Michael Pento Exclusive: Cheap Money to Continue Flowing & Helicopter Money to Start after 2017 Crash
Listen to the Podcast Audio below.
Mike Gleason (Money Metals Exchange): It is my privilege now to welcome in Michael Pento, president and founder of Pento Portfolio Strategies and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Michael is a money manager who ascribes to the Austrian School of Economics and has been a regular guest on CNBC, Bloomberg, Fox Business News, and also the Money Metals Podcast.
Michael, it’s always great to have you on. Thanks for joining us today and welcome back.
Q&A with Michael Pento
Michael Pento (Pento Portfolio Strategies): The best of all that list is the Money Metals Exchange. How’s that, Mike?
Mike Gleason: Well, thank you very much, again, for being generous with your time. Before we go any further, I would be remiss if we didn’t get your thoughts on what we saw with the presidential election. Trump defied the odds and managed to upset the establishment, similar setup to what we saw with Brexit with most pollsters completely missing the boat. They were calling for the mainstream political establishment to come away with the win, only to find out that the other side was pretty worked up and came out to vote in droves. Was it all that surprising that Trump rode a similar wave of dissatisfaction for the status quo to victory? What did you make of how it all played on in the end, Michael?
Michael Pento: It was surprising to the liberal corrupt media, but it wasn’t all that surprising to me. If you look at the fact that Americans haven’t had a real increase in wages and salaries for decades; if you look at the fact that the stock market hasn’t gone really anywhere since QE3 ended in October of 2014 in real terms; if you look at the fact that the economy can’t grow any faster than 2%; if you look at the fact that going back eight years you haven’t gotten any money when you put your deposits in the banking system… if you look at all those factors, it’s not surprising at all that an outsider who wants to drain the swamp would be elected president of the United States.
Mike Gleason: Now turning to the fallout in the financial world, what has the market reaction since the election said to you because many were calling for a major pullback in the equities markets if we got a Trump victory and it was heading that way election night, but the markets have since drastically reversed course. What are we to make of all that?
Michael Pento: I was short the market going into the election. I was short high yield. I was short emerging markets. I was short, a little bit short domestic markets. I was happy when the market was lock limit down. I think the Dow was down 800 points in the wee small hours of November 9th. And by the time I covered my shorts, I hardly made any money.
It was a Republican sweep that was not predicted by much of anybody. I guess gridlock was mostly predicted, but now what the people are thinking was let’s see, Donald Trump could be a little friendlier to businesses. He could reduce taxes. He could reduce regulations. By the way, complete candor, I did vote for Donald Trump, but I didn’t do so enthusiastically. I thought he’d be a far better president than Mrs. Clinton, but I also have some problems with Donald Trump and it would be remiss for me not to also tell you that I think Donald Trump is very inflationary and I think he might be in the process of popping the 35-year-old bond bubble.
Mike Gleason: There is a lot of optimism around some of Trump’s big proposals that you were referring to there, the tax cuts, infrastructure spending, cutting regulations, some are suddenly now expecting an economic renaissance akin to the one that occurred under Ronald Reagan, but there are lots of real differences in the landscape today versus 36 years ago.
For example, U.S. debt is over 100% of GDP. It was only about 30% back then. Individuals are also drowning in debt. From top to bottom America just is not in a good position to borrow and spend our way into an economic boom, but hey, if we get lower taxes and less bureaucracy, if Trump can deliver it great. But what are your thoughts? Is it a good time to get optimistic and invest accordingly?
Michael Pento: I have to say no. I don’t think I am overly optimistic right now. Let’s just go through some facts and you touched on how over-indebted we are. As a nation if you look at total non-financial debt we are at an all-time record high. It’s 230% of GDP, total non-financial debt. The country just cannot afford to go through a massive collapse in bond prices.
I’m talking about not rates going to 18%. Even if they go back sort of close to normal, the normal yield on the 10-year note is 7% going back to 1949. So, if you look at that average, suppose we go back to 4%, even 5% on the 10-year note, what’s that going to do to the housing market? What’s that going to do to every individual who was sequestered in bond proxies for the past eight years? You are going to collapse the entire stock market. You are going to collapse the real estate market and by definition, you are collapsing the bond market.
Mr. Trump is going to add to that collapse because he has huge deficit spending plans and that’s a huge increase in the supply of treasuries. He’s also – and this is what I hear from the members of the FOMC – that a Trump presidency suddenly means they are going to be more aggressive with their rate hike campaign. It’s going to be an accelerated campaign.
Now what happens if you have huge deficits, the deficits by the way are already up 34% year over year, now you have $1 trillion spending plan over the next 10 years. The Fed is more aggressively hiking rates, which means they are beginning to sell. In order to hike rates, you have to sell assets, so they are going to start to train their $4.5 trillion balance sheet and by raising short-term interest rates, much more supply. Who is going to buy it? The Chinese are not buying them anymore.
It’s a very, very bad situation that I think short term exists for the bond market. And if I’m right, by the way, the 10-year note’s yield went from 1.83% the night before the election to 2.3% in the wake just a few days after the election. Now if that kind of trend even remotely continues, Mr. Trump unfortunately is going to be welcomed in as so many other of his predecessors with a recession and maybe a very steep one.
There has not been one dollar of taxes that have been cut. There has not been one dollar