Latest / Financial Survival Network / Deflation/Inflation/Bust -- Michael Pento #5818

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Deflation/Inflation/Bust -- Michael Pento #5818 · Financial Survival Network

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So we're just collecting, you know, dividends through bonds and bond properties and
0:03
waiting for the second leg of this collapse to happen. And it absolutely,
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in my mind, has to happen. It has to happen. You're listening
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Welcome you are listening to watching the Financial Survival Network. I'm your host,
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Carrie Lotts. Well with us is our good friend Michael Pento. I want
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to find out Michael, when we talked about a year two year and a
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half ago, you predicted exactly what was going to happen bed raising rates,
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not turning back and the aftermath. But now we've got a banking crisis on
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our hands, probably directly as a result of the fence rappid rating creases.
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And where is that going to lead? Well, first of all, I
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have to know where you brought that shirt, because I definitely want one Oh
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yeah, I could have arranged one for you. It's a special Robert Graham
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shirt. So then you know, the problem of the banks is very clear
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to me, and I knew there was going to be a problem about a
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year ago, but I didn't. I just I guess I didn't put all
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the pieces together. I went to my local branch of my bank and I
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said, I'm going to pull a substantial amount of money from you guys if
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you don't raise my deposit rate to meet that of treasuries. This was before
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tea bills were about five percent. But the fact of the matter is that
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the rate that banks make on their assets you think about going back to two
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thousand and ten, most of their mortgages are three, four or five percent
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carry. It's a big part of especially these regional regional banks business is making
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loans. Well. If they raise their deposit rate to match that what I
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can get in a treasury, they'd be out of business because they be paying
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me more are my deposits, and they're collecting on their assets, so they
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can't do it. So you know, I made the decision to walk,
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and I moved to a money market fund, which treasury only, and I'm
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making five percent of my money instead of five basis points. Now that's the
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case if I move my money from a regional bank or to JP Morgan,
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I'm not going to accept five basis points of my money. And you can't.
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You just can't raise your deposits. You say, well, okay,
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why don't they veguts and why don't the regional banks or JP Morrigan money center
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banks just raise the money they pay and deposits to match the tebill rate.
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Well, they can't do that because then they'd be bankrupt. That's the truth.
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So it's it's a bank walk, bank run, whatever you want to
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say. That's what's really ailing these banks. So they lose deposits, they
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lose deposits are reserves. They're losing reserves through ut So they're in a lot
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of trouble. It's just taking a lot, you know, it's just taking
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a little bit longer for this to pan out. Kerry, do you know
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that in two years from two thousand and twenty to twenty twenty two, the
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end two money supply went up forty two percent in two freaking years. Now,
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the average in two thousand and nineteen, you know, the average increase
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in them two was four percent for Adam, then it went up to forty
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two percent. So it's taken some time to get that liquidity out of them
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of the picture. And then now guess what else happened, Kerry. We
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had a few banks for in counting go out of business. What did the
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FED do? They printed through the bank term funding program four hundred billion dollars
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in two weeks. So when people say, well, you know, Michael,
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you will write in two thousand and twenty two about the market having a
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correction, that is correct. I was. We saved our clients from the
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you know, the great preponderance of that disaster. Twenty twenty three so far
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has been a very choppy market. So if you look at AI stocks,
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they're doing fantastic. But if you look at the equal weight SMP five hundred,
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unchanged on the year, if you look at the Russell two thousand,
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unchanged on the year. So we're just collecting, you know, dividends through
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bonds and bond propsies and waiting for the second leg of this collapse to happen.
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And it absolutely, in my mind, has to happen. It has
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to happen because the FED is trying to fight inflation and fighting inflation the way
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they have already done so on top of the amount of debt that we have
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outstanding, and on top of the record acid bubbles that we created that we
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have created. Not way the Fed in the Treasury together guarantees us that we
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are going to have another massive leg down in the economy, in the stock
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market. It's virtually guaranteed, in my opinion and in my research, and
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the math and the data tells me absolutely. Now it's been held in abeyance
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again because of the draining of the Treasury gener all account, which is aided
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hundreds of billions of cash to the economy. It's it's been held in advanced
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by the four hundred billion dollars printed for the bank term funding program. But
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those things are going to end soon, and that's when you'll see the second
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leg. And that is a leg gonna be my call, it should be.
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And I would say thirty to fifty percent drop in the in the equity
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averages, and I say that that's what would happen if it was left unfettered.
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But who knows? Who knows Kerry what Jerome Powell will do? You
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remember, he's fighting inflation at the same time, we had a couple of
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banks go under and he immediately create you know, he bailed out the entire
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banking system with this BTFP brother. He didn't even blink an I. So
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you know what happens if I'm correct? And later this year, you know,
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full winter of twenty twenty three, we have the second leg unwind and
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all my I have a twenty point model that says that's absolutely still in the
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cards. That's absolutely going to happen. And then the Fed starts lowering interest
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rates significantly and re enters QE. Not this QE light. The BTFP is
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a QE light because it's just a loan. It's not a permanent monetization of
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debt. But what if he comes back and he says, you know what,
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the BTFB program is permanent, here comes from QWE and we're going back
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to zero. Well, here's the problem. He's gonna be doing that when
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inflation is still at least two times it's target of two percent. So what
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is it? So here's here's the conclusion I reach. We're either going to
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have a deflationary recession slash depression, or we're gonna have runaway inflation. I
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just don't see anyway. He Powell has to decide what he wants and at
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what time he wants it. But we're gonna we're probably gonna have them both.
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First, we're gonna have that depression recession and and and uh, disinflation
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deflation, and then we're gonna have the intractable inflation. So what's the world
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gonna look like after this happens here? Well, if anybody ever have any
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faith in the in the in the Treasury or the Federal Reserve to maintain in
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low taxes, low interest rates, and low inflation, they're in for a
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route awakening. If you thought that the current environment that we have is one
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of artificial construct you're one hundred percent correct. The Fed and the Treasury control
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everything. The massive manipulation and interest rates that we've seen since two thousand and
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eight has been unprecedented globally. It's been a global nightmare when it comes to
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free markets, and you haven't seen anything yet if I'm correct, Because they're
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gonna talk, you're probably looking at something that looks more like Japan, where
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you just say I'm capping the ten year note at two percent, and I'm
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going to print unlimited amount of funds to keep it there. Well, watch
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out, watch out dollar, and watch out for inflation to rise to a
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level that's never before been imagined. I say it's of America. I hope
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that's not the case, carry because the actual, the real thing that we
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need and desperately desire here to happen is for a cathartic depression to normalize asset
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prices. In other words, the home price to income ratio right now is
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much higher than it was in two thousand and five. The cost of the
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average mortgage and interest payment is higher today that it was at the start of
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the Great Recession in the Great Housing Bold. Well, that's an untenable situation.
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I mean, home prices are unaffordable, especially at first time home buyer
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level. So we need home prices to drop substantially. And I hate to
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say that because I have my own two houses and I bought them at the
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you know, well, I sold one at the top, but I bought
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two at the peak, and I knew I was doing that because not every
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decision is a financial decision, but they have to come down to a price
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that or a level that can be supported by the free market stock prices.
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Kerry, I mean a AI is the whole thing. You know, AI
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is the big thing. But we were talking in the pre interview. If
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you take out Microsoft, Apple in Video, Google or whatever the hell they're
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calling it now now alphabet Facebook or Meta. You know, Meta didn't work,
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so now maybe maybe he'll change his name from Facebook to Meta to AI.
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I don't know, Zuckerberg. But if you take those stocks out,
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the equal weight SMB by owner is flat on the year. The Russell two
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thousand is flat on the year. So it's only a very small handful of
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stocks that are bubble isious because of the latest thing wall streets attack, you
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know, attracting suit, the shiny thing of AI. But AI's been around.
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AI's been around for decades. I mean, ask IBM and it's Watson.
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You know it's been It's been around for decades. It's nothing new.
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Um, So look at bond prices, look at you know, we had
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a situation where bonds, bond yields were negative seventeen trillion dollars worth. The
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bonds were negative throughout the world. If you have a three great, humongous,
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a triumvirate of bubbles that have never existed concurrently and to this degree in
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history. So yes, we're in big trouble. And if you don't have
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an investment philosophy that navigates between disinflation, deflation and intractable inflation, you're gonna
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you're gonna be hurt. I mean, if you're in a sixty forty portfolio,
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Kerry, and you own bonds in intractable inflation, I don't care what
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bonds your own, you're gonna get destroyed, just like you did in twenty
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two. And if and if you're short stocks at that time, you're gonna
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get destroyed. However, if you're long AI in a deflationary depression, you're
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gonna get even more wiped out. So it matters where, it matters what
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you own and when. In other words, active management. So the stock
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market when inflations raging could go higher still, right, uh, innominal terms
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absolutely nominal and nominal terms absolutely in real terms. You know, listen,
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you look at the look at the what happened in any hyper inflationary economy.
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Shorting stocks is a really bad idea. That's why I have five sectors in
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my in my investment spectrum. They range, you know, from deflation and
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depression to intractable inflation, which is when you have high inflation but no economic
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growth, so real growth plummets and and real stock prices go nowhere but down.
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But in nominal terms, you know, shorting of stock in nominal terms,
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you're gonna lose money, don't you don't. Don't tell the guy that
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you you know, the guy you borrow the stock from. But yeah,
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we'll wait a second. Is down in real terms, doesn't matter. You're
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lost. Yeah, yeah, you're paying nominal dollars in your losses. So
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but then when it flips to deflationary, which and inevitably will do, right,
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then you clean up shorting. Oh then you cleaned. Yeah, that's
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why it's very important to have an accurate model that measures and maps the economy
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like I have. Um and listen, my gut feeling, Kerry is to
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get massively short the market. I would love to be massively short the market
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right now. I think our short positions right now, total of grant we
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have a grand total believe about three or four percent net in not net short,
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just in total shorts in my portfolio. But we're long bond and we
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log bond proxies in a big way. So think you know, utilities think
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about defense stocks, think about you know, treasury bonds. So why am
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I not more short because the model tells me it's not time to do so
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yet. I mean, I want to see the high yield spreads blow out,
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set financial conditions tightened, not loosen, and it still that happens.
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I'm going to stay with the data rather than my feelings. But when those
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things change, and my model predicts they will later this year, that's when
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I'll jump on this on the opportunity. In the meantime, I'll just be
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happy collecting a significant amount of dividends in a safe matter. All right,
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So play it's safe for now. I'm surprised that the stocks overall, when
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you filter out the thang are actually flat. I think they're doing pretty good
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staying flat. Well, it's because, like I said, you had that
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forty two percent increase in money supply that's bubbling around out there. You had
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the Treasury General Account which is being drained to keep the the the interest payments
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and the checks coming from the government. That's new money. That GGA is
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new money. It's almost it acts like QE. And then you had that
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four hundred billion or increasing the Fed's balance sheet over two week period, which
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is you know, starting to be eating eating away now, so it's you
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know it's been delayed in March. You know, you look like a hero
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if you' say, Michael, you know you're correcting. You're correct up to
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twenty two and then you said, oh, look, large things are starting
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to fall apart. The banks's banking system was failing, and and uh and
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the stock market was faltering. Well guess what it would have been a really
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bad idea at that time to increase your shorts because of what the Treasury and
14:30
Fed we're doing. I think that ends because eventually you're going to raise the
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debt ceiling, right, Kerry, Eventually you're gonna do it. I mean
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I would be I mean, what are the two things these two powers in
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DC, the red and the blue Republicans and Democrats, where do they care
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most about power? You're staying in power, right, That's what they're all
14:52
about. So I mean, eventually raise the debt ceiling. It's gonna come
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with pretty trench spending cuts though, otherwise it'll never get through the House.
15:03
So McCarty, if McCarthy wants to hold on to a speakership, he better
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put a bill to that back to the House. The one that they passed
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was good, right they did. That will never survive the Senate wasn't even
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put for a vote. But when they change it, when they agree,
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when McCarthy and Biden agree, it better have some you know, pretty sharp
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spending cuts deep and trench and spending cuts cuts. Otherwise it'll never go through
15:30
the House. If it gets through the House, it'll get through with Democratic
15:33
votes and mccarty'll be out. That's the end of him. And good if
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that's the case, good riddance to him. Yeah. Well, it's a
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kabuki dance, right, a lot of the form over substance. But you
15:45
know that the it's like Beijing opera, you know, you know in the
15:50
end that the workers are going to triumph in a Beijing opera, actually peaking
15:54
opera play that you watch in China. And now it's just farce. But
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at one time it was taken very seriously. So this isn't just the US
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happening in a bubble here. This is the whole world basically getting slammed,
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right, and the inflated deflated. Right. This is everywhere in the in
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the world. There's no high from this. There you know, there's there
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has never been a time in history you had isolated banana republics suffer inflation.
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We have never had inflation this high concurrently in Europe and Japan and China and
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the United States. It's just never happened. You look at the record,
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I mean, if you want to count for it accurately, United States inflation
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was at a record high twenty percent. Yea. Europe was suffering the same
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thing. Japan has a you know, they have a twenty a fifty basis
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point ten year note, so one half of one percent ten year note JGB
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with inflation above four and a half percent. It's ridiculous crazy, you know,
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severely negative real rates. And we know that that is a bad thing
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for the economy. Uh, you know, normalizing interest rates. They kept
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talking about that for years, Michael. They never did it. I would
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argue, maybe we're getting closer to a normalized the interest rate now, although
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you take into account the real rate of inflation, it's not even close now.
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So if you look at the CPI, for the first time in since
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two thousand and ten, we have a real Fed funds rate if you deflated
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for consumer price index, but you you have to look at the short on
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how negative of One of the parts of my model we're talking about is the
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real Fed funds rate. Um, the real the real Fed funds rate dropped
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to a sharply I mean never before even imagine negative rate in two thousand and
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twenty two and stayed there for a while. You know, we know it
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wasn't just here, it was you know, all over the world we had
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negative Like I said, seventeen trillion a negative interest rates. The global debt
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now stands at three hundred and five billion dollars. This is not my imagination.
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This is Institute of International Finance. Okay, three hundred and five trillion
18:11
dollars. That is forty five trillion dollars high, forty five trillion dollars higher
18:18
than it was three pandemic and twenty five percent higher. This is as a
18:22
percent of GDP. Now, I'm not talking about nominal debt anymore. Three
18:26
owner and five trillion is nominal. If you adjust it for GDP, global
18:32
debt is now twenty five percent higher than it was in two thousand and eight.
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Now, if five and a quarter percent interest rate on the Fed funds
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rate in two thousand and eight sent the economy crashing, we're back there.
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Carry We're at five point one percent on the effect of fence funds rate,
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and we got there a lot faster than ever before in history. Took us
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one year to get there from zero to five and a quarter. In other
18:55
words, the amount of debt that we have is unsustainable when interest rates are
18:59
that high above inflation and inflation. I think, by the way I've been
19:04
and I've been, I think you and I debated about this a little bit.
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I said that the rate of inflation would be coming down, So disinflation
19:12
not that inflation is not that the prices you pay in the in the grocery
19:17
store are going to come down. I said, the rate of change.
19:21
Of the rate of change. So if they were rising at nine percent last
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year, they're only rising at five percent this year. That's still disastrous for
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someone who couldn't afford the eggs when they were up from nine percent, now
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they have to pay another five percent on top of that. I'm using eggs.
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But you understand what sure, We're not getting falling prices, which is
19:40
deflation. We're getting disinflation. I would like to see deflation, because there
19:44
will be at It would be a necessary cathartic occurrence to have the gravitational forces
19:49
of deflation bring down debt levels, bring down asset prices to be to a
19:55
level that can be supported by the free market. That is what we desperately
19:59
need to happen. That would be healthy in the long run. Carry But
20:04
but it's untenable to politicians because you'll you'll have a period of time truncated I
20:11
would hope and pray where you would have deflation and a depression. Oh you
20:15
know, people can't you people can't do this. They can't do that.
20:18
They can't go out and needed restaurants. You know, Come on, Kerry,
20:22
listen. This is what we even. This is the situation we have
20:26
engendered. There's no help, there's no In other words, there's no easy
20:30
way out of it. You're gonna have breadlines because people don't have the money
20:33
to pay for bread. Or you're gonna have bread lines because people's money that
20:38
they have doesn't equate to enough for a loaf of bread. Yes, I
20:45
don't see how you avoid this. Because of this massive artificial construct of record
20:49
debt and record asset prices that must be addressed, it's gonna be a cataclysmic
20:56
event for the world. Governments are gonna have to like stop writing checks with
21:00
sony money, with inflated currency. Kerry, you know, I'm not you're
21:04
you're not You're not talking hyperbole here. I'm not being hyperbob hyperbolic. Here.
21:10
Listen, if you look at the you know, fifty percent of the
21:11
country doesn't have five hundred dollars. They're living paycheck to paycheck. And I
21:17
don't know how all this. There's a lot of statistics out there to say
21:19
it's seventy percent of the nation is living paycheck to paycheck. I don't have
21:23
all the statistics right at the top of my head and my fingertips. But
21:27
if you look at data on how that middle class and under are suffering,
21:32
you know, um they call it um. What do they call it?
21:36
The retailers when when stuff walks out the door, they call it. They
21:41
call it shrinkage? You know what? You know, that's the euphemism for
21:45
what it really is. It's called theft. Right, Why can't we just
21:48
say it's not shrinkage. You know, it's not coming out of a cold
21:51
shower. It's not shrinkage. It's death and theft. Is that record proportions
21:56
because people cannot afford to consume what they need for the basics, and that's
22:03
going to get a lot worse if we continue down this road of pursuit of
22:07
inflation. So if Powell says, as this inflation morphs into deflation and as
22:11
the recession becomes a depression and becomes fully manifest, if he says, I'm
22:18
going to start printing money again, and i am going to open up the
22:22
BTFB and taken all assets, even mortgage backed securities and junk bonds from banks,
22:26
and even the shadow banks can throw their stuff at me, and I'm
22:30
going to tet lower interest rates. He could do that. He very well
22:33
may do that. In fact, I think he will do that as the
22:37
situation becomes dire. But that does not solve the problem, because inflation is
22:41
not going to stop at nine or twenty. That's the problem. Grry.
22:45
Yeah, all right, Well, you've summed it up quite well. Got
22:48
to put a lot of credence in what you say, because you've been right,
22:52
like I say, right on the money for the past year and a
22:56
half. I'm not sure that's where that's going to leave the world, where
23:00
it's going to leave the United States, and where it's going to leave you
23:03
and I But I guess so we'll have to get through it. Well,
23:07
listen, here's the problem. Um, if you're someone who owns multiple homes
23:14
and has a lot of money in the stock market, you know inflations like
23:17
uh, huh okay, where's inflation go first? It goes into the hard
23:21
assets, you know, it goes into the real estate and stock prices.
23:22
Um, that's good for me, good for you, Kerrie. Um,
23:26
Well, what about the people who do the working in this country, the
23:30
living and working and dying. I think, I think I sound like Jim
23:33
Stewart a little bit. But to be honest with you, you can't have
23:37
a viable nation without a vibrant and healthy middle class. Um. And it
23:41
doesn't work when you have intractable inflation. I mean, you look at history
23:47
and show me an example of a of a of an economy that suffers high
23:51
inflation that functions very well. Yeah, it doesn't. It just doesn't happen.
23:56
It doesn't happen. So we mister Powell, if you're listening to mister
24:00
Lutz in this program, I wish you would. Let's get on with reality
24:04
as fast as possible. Let's shrink the balance sheet from where it was nine
24:08
trillion now it's eight point four, eight point three. Let's get it back
24:12
to where it was, you know, even if it was four and a
24:15
half trillion, where it was pre pandemic. Let's get it there. Let's
24:21
fast as bossible. Let's suck up some of this excess money. The gamblers
24:25
on Wall Street that you know that are buying anything that has AI. The
24:29
algorithms say AI. Oh, let's go. Let's let's run up Microsoft ten
24:33
points. You know, let's get rid of the gamblers on Wall Street and
24:37
let's provide for a real healthy economy based on markets. And in the long
24:44
run you'll be very satisfied and happy you did it. You're here. I
24:48
mean, if you look, if they'd let the markets function for the past
24:51
sixty years, the economy would be three or four times its current size.
24:56
We wouldn't be having this discussion. But he called, just tell us where
25:00
we find you, how we connect with you on the web. So if
25:03
you have one hundred thousand dollars to invest in your US citizen, you could
25:08
open up account at pentoport and I'll put you in the I deck portfolio.
25:11
Inflation, deflation and economic cycle portfolio. If you don't have that, and
25:17
if you're you know, yeah, fifty dollars a year, I'll give you
25:21
my weekly podcast which gives you some of my thoughts, like you here on
25:23
this program, some data and thoughts, a general view on what you should
25:27
do to protect yourself. All right, Well that's all we can ask or
25:32
I appreciate it. Michael, always great having you on. Got a question
25:34
for Michael myself about this or anything else, shoot me an email k l
25:38
at kryltz dot com. Make sure you click the link to Michael's site and
25:44
the show that's this interview on Financial Survival Network dot com. Sign up for
25:48
your food newsletter. Michael, always a pleasure. We'll talk to you again
25:52
real soon. Great stuff. Carry thanks for listening to carry Lets's Financial Survival
25:56
Network. Your solution to today is trying times. For the latest, go
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