Coming up Michael Pento of Pento Portfolio Strategies joins me and lays out a scenario he says is ahead for the economy, interest rates, and monetary policy – all of which point to a watershed moment for gold. You simply will not want to miss a truly enlightening interview with Michael Pento, coming up after this week’s market update.
Listen to the Podcast Audio:
Q&A with Michael Pento
Mike Gleason: Michael, how are you today? Welcome back.
Michael Pento: I’m doing fine, Mike. Thanks for having me back.
Mike Gleason: When we had you on last you commented that you believed the market was pricing in President Trump getting virtually all of his policy agenda pushed through Congress, the tax cuts, repealing Obamacare, and so forth. To say Trump has encountered some resistance in Washington would be a major understatement. The establishment of the right doesn’t seem to like him. The left and the mainstream media of course hate him. So, Michael before we get into the effects this will have on the markets here, first off, handicap for us the chances of Trump, based on what’s been transpiring in recent weeks, miraculously gaining enough allies in Congress in order to get his initiatives passed.
Michael Pento: I did say that the market was pricing in the imminent effect of a massive tax cut — and I meant tax cut, not a tax reform package. In other words, cutting the rate from 30% to 15% or even 20%, but certainly not offset by any spending cuts or an elimination of deductions. The market is still pricing in a lot of that hope and hype, in my opinion. But I had said and warned from the beginning, this was back right after the election, I did say that the Trump “stimulus” package — and I’ll put “stimulus” in quotes and I’ll explain why in a second — I said that the Trump “stimulus” plan would be both diluted and delayed.
It looks like that’s exactly what’s going to happen and is happening. I would be very, very shocked if we see anything before the August recess in the realm of healthcare, certainly in the tax reform package. It is my best guess that in early 2018 Trump will ram through a very adulterated and attenuated package that will be mostly a minor reduction in the rates, which is for the most part offset by some type of a reduction or elimination in write-offs.
In other words, the market is extremely, extremely overvalued, and – and we’ll get to this later – the only thing left holding this market together on top of a massive bubble is the perpetual QE from Europe and Japan. I do not expect the QE from Japan to end any time soon, although I do expect later this year at least some salvos from the BOJ, that that’s something that they might be able to do in the future. I do expect QE to end in 2017 in Europe.
Mike Gleason: Leads me right into my next question here. You summarized things very well in your Pentonomics piece this week. And for folks who aren’t getting those, you simply have got to get on the email list and get those on a regular basis. Go to PentoPort.com and sign up for that. It’s truly fantastic stuff. I want to read an excerpt from that and then get your comments here. You wrote:
“The truth is this extremely complacent and overvalued market has been susceptible to a correction for a very long time. But just like Trump, it has so far behaved like it is coated in Teflon. North Korean atomic bomb tests, Russian election interference, Trump’s alleged obstruction of justice, an earnings recession, GDP with a zero handle; who cares? As long as a tax cut could be on the way and global central banks keep printing money at a record pace, what could go wrong?”
With all that said, talk about the danger and when and where things might finally fall apart here, Michael.
Michael Pento: Wow, what a great question. Let’s just look at the earnings picture for a second here. In Q1 2017, the projected, not the actual yet, but the projected earnings is going to be $30.77. This is from FactSet data. If I look at Q1 2015, and I’m going to explain in a second why I’m going to 2015, the S&P 500 earned $29.01. So, we have earnings growth in this country, if you go two years back, is only 6% over those two years. And, more importantly, let me say, Wall Street loves to cherry pick data, so if you look at the earnings growth year over year, it’s much better. It’s close to 15%. Of course, this is pro-forma earnings that I’m talking about here, not gap earnings.
The reason why Wall Street likes to do that is because we had a vicious draw-down in the oil price right around that time. There was negative earnings in the oil sector. Now the oil sector is displaying year-over-year growth of 630%. I can assure you, that’s not going to be repeated in the future. So, if you look at earnings, the trailing 12 month earnings for all of 2016: $119.27; 2014: $118.96. so, the S&P 500 is up 30% in that time frame with virtually no growth in earnings. You have to ask yourself, why? Why would the stock market be up 30% — after being up, by the way, significantly before then – when there’s no growth in earnings?
People say it’s all about earnings. I’ll tell you, Mike, and this proves my point, I’ve always said the stock market is a function of monetary expansion. It’s a function of the yield curve and it’s a function of central bank money printing and private bank expansion of the money supply. And what we see now – and this is not my data, it’s data you can find very easily – that the first four months of 2017 central banks have printed anew over one trillion dollars of phony fiat confetti credit. That stimulus primarily coming from Europe and Japan is fungible. It finds its way all over the globe.
That’s when I wrote that commentary. I said, “You know what? Literally we have nuclear bombs being tested in North Korea. We just came out of an earnings recession, but the stock market went up 30%. Trump may be impeached. The market goes down one day and it’s buy-the-dip. Why would this ever be the case?” Why would it be the case when the stock market, if you look at it as a percentage of the economy, is virtually at an all-time record high outside of a small window in the year 2000? If you look at price to sales, it is virtually at a record high.
Why is the market so expensive? Why is it so overvalued? Because central banks are still in the process of blowing up asset bubbles. That is changing. It has already started. In December of 2013 the Fed started tapering. That was tightening. They started to raise rates. This will be another rate hike probably in