in seven years has happened in the last 10 months, pretty much. And when you think about that, you don't have to wonder as to why stocks are going up. This is replete all over the world. Central banks have gone crazy and they were already crazy going into this Wuhan virus crisis, this pandemic, but they have completely jumped the shark. They are printing money like Zimbabwe. They would make Zimbabwe and maybe Hungary or Weimar, Germany blush.

And no one seems to care about the depreciation in the purchasing power of fiat currencies, because they're all doing things in tandem. I mean, if there was just one country doing it, you would see a currency collapse, but every country is doing it. And by the way, Mike… I want to make this very clear… the Fed's balance sheet is now over $7 trillion. It's rising. It's going to go to nine, $10 trillion in the next few months and nobody cares. How much longer will people have faith in the purchasing power of paper money? I have no idea, but truly that is eroding quickly.

Mike Gleason: Leads me right into my next question here. In terms of the government response to all of this, so we've obviously seen some incredible stimulus already and much more is being proposed. Where do you envision that all going and what is it going to mean for the dollar? Because for the most part, we're still seeing it hold up quite well in the currency markets. Obviously it's because as you just said, every country in the world is doing this, but help us make sense of that disconnect and where you go from there with the devaluation of all paper money.

Michael Pento: Yeah. There're some people who are on record saying, "the dollar is going to collapse, the dollar is going to collapse." Well, collapse against what? That's the question you have to ask. I mean, it's a currency, you measure a currency's value against something, right? What is it buying? What is the purchasing power of the dollar? Well, I don't think it's going to lose a lot of value against the euro or the pound or the renminbi or the yen. It's just not going to happen. It's going to lose its value against hard assets, against energy, against gold, against platinum, against farm land.

That's where the dollar is going to lose most of its value, not against other flawed fiat currencies. But here's the truth, Mike, we have insolvent nations replete around the world. This was the case going into the virus. It's just gotten a lot worse. Let me give you an example. If you just give me a minute or two here, this is important. We now have a $26 trillion national debt in the United States that is up against, supported by about three trillion in annual revenue.

So, that means our existing debt is 850% of our revenue. And by the way, that revenue still leaves you with about a $4 trillion annual deficit red ink this year alone. So let me boil it down to like a household. So, let's say your household has $100,000 in income and that household has outstanding debt over $850,000. But here's the real problem, that $100,000 of income isn't enough to match your annual expenses. You're spending $130,000 per year more than your income if the household was the United States.

And making matters much worse is that this government is aggressively pursuing inflation, which will make the cost of servicing that debt go much higher. What am I saying? This is just the United States. We are a nation that is insolvent. We're going to have an insolvency and inflationary collapse of our bond market. That is where this is all headed.

And I've gotten on some things wrong in my life, Mike. I've gotten a lot of things right in my life, too… especially when it comes to investing. I have been predicting the collapse of the sovereign debt market for many, many years. I never thought that central banks would print, globally, $26 trillion worth of fiat paper to try to push and repress interest rates down to zero and below. That's what they've done.

But when that backfires… so, we already have the insolvency portion of the equation. That's done. All we need is for these central bankers to become successful and achieve inflation. That is when you're going to have the big catastrophe in the bond markets. That is when you're going to have the stock markets around the globe implode. And that is when you'll have the real greater depression begin.

And by the way, if I could just say one thing, Mike? I want to just add that if you're an active manager, you have a chance to survive. If you are a passive investor, you are going to get slaughtered with various iterations of minus 30, minus 50% of your portfolio that happen regularly because of the dynamics put in place. Because of the fact that free markets no longer are viable. Markets are now controlled by sovereign nations and central banks.

Mike Gleason: Yeah, well said. Crystallized it very well there and yeah, I think the buy and hold days of investing are behind us for sure, and people need to come to grips with that.

Well, one of the Fed economists came out this week in favor of negative interest rates here in the U.S. Now Chairman Powell has voiced somewhat of a negative opinion on negative rates in the past, but it's probably not out of the realm that we could see it here in the States at some point. Talk about what that might mean and then handicap how likely you think it might be.

Michael Pento: Well, they haven't worked in Europe, Mike. They've demonstrated very clearly that negative rates don't really help the economy and they destroy the institutions. So I mean, the Fed is in place, it has its existence because of the fact that it's there to protect banks. So I don't really think we're headed for negative interest rates in the nominal sense of the word. So, if you're asking me if we have a condition where negative interest rates will be in real terms? I mean, that's a 100% guarantee. They're here already. Negative rates in a real sense, after adjusted for inflation, they'll be here now. They're coming now. And they will be here for a very long time in the future and they will be growing more and more negative. That's a fact.

But here's the thing that you should think about. Janet Yellen, former Federal Reserve Chair said that she wants to change the rules on what the Fed can buy now. So it's not enough that the Fed is buying junk bonds and making primary loans to businesses. That's not enough for the Fed. Ms. Yellen wants the Fed to have congressional approval to buy stocks. And she wants that approval cleared away now because I believe she knows that what I said is going to pass.

What I said is coming to pass, that we are going to have an inflationary and insolvency implosion of the bond market, which is going to cause stocks to crater 80% on their own volition. And that is why I think she wants to clear the path right now, so it's smooth and clean so they can buy stocks when that happens.

Mike Gleason: The end of free markets as we know it if that happens, if we don't already have it. Goodness gracious. Well, turning to gold here. Talking about negative real interest rates, hard asset that performs very well in that type of environment. We've seen it consolidate now for the better part of the last month or two following the big sell off in mid-March as all assets classes were selling off hard in the midst of the first major effects of the coronavirus being felt in the U.S.

Anything surprising you when it comes to gold here, Michael and what do you think all these market and economic headwinds are going to mean for the yellow metal throughout the rest of the year?

Michael Pento: Well, starting in the beginning of this year, I increased my allocation from 10% to 20% in gold. I recently paired it back to 10% and I'll tell you why briefly. If you're an active trader like myself, you want to maximize the return in the portfolio and here's what's happening right now. We have a lot of optimism about economies opening up across the globe. And you have the Federal Reserve who has stopped buying Treasuries for the most part. They were buying $75 billion worth of treasuries to try to push down interest rates.

The interest rates exploded in March, went from like 0.3% to 1.2% in March. The Fed was buying $75 billion worth of these treasuries a day. Now they're only $4 billion of these treasuries per diem. And so if you have optimism about the economy, some better economic data coming out, and the Fed stepping away from buying Treasuries, you might see a rise in nominal rates and it might spike in the next few months.

So, the next two, two and a half months is what I'm predicting. That's what I think the gold market by the way is anticipating. The gold market's rise was capped temporarily because they're worried about that situation that I just mentioned. However, on the other side of that, I see the Fed coming out with the announcement that they're going to actively put a cap on long-term treasury yields. That is what I predict in the fall to occur.

Because they just can't step away from the market because they're stepping away from a market that's insolvent, which I just proved earlier on this podcast. So, if they come back in the fall, when we have a resurgence in the virus and the data gets worse and the Fed has to come back in and put a cap on rates, that's when I think gold has the opportunity to go to all-time record highs.

Mike Gleason: Well, finally, as we begin to close here, Michael, one of the reasons we have great guests like yourself on the podcast is because we both really respect what you have to say a great deal. And then also, because it's good to get the perspective of such a sharp and studied mind like yourself on how to navigate what is becoming an incredibly concerning time in history.

So with that said, what advice do you have for people out there right now? And feel free to take that any direction you wish, whether it's how to manage one's money, how to emotionally deal with the tumultuous nature of the world. Wherever you want to go with that.

Michael Pento: Okay. Well, first of all, I think you should start every day with a prayer that you do God's will. That's a great way to start the day. You try to do become the best person that God has enabled you to be. And that goes a long way to relieve any kind of depression that you might have. So, stay in faith. And then as far as the investing is concerned, you have to be an active manager. This is not the world of your grandfather's.

I'm not talking about a world where markets function freely and you could just buy and hold a diverse bunch of assets and say, "You know what? If the market goes down, my bonds will make up for the decline in stocks." Well, when the 10-year note yields 0.7%, Mike, even if it goes to zero, you're not going to make much money. You might make 7% on your bond allocation. But I can assure you that if the 10-year note goes to zero, then your 60% allocation to equities is going to go down 40%.

That would be the scenario that would cause the bond yields to fall to zero. So, your 7% in your 40% diversified portfolio is not going to save you from the 40% wipe out in the 60% portion of your portfolio. What I'm saying is you have to be an active manager. You cannot sit back and let Wall Street destroy your purchasing power and your standard of living over and over again.

Mike Gleason: Yeah, well put. Underscores the importance of a time like this to have good people by your side. You could be one of those for folks if they are inclined. So before we let you go today, tell people more about Pento Portfolio Strategies, how they can reach you, how they can follow you more closely. Do all that, please.

Michael Pento: So, the website is a PentoPort.com. My email address is [email protected]. The number here for the office is 732-772-9500. If you have around a $100,000 to invest, I'd be glad to take you on as a client and put you in the inflation/deflation and economic cycle model. Help you navigate through these tumultuous waters that are going to get much more rough.

And if you want access to the podcast, which is a weekly podcast of my thoughts on I guess a 36,000 foot level, (I) don't give specific recommendations, but let you know where the economy is going and markets are going in a general sense. It's called the Midweek Reality Check and you get a free trial. And that only costs you $50 a year.

Mike Gleason: Yeah. Well, good stuff. Hope people do that. Thanks again, Michael. All the best to you. Stay safe, healthy, and thanks again. Have a great weekend, my friend.

Michael Pento: Thank you again, Mike.

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 PentoPort.com. 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 PentoPort.com.

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.

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.