Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up don’t miss another incredible interview with Michael Pento of Pento Portfolio Strategies. Michael covers a range of topics, including the evisceration of the middle class, the unsustainable debt levels and debt servicing costs we’ve reached in this country and how he – as an investment advisor – looks at markets and aims to capitalize on all of the market chaos.
So, be sure to stick around for a conversation with our good friend Michael Pento, one of the best market analysts around, coming up after this week’s market update.
As the national debt soars to yet another new milestone, gold prices are ascending toward a new record of their own.
The official debt held by the public has just ticked past the $35 trillion mark. Of course, with all the billions and trillions being spent by the government on various projects using money it doesn’t have – and the tens of trillions more in unfunded entitlement commitments – it can be difficult to keep track of just how much spending is taking place.
Joe Biden: There's a situation where there's an estimation of somewhere between 700 billion and a trillion, 300 million, billion dollars.
John Dickerson (CBS News): There was once a time, not that long ago, when the size of the national debt dominated political conversation. In 1992, when Ross Perot ran for president on that issue alone, the debt was about $4 trillion. It has now surpassed $35 trillion. It hit that number for the first time on Monday, and equates to over $104,000 per person. Financial hole is mounting quicker than most economists had predicted, that's because the money spent on federal programs recently has gone over their initial projections.
Joe Biden: Over a billion, 300 million, trillion, $300 million.
Yes, numbers so high some people can’t even seem to spit them out.
We’ve heard talk from President Joe Biden about how he is supposedly reducing the budget deficit. Politicians may lie, but the numbers don’t.
In the last year alone, the Biden administration has added an astounding three and a half trillion dollars to the national debt. So far this year, interest payments alone on the nation’s line of credit have exceeded $900 billion. That’s more than the United States spends on national defense.
Many Republican members of Congress decry the Biden administration’s spending record. But they aren’t entirely credible on the issue of fiscal responsibility, either. Most Republicans routinely vote for budgets that expand rather than reduce federal deficit spending.
Congress ultimately has the power of the purse. And only a small handful of politicians are willing to actually vote to cut government outlays.
Substantive discussions of how to tackle the debt have been virtually absent from the Democrat and Republican presidential campaigns. Kamala Harris is stuck having to defend incumbent Joe Biden’s spending record. And let’s not forget that the debt also ballooned under the presidency of Donald Trump.
Trump wants to grow the economy faster than the rate of debt growth. Were he to return to the White House, he’d also likely try to talk interest rates down to reduce the government’s servicing costs.
But the President of the United States cannot simply order an increase in GDP – let alone one massive enough to reduce the relative debt burden. Nor can he simply refinance the $35 trillion debt at a lower rate.
Trump can publicly berate the Federal Reserve chairman for keeping interest rates too high. But the reality is that for most of its existence, the Fed has artificially suppressed interest rates. Artificially low rates, in turn, encourage consumers, businesses, and governments to take on excessive leverage – making the debt problem even worse.
The Fed is widely expected to begin cutting its benchmark Funds rate in September. Recent economic data showing rising jobless claims and declining manufacturing output are bolstering the doves at the central bank and raising recession concerns. Rising loan delinquencies and defaults are also raising alarms about the health and stability of the banking sector.
Meanwhile, the relentless stock market rally may finally be giving out. The S&P 500 plunged this week. Wall Street saw a massive rotation out of technology and growth stocks and into defensive sectors including utilities, consumer staples, and of course gold.
On Thursday, gold prices rallied to nearly match their all-time high mark. As of this Friday recording, the monetary metal trades at $2,441 an ounce and is up 1.8% for the week. Silver shows a weekly gain of 1.4% to bring spot prices to $28.51 per ounce as of this Friday midday recording.
During times of stress in the economy and financial system, gold tends to outshine not only stocks, but also other metals. As this week’s podcast guest Michael Pento will get into in a moment, silver and platinum group metals markets are more sensitive than gold to changes in the outlook for industrial demand.
But given that gold prices are already relatively high versus silver, now may not be the best time for investors to favor the yellow metal over the white metal. Any deterioration in industrial demand for silver could be more than offset by diminishing production volumes from major mines. In fact, silver and other critical metals face chronic supply deficits.
Of course, all hard assets stand to gain value in terms of U.S. dollars over the long term. Those fiat units of account are sure to depreciate steadily as the government’s appetite for borrowing rises relentlessly, along with its costs for debt servicing.
Currency depreciation translates inevitably into price inflation. It’s not businesses raising prices or workers demanding higher wages that cause inflation. These are mere symptoms.
The root cause of inflation is the creation of new currency. And every time the government issues new debt backed by nothing except the power of the printing press, it is effectively doing just that.
Well now, without further delay, let’s get right to our exclusive interview with the wonderfully insightful Michael Pento.
Mike Maharrey: Greetings. I'm Mike Maharrey, an analyst and reporter here at Money Metals, and I'm here today with Michael Pento, the president and founder of Pento Portfolio Strategies. He's been in the professional investment world for over three decades, so a lot of experience here. How you doing today, Michael?
Michael Pento: Yeah. Well, now I feel old.
Mike Maharrey: Well, sorry. Let's be real. We're both not young.
Michael Pento: Yeah, no.
Mike Maharrey: But that's okay. We're still alive and kicking and doing our thing.
Michael Pento: There you go.
Mike Maharrey: So I'd like to kick off our conversation, talk a little bit about silver and the silver market. We've seen some profit-taking in gold, but it's still kind of hanging on to $2,400 an ounce.
But silver's really gotten hammered down over the last few weeks. We've seen the gold-silver ratio blow up to over 85 to one, and really nothing's fundamentally changed. So what do you think is going on here with silver?
Michael Pento: Well, I don't think silver and gold are the same thing. So silver has an industrial component to it. It's like this hybrid half-precious metal, half-industrial metal and, therefore, it only really does best or better than gold when you have inflation and a growing global economy.
Gold is money. It's pure and simply money, and it's a placeholder of your wealth, so it doesn't care if the global economy falls off a cliff. As a matter of fact, that would be better for gold because nominal and real interest rates might be falling, and that's less competition for an asset that doesn't have any interest-bearing property.
I think what's happening is, and by the way, I don't have to pat myself on the back because hardly anybody else does, so I got to do it sometime, I told people, buy gold because the global economy is anemic. I think US economy is in trouble. I don't believe in the soft landing myth. We have incredible asset bubbles that are tenuously clinging onto the fumes of, I would say, the vestiges of monetary fuel that is attenuating quickly, and I don't think it's going to fare too well for the banking system, for the economy, for markets.
So people tend to rush into treasuries and they tend to buy them. That brings down yields, nominal yields falling, less competition for money, which is gold. And silver, since it has the industrial component to it, doesn't fare quite as well.
Mike Maharrey: That absolutely makes sense, and I agree with you.
But I think a lot of people would probably frown at you when you say that you think the soft landing is a myth because, I mean, after all, we just got this fantastic GDP print, right? I mean, how can you say that the economy is not doing well?
Michael Pento: Well, it is doing well for me and the top quintile, maybe the top 20%, especially for the top 1% of us, doing great. Our houses are going up, still rising in value, and the stock market's close to an all-time record high so we're doing fantastic.
But the bottom fourth quintiles have been eviscerated and disemboweled by inflation and their purchasing power has been destroyed. It was actually a Federal Reserve survey put out recently that said a full 25% of Americans are having to cut back on food and Medicare, medical care, because they just can't afford it.
The problem is, Michael, is that prices are rising at a fast clip, a rate of change that is above the Fed's target of 2%, which is an asinine target, by the way. But the problem is, is that inflation has already destroyed, hollowed out the middle class of this country, and it's rising very quickly from a level that's already unaffordable, has destroyed their purchasing power. So that's why to most Americans, 80% of Americans, it's a recession.
Mike Maharrey: Yeah, I just saw a poll. It was relating to the presidential election and, by far, the number one issue was inflation. It was above everything else in the list, including all of the things that the pundits like to talk about. So that kind of bears out what you're saying. People are definitely feeling it.
And yet the Federal Reserve, I think, is about to declare a victory on inflation, and I've been saying whenever they declare victory, it's really more like a surrender. What are your thoughts on kind of the trajectory of the Fed right now?
Michael Pento: Well, I have a lot of thoughts on it. First of all, I think it's embarrassing and disgusting that anybody associated with the Federal Reserve would claim that they have a victory over inflation. Americans need prices to fall. They need them to retreat to a level that was more on parity with where they were in 2020 before the helicopter money barrage. $6 trillion of helicopter money was inflicted on the American population. Four and a half trillion was printed by the Federal Reserve. Their balance sheet went from four and a half trillion to $9 trillion. Actually, that balance sheet went from 700 billion prior to the Global Financial Crisis to $9 trillion, and that's an embarrassment. That's like Zimbabwe numbers, so that's terrible. And like I said, the inflation rate needs to come down, the price level so we need deflation, not disinflation.
But the sad truth is, Michael, that the Federal Reserve cares much about banks than they do about people, Main Street. So Main Street second, or maybe even a tertiary position, and Wall Street is in the primary pole position because that's what they really care about. They can claim what they want because there's no way any central banker can claim that they're actually inclined to start reducing rates right now when inflation is rising faster than their target level. As a matter of fact, core PCE inflation actually increased month-over-month at last reading. The rate of change is above their target level, it's going in the wrong direction. It's rising from a level that has destroyed the middle class, and they want to still cut rates.
Because this is what they know. They know that business debt is at an all-time record high. It's like 21, $22 trillion of business debt. That's a nominal level. As a percentage of GDP, it's at 75%, which is very close to an all-time record high. And they know that the shadow banking system and the commercial bank system is not viable in this regime of an inverted yield curve, and home prices cannot stay where they are, unless the Fed aggressively cuts interest rates. And if they do fall, they should fall 40%, Michael, to put them back, the home price-to-income ratio back into parity.
Same with the stock market. Stock market, it's 190-something percent of GDP. Should be more like 100%. So stock prices should fall 40, 45% just to get them close to a reversion to the mean. And they know if that happens that the banking system would be wiped out. All the CLOs go bankrupt and private credit goes bankrupt, and the shadow banking system goes bankrupt, and the commercial bank system goes bankrupt, insolvent. And you know what? They just don't want that to happen because they can say, "Under the rules, well, if the banking system has problems, that's not going to be good for the middle class."
So yeah, so you caused the problem. The problem was you had negative real interest rates for the better part of 21 years, the last 21 years, from 2002, all the way to 2023, negative real interest rates, which is a new phenomenon, Michael. That's very new. For most of the existence of the Federal Reserve, interest rates were positive. You mean, in real terms, after inflation, it cost you something to borrow money.
But the opposite was true. As a matter of fact, in the depths of the COVID crisis, real interest rates were negative 8%. It was a no-brainer. You just borrow like crazy. That's exactly what the government did, and that's exactly what Corporate America did, and that's why we have a triumvirate of asset bubbles. So we have a stock bubble, we have a real estate bubble, we have a credit bubble, and they need monetary fuel to keep them going. The monetary fuel has been cut off, and we're living on fumes.
Mike Maharrey: Yeah, I think that's a perfect analysis. It's like they went down this road, and they can't... There's no off-ramp. They just have to keep doing the same thing.
I pointed out in an article I wrote today that everybody's focused on interest rates. They've already slowed down balance sheet reduction. They announced that back in May, and hardly anybody talks about that. And I think that's almost a bigger piece of the monetary pie than interest rates, the fact that they never did drain the liquidity. I mean, they haven't drained the liquidity that they injected in 2008, even though Bernanke promised that that was going to happen.
Michael Pento: It's a one time. But see, that's the nucleus of the issue, Michael, because... So inflation, when you boil down to what inflation is, inflation comes from, and inflation, I know the official definition is an increase in the money supply. Well, which money supplies, the base money supply? Is it M2? We could argue about that.
But what you're really talking about when it comes to inflation is when you talk about an inexorably rising prices, it comes when the market loses faith in a currency's purchasing power. That's what really happens when you have inflation.
The first time this happened was in 2007, the Global Financial Crisis, when interest rates were taken to 0%. Actually the first time was the NASDAQ, when interest rates went to 1%, they were taken down 1%. That engendered the housing bubble, and then the housing bubble burst, and we went to 0%.
So these were like one-off things. They were supposed to be like never happen again. Then we had COVID and we went back to, even though we were low interest rates prior to COVID, we went to 0% in COVID again. We're kind of like have excuses now. So, okay, the Global Financial Crisis was a once-in-a-thousand-year storm, okay. And then, "Oh, well, we had a once-in-a-thousand-year global pandemic."
But Michael, what happens if the recession comes and deficits go to $6 trillion and home prices are crashing and the stock market's in free fall, and the Fed goes back to SERP and QE? They're going to say this is a once-in-a-lifetime pandemic? No. Or they can say it's a once-in-a-thousand-year global financial... No, this just happened a decade ago or so.
The truth is that asset bubbles and credit and debt levels have become so extreme that they need low and negative real interest rates to function.
Mike Maharrey: Right. It has to be the norm.
Michael Pento: So what you're saying then, what you've well inculcated to the market is, "Hey, you're never going to get inflation under control, buddy."
I understand that, and what could happen is that the long-term interest rates could start to rise inexorably. That's the real danger. And if that happens, then you're not going to have that curative or remediation process to an economy. So if the problem with the economy is crashing home prices and crashing asset prices, and the normal fix is to print a bunch of money to buy debt, to get interest rates down, and that causes asset prices to rise, well, what happens if rates don't fall, they rise instead? And you're not going to get any cure in the housing market or in the stock market if that's the case.
Mike Maharrey: Yeah. I've been saying for a while that I think COVID kind of saved their bacon because we were heading for that crash in 2018. We saw that we had a big stock market sell-off in that fall, and then they went right back to... They were doing QE in 2019 before COVID. I don't think a lot of people realize that, and they were already doing that before.
So that kind of gave them the excuse that they needed. It makes me nervous because I wonder if the next excuse won't be a war or something like that, that they can trot out. Hopefully not.
Michael Pento: Like I said, they can use any excuse they want to, but I think the market is now fully aware that the ruse is up, that, "Hey, listen, fool me once, fool me twice, fool me three times."
No, I don't think there's any exceptions to the rule left. I think because the government is now insolvent and because inflation has already destroyed the middle class, I think trying to remediate an asset bubble implosion by helicopter money or a SERP or QE, that is really going to have an very deleterious effect on bonds, the long end of the bond market. In my opinion, there's a very high odds that interest rates rise and prices fall for long-term bonds the next time that happens.
Now what I think what's going to happen is there'll be a Pavlovian reflex move into the bond market as the recession starts to manifest. But then after that, once they start to reliquify the system, I think rates just go bonkers up and that, to me, smells a lot like stagflation.
Mike Maharrey: Yeah. You mentioned the debt, and we had a... Officially we're now past 35 trillion for the national debt and, of course, it's more than that when you factor in all of the unfunded mandates and whatnot.
But I've talked about the debt for years and everybody kind of yawns and no big deal. How do you look at the national debt, and how does that kind of factor into your investment strategy?
Michael Pento: Well, I know there's one guy that I really had a lot of respect for. Now he's saying, "Oy, the deficit. Oy, the deficit." That he says that since the United States has the world's reserve currency and the deepest bond market on the planet, that we don't have to worry about debt and deficits because, "Hey, [inaudible 00:15:08]"
Mike Maharrey: So like the milkshake theory?
Michael Pento: Yeah, the milkshake theory. Well, the milkshake theory is not... A lot of people talk about this. It's like, "Is this a new theory?" I've never met the guy. I'm sure he is a brilliant man, probably smarter than me. But all they're saying is that, and I know we're off-topic here for a second, but the milkshake ... it's an unwind of carry trades. So people borrow dollars, they borrow yen and they invest it in higher-yielding countries. Then when the global economy starts to melt down, people have to unwind their carry trade bets. That means they have to sell the riyal or they have to sell whatever, the ruble, whatever assets they were buying in foreign currencies, and then buy back dollars and buy back the yen. That's why these currencies, the yen and the dollar, tend to rise in global issues.
When I talk about the debt and deficits, I said to myself, well, wait a second. We have the best bond market. We have the world's reserve currency, but didn't we have that in 1980? Weren't both those positions there? And that didn't stop interest rates. The 10-year net went to 15%. So why couldn't it happen again? I don't understand. The argument is silly saying, "Oy, the deficit." Well, we now have a trillion dollars in interest payments. In interest payments.
Mike Maharrey: Yeah.
Michael Pento: $2 trillion deficits in supposedly this soft landing peacetime economy. So for reference in 2007, the total deficit was $160 billion.
Mike Maharrey: That's insane.
Michael Pento: Let me say it again. The total deficit in 2007 prior to the Global Financial Crisis was $160 billion. The deficit now is 2 trillion with a trillion dollars in interest payments. The national debt is 725% of revenue, and you're adding 40% of that revenue to the debt every year in the deficit. So your obligations are astronomically higher than your revenue. And it's not like you're paying off the debt. You're adding to that. 40% of all of your revenue is being added to the debt every year through deficit.
And in that environment, in that peacetime environment, in that rubric, you're going to tell me that if we have a recession and deficits go from 2 trillion to 4 to 6 trillion? That's the history of deficits. And then you're going to unleash some kind of massive monetary easing policy and inflation is going to go bonkers, and you're going to tell me, "Oy, the deficit?"
You know, if interest rates go to 15%, you tell me how many... What does the already dysfunctional real estate market look like when mortgage rates are 15% or maybe 20%? Tell me that. Tell what the stock market does when interest rates go from 4.2% on the 10-year note to 20. Talk about competition for equities. So I'm not really an, "Oy, the deficit" guy.
Mike Maharrey: Yeah. So how do you play that as an investor?
Michael Pento: Well, how do I play it? I mean, I have a construct called the Inflation-Deflation Economic Cycle Model. I ask myself a question, "What is the second derivative of inflation?" That ranges from five sectors ranging from deflation, disinflation, stasis, reflation, and then stagflation or intractable inflation.
I then ask myself, "In what context is that inflation vis-a-vis growth, economic growth? How healthy is the economy?" So I have a model that tells me where the economy is. Usually in a fiat currency regime, you'll see the economy weaken during recessions, and you'll see the economy strengthen during inflations, as that monetary fuel ebbs and flow.
Then I ask myself, a third question is, "Well, what is the level of asset prices and debt? What is the construct that the economy sits in the fabric? Is it a very overleveraged economy with asset bubbles?" Well, that's how we are today. "Or is it more a benign structure where you could say, 'Well, we might have a recession, but it's not going to be very deep because home prices are only 5% or 10% overvalued, not 50% overvalued or 100% overvalued.'"
Mike Maharrey: Yeah. Well, where can folks kind of follow what you're doing, get in touch with you if they're interested in working with you? Where can Michael Pento be found?
Michael Pento: So the website is pentoport.com, P-O-R-T, pentoport.com. And I have a midweek reality check for... It's actually a five-week free trial, and it's $50 a year if you like it. That will give you the salient data of the week and my interpretation of it, unbiased as it may be.
If you are a US citizen and you have $100,000 to invest as a minimum, I will take your funds into the Charles Schwabs, which, my clearing firm, and it's under my charge, Pento Portfolio Strategies. I will manage your money in the inflation, deflation and economic cycle portfolio where I have a lot of my own money in, because I eat my own cooking, as they say.
Mike Maharrey: Right, right. Well, that's outstanding. I hope folks will take advantage of that and follow your work because your analysis is outstanding. I agree with pretty much everything that you're saying here. We're definitely on the same page.
I really do appreciate you taking time out of your busy day to chat with me. I know that you're a busy man, you've been doing traveling and whatnot, so thank you so much for spending a little time with us today.
Michael Pento: My pleasure, Michael.
So good to hear from Michael Pento again and I hope you enjoyed that interview.
And that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. And don’t miss our second weekly podcast, the Money Metals Midweek Memo. To check out any of our audio programs just visit MoneyMetals.com/podcasts or find that on whatever podcast platform you prefer.
Until next time, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a wonderful 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.
