Stock Market, Gold, & Silver All Coast into Year End

Mike Maharrey: Greetings. I'm Mike Meharry, a reporter and analyst here at MoneyMetals, and I'm here today with Michael Pento. Michael is the founder and president of Pento Portfolio Strategies. He's also the author of a book, The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Greetings, Michael. How are you?

Michael Pento: Greetings to you and Merry Christmas, Mike.

Mike Maharrey: Likewise, likewise. I really appreciate you taking a little time out of your busy Christmas week to chat with me. That means a lot to me that you would take the time, so I appreciate it.

Let's just dig into it here. We had a Fed meeting last week, and we had Jerome Powell and his, I like to call them his minions, telling us that inflation is still a problem, and yet they delivered another rate cut. Is there any way you can make sense out of what the Fed is doing and saying?

Michael Pento: You know, it's Christmas week, so I kind of want to try to be nice, but you started me on the wrong foot here.

I mean, he has this asinine 2% target for inflation. I mean, I thought the whole point of the Federal Reserve was to maintain the purchasing power of the U.S. dollar. That's ostensibly what it was supposed to be, but that's a thin, strong man veil. Really, their business is to protect banks. That's what they do.

He missed his asinine target to the north of... 2% is the target, so he was above 2% for 43 months in a row, and he's aggressively cutting interest rates; 50 basis points emerges and... When he was, before the election, it was, "Oh my gosh, we're way too tight. We've got to get this fed funds right down, 50 basis points, 75 basis points." Now we're at 100 basis points now, and we're going to probably go a little more slowly now, next year. My question is what are they looking at?

Mike Maharrey: Yeah, that's my question too.

Michael Pento: The unemployment rate is very, very low, historically speaking, extremely low, way below the long-term average. We have an economy that's supposedly growing way north of trend growth. Trend growth is 2%. We're growing like 3.3%, according to the Atlanta Fed. Stock market's in a massive bubble. The real estate market is in a massive bubble. But maybe the truth is that's, maybe that's why he's cutting rates, because he... I'll tell you three reasons why.

I'll give you three reasons. One, he wants to keep the bubble in equities rolling. Two, he needs to keep the housing market from imploding. And three, he wants to help his buddy, Janet Yellen, who is paying a trillion dollars in interest on the debt, so it's all G-bills pretty much. That's where the duration curve is, so it's an adjustable rate mortgage on the debt, and he needs to get that money market rate down. Fed funds competes with money market rates and he wants to get that T-bill rate down as low as possible, and who cares if we have... Who cares if inflation is like four, five, six? Because they'll lie about it. They'll just say, "Oh, it's not 9% anymore. It's 2%," or actually it's the core rates. It has a three-handle. He'll just say, "Oh, it's way down from where it was, so let's declare victory. Aren't we a great institution?"

Mike Maharrey: Yeah, and then he'll blame somebody else. You know, I was mentioning this to somebody the other day. If you listen to what he says, they're always taking credit for, "Hey, we've done really great work here getting this price inflation..." Never once have they ever said, "You know, we might've caused this to begin with." It's always Putin or green corporations or who knows what?

Michael Pento: Right, right. And it wasn't the fact that we... Let me say, so it wasn't the fact that you printed $5 trillion after COVID broke out. That wasn't the issue.

Mike Maharrey: Nah.

Michael Pento: That wasn't it. We don't really care that we bankrupted most of the middle class of this nation. I mean, they can't afford to eat properly anymore. They can't afford basic health care, insurance, taxes. But we're so happy now that we're close to 2%.

Mike Maharrey: Mm-hmm, yeah, it's crazy.

Michael Pento: And they don't care that the dollar's lost like 98% of its purchasing power since 1913. None of those things matter.

Mike Maharrey: No. Well, let's talk a little bit about the interest on the debt, because I think you hit on something that's really important. We've got, and it's not just the Federal Government, but we'll kind of stick with that because it's almost the microcosm of what's going on in the economy. We've got massive corporate debt. We've got massive household debt.

I say all the time, this economy is built on easy money. It can't survive in even a moderately tight interest rate environment. And yet, over the last couple of months, since they started this rate cutting, we've actually seen yields on the higher end of the bond curve going up. That's a little bit counterintuitive. You think, well, they're cutting interest rates. Maybe we should be seeing interest rates coming down. Can you explain why we're seeing this little bit of a dichotomy going on?

Michael Pento: Yeah. We are an insolvent nation. We have not conquered our problem with inflation at all. The Fed is throwing gasoline on that inflation problem, and we have a massive amount of illiquidity now in the bond market. The other reverse repo facility, which is where most of those excess reserves credit was created, since the GFC, and it's more particularly after the COVID crisis-

Mike Maharrey: Right.

Michael Pento: There was $2.5 trillion of excess reserves for the Fed. That number is now $80 billion.

Mike Maharrey: Oh wow, yeah.

Michael Pento: That's a big amount of QE that was running along currently with the QT program of the Federal Reserve, so I'm not surprised that illiquidity is rising. I'm not surprised that bond yields are rising on the long end. What I found very interesting, Mike, is that when the Fed... They cut interest rates by 25 basis points, but they lowered the dot plot by 50 basis points. They were supposed to cut by 100 basis points or 1% in 2025.

Mike Maharrey: Right.

Michael Pento: In other words, this was a very hawkish move. They said they were only going to cut two times, or 50 basis points, in 2025, so if you're more hawkish, that should've sent people scurrying into the long end of the bond market, right?

Mike Maharrey: Right.

Michael Pento: You're more hawkish, which means growth is going to be slower, which means inflation's going to be under control to a greater degree, and that should've sent bond prices higher and yields lower, but the exact opposite happened all the way out along the yield curve, even 30 years out, based, the 30-year dropped by... Well, the yield went up by 10 basis points. That is indicative to me. That's saying, "Hey, look. The bond market is illiquid, the country is insolvent, and we have big problems coming up in the bond market." I think we're just beginning to see them, because I'm thinking to myself, what happens if we do have another crisis, we do have a recession? Not if, when we have a recession.

By the way, the last recession occurred, so we had an inverted yield curve. The yield curve started to normalize, and six months later we had a recession, in December 2007. Well, you know what? The yield curve began to re-invert or normalize or steepen just a few months ago, so it wouldn't surprise me at all if we had another recession starting around March, when the Treasury General Account is probably going to be tapped dry. Then there's no liquidity. The market is going to run into a liquidity crisis, no reverse repo facility and no TGA.

Then I would assume the Federal Reserve will stop QT by that point, but you're going to have a big problem in the bond market, because these foreigners don't really want to hold our dollars and our debt anymore. If the Fed's not buying it, who's going to buy it? You know what, Mike? In the next recession, the annual deficit, so the deficit in one year, could be $6 trillion, just based on what the percentage of the increase in the debt was in the last two, last three recessions.

Mike Maharrey: Yeah. We're running over a trillion with this supposedly great economy.

Michael Pento: Well, the deficit's $2 trillion.

Mike Maharrey: Right, right.

Michael Pento: The interest on the debt is a trillion.

Mike Maharrey: Right, right.

Michael Pento: So, we can have a 300% increase, because the automatic stabilizers kick in. There's nothing they can... Congress doesn't do anything, just the unemployment insurance is automatic. They don't have to pass in the tarp or towel for any of those other crazy things I'm sure they'll do, and then the revenue dries up. So, you could have a $6 trillion deficit, and I think the bond market's saying, "Who the heck is going to buy it all?"

Mike Maharrey: Yeah, that's an excellent question.

Michael Pento: And if the Fed does buy it all, and inflation goes back to 9 or 20%, where it really was, how much long-term U.S. debt are you interested in? Then you could say, "Well, Mr. Pento, maybe the Fed will just buy everything, like they do in Japan." Are they going to buy municipal bond debt? Are they going to buy corporate bond debt? Are they going to buy mortgage-backed securities? I mean, how much fixed income do you think the Treasury is going to buy?

If they do assent to buying everything that's not nailed down, and inflation goes to the moon and there's helicopter money, what do you think your portfolio's going to... I mean, in real terms, what do you think your portfolio is going to do. You can't just say, "Well, I'm going to be a 60/40 investor because the Fed's going to buy everything, and we're going to have hyperinflation, and the stock market usually goes up in hyperinflation." Well, that's true, but what part of the stock market do you want to own?

Mike Maharrey: Right.

Michael Pento: Do you want to own fixed income and utilities? Is that what you want to own, and bond proxies? Or do you want to buy base metals and energy and stuff that actually goes up the most to keep... Here, the whole concept of investing is you have to make a real return after inflation, right? That's it.

Mike Maharrey: Well, speaking of real returns, given what we're seeing in the bond market and given the debt levels, given the fact that we have a trillion dollar interest payment every single year, do you think that the Fed is going to end up having to keep that lower end below the real interest rate, in other words, where we have negative yields, in fact?

Michael Pento: Yep, yeah.

Mike Maharrey: Do you think that that's the scenario?

Michael Pento: Well, I would hate to agree with you, but I think I'm forced to agree with you. Here's the thing. Normally, I mean, before 2007, actually before 2000... Most of the lifetime of the Fed, since 1913, we've had a real interest rate, so the fed funds rate minus inflation was positive, but that all changed, especially post the GFC. We had 10 of the last 14 years where real interest rates were negative, and sometimes like 8% negative.

What that means is so important. In other words, if I am an investor, if I'm a saver, I have money to invest, and I say, "I'm going to buy a bond or something like that. I'm going to put my money in the bank," I'm guaranteed to lose money in real terms. That's what negative real interest rates do, and savvy investors know that, and they say, "Well, if the fed funds are rated as one and inflation's nine, I'm losing 8% per year in real terms. I am going to do something else than keep my money in the bond market. I am going to buy stocks and I'm going to buy real estate."

That's exactly what happened, to the point where Blackstone was buying single family homes as much as they could, and 25% of, even more in some cases there was like 60% of all single family homes for that particular month were bought by investors.

Mike Maharrey: Yeah, I remember that.

Michael Pento: You have crazy things like that happening, and that has distorted prices incredibly. That, I'm hoping, and I think I'm correct, that Powell and his many merry brand... Let me say this correctly. Powell and his merry band of money printers are going to be reticent and reluctant to go back to ZIRP and QE, and Yellen will be very reluctant to go back to QE right away, because they know where this... They know where helicopter money, they know where helicopter money and QE and ZIRP end up. They end up bankrupting the middle class of this country.

Mike Maharrey: Right.

Michael Pento: And they end up causing 20% inflation at a minimum, so they're not going to like, "Okay. Oh, we have..." GDP is now growing at 1% or close to 0%, so we're not going to go automatically back to zero. No, it's not going to be as fast as it was before, so Powell will be a little bit late to the game before he slashes interest rates. But it will happen.

Mike Maharrey: Right, right.

Michael Pento: I have no doubt about that, and I have no doubt there's going to be QE and ZIRP and helicopter money, but it's going to be after the market's down 30, 40, 50%.

Mike Maharrey: Wow, yeah. Right.

Michael Pento: And then, here's the question. Here's the big question, Mike. What happens to the long end of the bond market, because every other time, since 1981, that the Fed has intervened in the stock market to keep asset prices higher and real estate from collapsing, the long end of the bond market behaved, because the problem wasn't, oh, well, we have a problem with inflation. The problem was, since 1981, we have disinflation or deflation. That's how they think. But now we know. Record high inflation is salient in the minds of Americans, and I think, in my opinion, which is, and I think it's a fact, inflation is the market's belief in the purchasing power of your dollar. That's what inflation is caused from. If I print a bunch of high-powered money, and the Fed's balance sheet goes up, that's not exactly dollar-for-dollar how inflation happens.

Mike Maharrey: Right.

Michael Pento: It's too much money chasing too few goods. And, if you have a habit of printing too much money, you destroy the confidence in the purchasing power of a fiat currency. That's exactly what's already happened, and they're going to make it a lot worse the next time around. So, what does the bond market do? The bond market doesn't behave like it normally does, which is prices up and yields down, the long end, and it's prices down and yields higher, then we're going to be in a huge problem in this country, because where are asset prices going when...

Let's just do a thought experiment. What's going to happen to the real estate market if mortgages go to double digits? Well, given where prices are and given what I just said, where mortgages are going, the real estate market is going to plunge, and I don't care what the Fed is going to do.

Mike Maharrey: Right, yeah. I mean, at some point they lose control of the markets.

Michael Pento: Right.

Mike Maharrey: It's just, I think, a lot of times, people and even the Fed people themselves, there's a little bit of hubris there. I think they overestimate their ability to keep things under control.

Michael Pento: I know. I know. They're demigods. Every word out of their mouth is parsed like we're reading Scripture, you know?

Mike Maharrey: That's a great way to put it.

Michael Pento: Oh, he took one word, he took this word out of his statement. What is he going to do? You know?

Mike Maharrey: Yeah, so I know. I love it when you get it on... CNBC always does it. They give you the two statements and the red lines.

Michael Pento: Yeah, exactly. Here's the thing, Mike. In a free market economy, which we don't have anymore... I mean, no free market. The most important price signal there can be is the cost of money.

Mike Maharrey: Of money, yeah.

Michael Pento: Why we've relegated it... We've taken it. We've usurped it from markets and given it to 12 voting members on the Federal Open Market, 12, the 12 apostles of the Federal Open Market Committee. Why'd we do that? I mean, can't we just say here's a simple solution. Trend GDP growth is 2%, because that's population growth plus productivity, and we'll just expand the Fed's balance sheet by 2%, no more or no less per annum, and we regulate the banks, so that if a bank goes under, they expand the money through a fractional reserve system, they go crazy, they're out of business. They're done. Then you have markets, so it's the demand for money versus supply of savings will set the cost of interest rates.

Mike Maharrey: Because you and I both know-

Michael Pento: And if banks know they're going to go under, and then they'll take less risk.

Mike Maharrey: Yeah, absolutely.

Michael Pento: They know there won't be a bailout right around the corner. Of course, the problem, and you and I both know this, is the fact that without the persistent money creation and the persistent tinkering with the bond market, the Federal Government can't keep borrowing and spending to the extent that it does.

Mike Maharrey: With that... Right. With that, let me... We'll close out on this thought. We just had, I call it a fake debt ceiling fight, because they're going to raise it at some point. It's posturing, a kabuki theater, for the most part, but it does kind of underscore, at least makes people think about the fact that the borrowing and spending is out of control. We have got Trump coming in. He's talking about cutting government. We've got DOGE. We've got Elon Musk. Do you have any confidence that the new administration can actually get even a little bit of the spending under control, or is it just going to end up being business as usual in your mind?

Michael Pento: Well, first of all, it's a great interview, and you're a great questioner. I mean, the last question you asked me, I could talk about for like an hour. So, the two things I... Well, I guess there are at least two things I'm going to try to get out in time is, number one, the Department of Government Efficiency, DOGE, I find very ironic that the Department of Government Efficiency was strongly advocating that we raise the debt ceiling, in fact abolish it completely, so you had Trump, and I voted for Trump, so this is not an anti-Trump comment. I'm just saying Trump and Ramaswamy and Musk were arguing to get rid of the debt ceiling completely, but you're heading the Department of Government Efficiency. Why? Is that a little counterintuitive at least?

I think, when it comes to spending, you have Defense, you've got interest, you've got Social Security, Medicare, Medicaid. Those are mandatory things that no one's going to touch. No one's going to touch that, so you can take it around the edges and say cut a few billion here and a few billion there, but the dramatic changes to the budget are not going to happen. But I will say this. I thought it was interesting that the debt ceiling was... They did this continuing resolution, the stopgap spending measure, which is three months. They punted the ball for three months, so their head in the sand for three more months, but they did not raise the debt ceiling, not by a penny; 38 Republicans in the House, the Freedom Caucus, said, "No, no. We're not doing that."

I don't know if they did it. Here's the question, and I don't have the answer yet, but we will in early '25, in March '25. Are they just doing it, are they doing that just to posture, because the blame goes on Biden if something bad happens right now? Because he's still our President.

Mike Maharrey: Right.

Michael Pento: Or will they all fall in line under Trump? I don't have an answer for you.

Mike Maharrey: Yeah, it'll be interesting to see how it plays out.

Michael Pento: But it'll be interesting, because if you do things through continuing resolutions, with the Byrd Amendment, you have to pay for it, so I mean, Trump might be able to extend the tax cuts later in '25. That's not a tax cut. He's just extending the taxes as they are.

Mike Maharrey: Right.

Michael Pento: So, it's not really... On the rate of change basis, it's nothing. But he might have to pay for that.

Mike Maharrey: Yeah.

Michael Pento: Right? I think they wanted a $5 trillion increase in the debt ceiling, and they didn't get it.

Mike Maharrey: Right.

Michael Pento: But if they're going to get that kind of an increase, they might have to have massive tariffs in place. So, I mean, I just don't think it's a... It's very superficial to say, "Trump won the election. We're going to have massive tax cuts, even above and beyond the extension of the Trump cuts, and we're going to have massive deregulation." I would hope that he could cut taxes, but I would also hope that he can cut spending dramatically, too. I just don't see that happening.

Mike Maharrey: Yeah, I'm the same.

Michael Pento: He's saying-

Mike Maharrey: I want to be optimistic, and yet, I've been watching this for a long time. I thought it was notable. You've got all of this talk about budgetary hawkishness, and yet, even with this continuing resolution, they added another $100+ billion in spending. They did the disaster relief. They put in the farmers' aid. I think they put in money for the bridge, and you could say, "Yeah, these are important things," but it seems like they always find something else to spend the money on, so I'm not very optimistic. Before we go-

Michael Pento: Yeah, I-

Mike Maharrey: Go ahead.

Michael Pento: I'd be happy if... If you want to do away with the debt ceiling, at the very minimum, and this is the bare minimum, you have to say, okay, we're going to replace it with a debt-to-GDP cap. That would... I mean, like you say, okay, we will never... We want, debt-to-GDP has to be under 90%.

Mike Maharrey: Right.

Michael Pento: Then, if it's above that, the government shuts down. I mean, that would be something that you can say, "Okay, the debt ceiling has to be voted on, but listen. You need to have a debt-to-GDP ratio that encourages growth and stability in our bond market and stability in our currency." I mean, I haven't heard anybody say that. I only heard, "Let's just suspend the debt ceiling. It's something that we don't..." Well, it's been around since World War I, and it says, "Hey, this is the most debt the United States is willing to incur," and if you can't replace it with something that is meaningful, like the debt-to-GDP ratio, then I say keep it. Keep these guys in line.

Mike Maharrey: Right. I mean, at least it gives the illusion of some accountability anyway.

Michael Pento: Right, right.

Mike Maharrey: Yeah, so-

Michael Pento: Hey, who cares about... Hey, listen, Mike. Who really cares about debt when you can just print money?

Mike Maharrey: Well, yeah. I wish I could print money. Oh, well, I'm a peon. Well, before we go, I want you to let folks know where they can find you and your work and your book, all of those things. Where do they go find Michael Pento's-

Michael Pento: Well, I wrote a book in 2013 called The Coming Bond Market Collapse. I said, eventually, we're going to have a huge problem with inflation, and that's going to bring the yields in the bond market much, much higher. We're seeing that happening today. It wasn't a prediction that was going to happen in 2013. I said, eventually, if we keep this line of behavior up, where the debt-to-GDP ratio skyrockets, there's no limit to the debt, and there's no limit to the Fed's balance sheet, we're going to have a huge problem in our bond market, our sovereign bond market, and we're having, it's happening today.

But if you want to reach out to me, the website is pentoport.com and on it you'll see the midweek reality check, which I publish, for $50 a year if you like it. There's a five-week free trial. You can kick the tires before you spend that $50, and you'll get the real insight, the real data and the real insight, independent of the madness that's on Wall Street and in D.C., and there's a lot out there. And if you have $100,000 to invest, and you're a U.S. citizen, and you qualify for the portfolio, then I will manage your money myself, in the Inflation-Deflation Economic Cycle Portfolio that I've created.

Mike Maharrey: Outstanding. Well, folks need to find Michael Pento's stuff, because I think what we're hearing in the mainstream is not going to play out well.

Well, again, I really do appreciate you taking the time. I know it's a busy week, and I hope you have a very, very Merry Christmas, a Happy New Year, and thank you.

Michael Pento: Thank you. God bless. Take care.