Silver Institute Forecasts $30 Silver on Record 2024 Demand of 1.2 Billion Ounces

Mike Maharrey: I am Mike Maharrey. I'm an analyst and content producer for Money Metals, and I'm here today with Michael Pento, who serves as the president and founder of Pento Portfolio Strategies. He's also the author of a book, The Coming Bond Market Collapse, and I'm excited to talk to him today. Michael, how are you doing?

Michael Pento: I'm doing fine, and thank you for having me on the program, Michael.

Mike Maharrey: So to kind of kick things off, can you just first give the audience, who might not be familiar with you, a brief overview of your background, how you got into this crazy world of investing?

Michael Pento: So we'll fast-forward then, I guess to when I started, I started at a discount brokerage house called Scottsdale Securities, and this was the early 90s, and then I quickly moved to New York Stock Exchange in the middle to late 90s. Then I started my own firm in 2012 after, let me just reverse that for a little bit. I actually worked for a company called Delta Global and Europe Pacific Capital as an economist there. And I was regularly on... I wrote a white paper, dissertation, whatever you want to call it in late 2005, talking about the housing bubble and how it was going to burst and affect the economy. And that paper was picked up by the Wall Street Journal, and that paper, which was picked up by the Wall Street Journal, was then read by the producers at the Kudlow and Company program on CNBC. And then I became a regular on CNBC.

They needed a straw man to knock down, and I always like to ride it on and everybody would laugh at me. It's like, "Oh, this guy is an idiot. Obviously unqualified to even be on television. What does he know about housing?" But God works in mysterious ways. So maybe I ended up helping people avoid getting run over by a steam roller because home prices dropped 33% and the market lost 50%, as it has a tendency to do as of late. And then I started my own firm in 2012. I launched my inflation/deflation economic cycle portfolio in 2016. And the predicate there is how do I invest in bubbles and participate in them safely, but know when to get the heck out of harm's way and sprint for the emergency exit? So that's the predicate behind the understanding and launching the inflation/deflation and economic cycle portfolio. And now I'm on the show with you.

Mike Maharrey: Awesome. Well, this is the highlight of your career right here. I have to tell you.

Michael Pento: This is the pinnacle.

Mike Maharrey: So you were one of those handful of people who actually saw what was coming down the pike. And I think that alludes to the fact that you don't have to know anything about housing if you understand monetary policy and the way the powers that be create these bubbles in the boom/bust cycle. And it's fantastic that you've got an idea, or a system in place, to take advantage of. Because it's the world we live in, and we can rail against the Fed and the government all we want to, but they're going to keep doing what they're doing. So it's incumbent upon us if we want to protect our wealth and grow our wealth to be able to operate within that paradigm.

Michael Pento: Well, you had me versus Ben Bernanke, who... Obviously I don't have a PhD in economics, but he has one and he's surrounded by about 80 of them. And doesn't seem to help him very much because he said that the subprime mortgage crisis was contained.

Mike Maharrey: Yes, he did.

Michael Pento: After claiming that there was no crisis in the subprime mortgage, and if there was one, it wouldn't spill over to the regular economy. So it helps to have a reasonable amount of intelligence, a whole heck of a lot of hard work, and to not have an agenda, Michael. You just can't have an agenda. His agenda was to... His agenda... Like of all Federal Reserve officials, this cabal of money printing maniacs, their real purpose for existence is to protect and bail out banks, it is not to protect the poor.

Mike Maharrey: Right.

Michael Pento: Let's make no mistake about it. The poor or the lower two quintiles of the United States consumers, they can't afford a house any longer.

Mike Maharrey: Correct.

Michael Pento: And how did that happen? How did home prices go up 20% two years in a row post COVID? That happened by osmosis? No. The government locked the doors, told people you couldn't go out of your house, you couldn't produce anything, and then printed four and a half trillion dollars, and handed 6 trillion of it, because they borrowed some too, and handed out to people, checks in the mail called helicopter money. And then wondered how... Why is it that we had, the way we calculated here, 19 to 20% inflation? Highest we've ever seen in this country. And four years after COVID, we still have 3% inflation, over three, which is 50% above their asinine 2% target, as I like to say.

Mike Maharrey: Right. Well Michael, inflation was transitory. Didn't you get that memo? I guess we abandoned that narrative a while back.

Michael Pento: Michael, we haven't seen anything yet because there's going to be another crisis coming. And the reason why I say it, it's not because I'm some Pavlovian bear, I'm not that. It's just that there hasn't been anything remedied. The conditions have gotten worse. So there's been no de-leveraging. I look at this figure, I'll give you a couple of figures. Total non-financial debt, as a percentage of GDP, reached 227% prior to the global financial crisis in 2007.

Mike Maharrey: Right.

Michael Pento: That figure is now 263%. And so don't tell me all this debt doesn't matter when interest rates have gone from zero to 5.3% on the effective Fed funds rate. It matters.

Mike Maharrey: Of course it does. And we're seeing that, I think, you and I are certainly seeing it, I think if you take the time to look at what's going on. It's pretty apparent that... I say this all the time. People are worried that this higher interest rate environment might break something in the economy. I argue that they broke something in the economy more than a decade ago when they pivoted into this perpetual artificially low interest rates and the loose monetary policy and all of those things. But we have a narrative going on today, right? The narrative is, price inflation, basically under control, the last CPI report, not withstanding, or at least they'll say it's trending in the right direction. And the Federal Reserve is going to start cutting interest rates soon and the economy is going to glide into this mythical soft landing. What is your gut reaction to this storyline?

Michael Pento: Okay. So first of all, let's just talk about what you just mentioned about the Federal Reserve and their interest rate policy. They have destroyed the middle class in this country. If you look at... David Stockman does a lot of good work on this. If you look at the relationship between the top 0.01% and the assets they hold, and compare that to the percent of assets that the lowest portion, the lowest quintile of the country, the yawning gap has never been more [inaudible 00:08:02] It solely exists because of the Federal Reserve. So let's go back to your point. One more point about the Federal Reserve before I move on. People say, and I used to have a fight with Steve [inaudible 00:08:14] on CNBC about this all the time, and I used to say, we don't need the Federal Reserve. He said, "Well, what would you do?

How would we function?" As if the Federal Reserve was around when Moses got the 10 Commandments. We didn't have a Federal Reserve in this country until 1913. We had a wonderful economy before that happened. And if you allowed the money supply, the base money supply, which is what the Fed basically controls, if you allowed the base money supply to grow commensurate with a mine's supply of gold, which happens to be commensurate with productivity and population growth, you would never have an inflation problem in this country.

Mike Maharrey: Correct?

Michael Pento: But when you expand the M2 money supply by 30%, 40% in a year, you're going to have a huge problem with inflation, because the GDP growth can't keep up with that.

Mike Maharrey: Right. And that is, by definition, inflation. I think people forget that. They focus on the rising consumer prices. The inflation is this increase in money, the rising prices is a symptom of that. They've conflated those terms, I think, on purpose to obscure where the problem actually lies.

Michael Pento: Here's where the rubber actually meets the road with inflation. So of course inflation is increasing the money supplied and money supply is inflated. But even more important than that, in my 33 years of doing this, is what the consequences of doing that, the consequences of that inflation is it serves to destroy the market's perception of the purchasing power of the currency. And that's when you get inflation, is when people... If you hand people money and they go out and purchase capital goods with that and increase production, it's not just a bad thing, but when you hand people money and people understand, well wait, I'm not going to invest this money. I'm not going to create capital goods with this money. I'm going to consume with this money as quickly as possible because tomorrow it's purchasing power is going to be destroyed. That's when you get into this hyperinflation.

And here's the problem, Mike, if I just can touch on this. The next time we have a problem in the economy, the Fed is going to have to cut rates substantially and quickly in the next 24 months, because I think the soft landing is BS. And the reason why it's BS is because... I have to just touch on this, one point I want to make. So the Fed started cutting rates in 2007, and it wasn't until a year after they started cutting rates that there was a major problem in the economy and in the housing market. I think the Fed's going to start cutting rates, probably in the next, say around May or June. But the economy might not melt down until sometime in 25. I think it could be before that. But even if it was 25, you have to look at history and show what happens when the Fed raises rates from 1% to five and a quarter, as they did from 2003 to 2006. And when they raised rates from 0% in 2022, 2020... When they started in 22, right? I lost my track. I believe it was March of 22.

Mike Maharrey: Yeah, I think you're right. I think that was the first hike.

Michael Pento: So they went from 0%, off the 0% bound in March of 22, and they stopped hiking rates in the summer of last year at five and a quarter, five and a quarter to 5.5, which is effective. Fed fund rate is 5.3%. It takes some time, about a year, for that to filter through the economy. So we haven't seen the effect of these interest rate hikes yet. And I hate to get a little bit in the weeds, Mike, but the reverse repo facility is actually money from banks, this Fed credit that was sitting fallow on the Fed's balance sheet out of the economy. That has been coming... That was at two and a half trillion dollars, that reverse repo facility. That money has been pouring into the economy and offsetting the Fed's quantitative tightening program.

There's now about $500 billion left in the reverse repo facility. That money will be run dry around late March or early April, according to the vector of the decline of that facility. On March 11th... So let me just finish that thought. So when that happens, there'll be no more of this liquidity pouring into the economy, and then that's when QT will actually begin to bite and affect the liquidity that's available for [inaudible 00:13:16] gambling in the stock market, and gambling on Nvidia, and gambling in the bond market, which we could talk about that later too. I know you want to get to that. So on March 11th, which is not too far away, the bank term funding program expires. I called for a recession to happen in 2023, and the recession was beginning to manifest. And I say that because the entire regional banking system went into meltdown mode. And it was bailed out by the printing of these money printing maniacs by a $400 billion, they printed in two weeks.

And then they said, "Hey banks, I know you hold a lot of... Because we raised rates from zero to 5% in two years." I'm sorry, way less than two years. "All of your assets are underwater, mortgage backed securities, commercial mortgage backed securities, treasuries. They're all underwater. And it's breaking the banking system and the yield curve is inverted, and I understand this, so I will take all of your assets at par value even though they're at 70, 80 cents on the dollar, and I'll give you all that credit, a hundred cents on the dollar, and I'll hold them from you for a year. And you can go out and gamble on Bitcoin if you want to, and bonds and an Nvidia and the AI stocks if you want to." On March 11th, the banks have to hand back to the Fed a hundred cents on the dollar. They're going to get their mortgage backed securities, they're going to get their treasuries, they're going to get the CMBS back too. And it's more underwater today than it was in March 2023.

So tell me how that's going to go. So I don't believe the soft landing narrative, because we have the lag effects of raising rates. We have a bankrupt regional banking system. In fact, the whole financial system is under duress. That will be exposed. The veil will be lifted on that in March. We have the reverse repo facility running dry as well. And we have all the debt that we have plus some that we had going into the great financial crisis. And I'll make one more final point, is that the market value of equities, as a percentage of the underlying economy, has never been higher. Prior to 2020, before we engaged in helicopter money, it was below the current figure of 180%, total market cap of equities as a percentage GDP. It has never been higher outside of that small area that we had in 2021. So it was higher than it was by a lot before we had 1929, the Great Depression. Higher than it was in 2000. And higher than it was in 2008 by many, many, many percentage points, like dozens of percentage points.

Mike Maharrey: Well, you and I are on exactly the same page in terms of how we view the trajectory of things. Before we wrap up, I do want to touch on bonds, because after all, you did write a book about it. The title resonates with me, but I have to admit that they seem to keep managing to float things down the river a lot farther than I expect them to. I'm a big fan of Jim Grant, I imagine you probably are too.

Michael Pento: I am.A.

Mike Maharrey: Nd he's argued that we are on the cusp of a generational bear market and bonds. And he relies on historical trends. He looks back at these 30, 40 year cycles in the bond market. Totally makes sense. And obviously this would be a huge problem for the US government. They're already having a huge problem. You can look at the interest expense right now. They're paying more for interest expense than they are for national defense, which is insane.

Michael Pento: Trillion dollars.

Mike Maharrey: Yeah, it's insane. So when you look at this, obviously there are huge problems in the bond market, but a skeptic would say to you, because when we're talking about a bear market, people have to understand that we're talking about the price of bonds dropping and concurrently yields rising. So we're talking about higher interest rates. And people just say, "Well, the Fed can fix that because they're going to cut rates, so we really don't have to worry about this." Why don't you think the powers that be can get the handle on the... I guess a bond bubble is probably the best way to look at it.

Michael Pento: I wrote the book in 2013. It didn't say the bond bubble is going to burst that year. It said that this is where we're inevitably going to head. The predicate on that book was that eventually we're going to break the back of deflation, which was the problem. And I'll put that... I'm not on video, but my hands are in quotations. The "problem" with deflation. I think deflation is a wonderful thing.

Mike Maharrey: Oh my gosh, prices are going down.

Michael Pento: I think a mild deflation is wonderful.

Mike Maharrey: Right. You should expect it with a... Yeah, as production increases.

Michael Pento: It's a natural byproduct of productivity. No one was complaining when Henry Ford's model T brought the price of automobiles down. It's like, "Oh my gosh, I wish they were more expensive."

Mike Maharrey: Yeah, I sure do wish I could pay a thousand dollars for a 24-inch TV again, right?

Michael Pento: Yeah. But that's what happens when you have the horrific cabal called the Federal Reserve or all central banks, all fiat currencies suffer the same thing.

Mike Maharrey: Sure.

Michael Pento: But the problem now is we have... So from 1981 all the way to 2020, the problem, the salient issue was well deflation. The Federal Reserve wrote books about this, "How do we get ahead of this deflation? Oh my gosh. So we can't create inflation by what we do." And you ask yourself, "Well, why do they need inflation?" Because we have a bubble economy. Wealth is derived... This is why we hate the organization of the central banks so much. Central banks. Because they want to have 2% inflation, gives them a lot of cushion to keep asset bubbles afloat and to keep the stock market rising. It's not in real terms, it's inflation. Your house, which is a degrading asset, goes up several percentage points above inflation. And that makes people happy because then it creates wealth.

Mike Maharrey: Yeah. It's the wealth effect.

Michael Pento: It creates the illusion of wealth. Not for renters.

Mike Maharrey: Right.

Michael Pento: Not for people who don't have a huge 401k plan. So that's the [inaudible 00:20:15] and growing gap between the wealthiest of us and the poor. And you can't run an economy without a vibrant middle class. But let's just talk about bonds. Okay. So we have $2 trillion deficits, debt to GDP at a 134, 135%. It's higher than ever, even higher than World War II. $2 trillion deficits in an economy that's supposedly enjoying full employment. So during recessions, the deficit tends to rise by triple, the deficits tend to triple. So you have a situation now, that if I'm correct, and we're going to have a recession, and that's when income to the treasury plummets. And that is when the automatic stabilizers kick in, unemployment insurance, you can have a deficit that's five, six trillion dollars easily per annum. So that's a massive amount of supply.

So when you look at the long end of the yield curve, what usually happens in a recession, Mike, is that the Fed drops the interest rate on the short end of the curve, the money markets, and treasury bills drop along with it because they compete with Fed funds. Goes to 0%. And the long end tends to come down too. And that's part of the healing process because people have debt, it's unsustainable. And when you have unsustainable level of debt, it's unserviceable. What happens is when you reduce the interest payment on that debt, and that tends to make the debt problem go away. You default on the debt, interest payments come down, the economy heals, and you get out of the recession.

So... Sorry for the phone. So in the next time we have a recession, there's a salient problem is, the salient problem will be that we no longer have a problem with deflation, we have a problem with inflation. We just exited, in reality, the way they count reality, 9% inflation. But in actual reality, it was 20% inflation. We still have inflation that's 50% above their target. So if we start printing money, let's just say that if we have a recession, the Fed goes back to [inaudible 00:22:50] back to QE, launches, the [inaudible 00:22:55] the TARP, the BTFB, they just unload the bazooka on the account.

Mike Maharrey: That's the fork they know, right? That's what historic history says they'll do happen.

Michael Pento: They have to do it because they have to bail out banks. So now the long end of the yield curve, which is concerned with two things, inflation, the rate of inflation and the supply of treasury, slide demand, that's the long end. Now the supply is going to go through the roof, and inflation, which is already a problem, which just exited the biggest inflation we've ever had, but still above trend, inflation, which is a huge problem, is going to cause the long end of the yield curve, the prices to drop, and yields to go up. It's not going to drop like it always does and it always has in the past. And in that case, there will be no automatic healing of the economy.

Because if you look at housing costs, I'm sorry, mortgage rates which are pinned to LIBOR now, so far, and the benchmark treasury, they're not going to come down, Mike. And if that's the case, if I'm correct, then there's going to be a condition of stagflation in this country like we've never seen before. Higher bond yields, higher rates of inflation and crippling negative economic growth. I made my case. That's the real danger. Long end of the yield curve may not drop anywhere near, if at all, like it usually does, providing no relief to borrowers, no relief to corporations. The only relief is going to become in the money markets, rising rates of inflation, and a devastating and protracted economic contraction. That's the danger.

Mike Maharrey: I completely agree with what you're saying. Great way of explaining it. I think it's poignant to point out that the Fed can force that short end down. With its monetary policy, it's much more difficult to do that.

Michael Pento: They don't control the long end of the yield curve. The long end of the yield curve is concerned with inflation and the supply demand dynamics. Now, and listen, normally the long end of the yield curve falls in sympathy with the money market rate, the Fed funds rate, but not when you have $6 trillion deficits, a tsunami of supply hitting the market. And everybody know... Mike, if we have a problem with the economy now, the Federal Reserve can no longer tell the market for our currency that they'll be able to supply us with a real federal funds rate. In other words, one that's above inflation. We'll know what happens. This happened too many times in the past. You have a habit of destroying the purchasing power of our currency, printing trillions of dollars, which, Federal Reserve officials, back when I was cutting my teeth in the business, would go out and avow, they would have promised that will never happen in this country.

It only happens in Argentinian and in Zimbabwe and maybe in Hungary. These are the countries, Weimar Germany. That's the countries, that's the time that it happened. We'll never do that here. Well, you did it here and you had the same consequences. You have the beginnings of the fracturing and the erosion of the faith in the purchasing power of our currency, and the value of our sovereign debt. And I think part two of that is going to be very devastating. And it's coming. Unfortunately, it's coming because, Mike, we have solved none of our problems. Our problems have been artificial manipulation of markets, massive amount of debt, and asset bubbles. And tell me what problem we've solved.

Mike Maharrey: We've just exacerbated them.

Michael Pento: We've made those problems worse. We've exacerbated it. We solved nothing. So that's why we're going to have another problem. And you have to know how to navigate that and invest around it. Because you can't sit here and say, well, "I have a 60/40 portfolio. I'm 60% stocks."

Mike Maharrey: Or just complain and say, "Well, they shouldn't do that." Well, yeah, that's true. They shouldn't. So with that in mind, we probably ought to wrap up at this point, but do let people know where they can find you and learn about how to navigate this in a way that will help them preserve their wealth and hopefully even increase it.

Michael Pento: So, at pentoport.com, that's the website, pentoport.com, you'll find a link to a midweek reality check podcast, which I put all my thoughts down every Wednesday night. And you can get that for a free trial, a five-week free trial. It's $50 a year, $50 a year if you want to listen to it. Actually get the valuable... If you want the CNBS spin on things, don't subscribe. But if you want the real... If you want to know why the non-farm payroll report for this past January was horrific, not a blowout number.

Well, I go through all the numbers, you know that it was horrific. The numbers you need to know. That's $50 a year. And if you have a hundred thousand dollars to invest and you're a US citizen and you qualify for the IDEC, the inflation deflation economic cycle model, strategy, I will manage your money personally and let you know where you should invest on the yield curve. When you should buy short-term debt, when you need to buy long-term debt, when you need to shorten the bond market and when you need to get the heck out of harm's way, which I think could be Q2 of this year.

Mike Maharrey: Awesome. Well, we'll send people your direction. I appreciate you taking a little bit of time to chat today, and really enjoy... You have a great way of breaking this all down in a way that folks can wrap their heads around. And I think that's important in this day and age when there's so much, I don't know, BS out there for lack of a more polite term.

Michael Pento: Yeah.

Mike Maharrey: All right, well we'll wrap this up and hopefully we can chat again in the near future. And again, appreciate your wisdom and your insights.

Michael Pento: Thanks for having me on, Mike.