Michael Pento Exclusive: “If you do not have a plan to protect yourself from this you’re going to be in deep trouble…”
Q&A with Michael Pento
Mike Gleason: 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 and 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 great to have you on with us again, and thanks so much for joining us today. Welcome back.
Michael Pento: Thanks for having me back on Michael, and great to be on with Money Metals.
Mike Gleason: Well the last time we had you on was right after the election back in November, and a lot has happened since then in terms of the Trump administration taking shape. Now on that front I want a zero in on the monetary policy side of things here first off.
Now we’ve been hearing Trump and his Treasury Secretary Steven Mnuchin make lots of little comments lately about wanting a weaker dollar. Now we used to hear US officials talk up a strong dollar even though we never really believed them. It sounds like you don’t believe them this time around either.
You’ve written at least if you look at the policies they’re pursuing, despite saying they want a weaker dollar, they seem more likely to get a stronger dollar. At least vs the other world currencies. Am I understanding it correctly, and why do you think that?
Michael Pento: Well, first of all just to be clear, no fiat currency regime ever wants stronger currency because in the modern Keynesian group think they believe you grow through exports. How you engender exports is by crushing your currency. You grow the stock market, you grow wealth by ruining your currency. Completely antithetical and illogical, but that’s what they think.
But why do I think the dollar should be strengthened? By the way, the dollar’s up to a 14-year high. I’ve been long the dollar, and I’ve been right. The reason I believe the dollar should strengthen here for a while longer is (because) you have a more aggressive Fed. You look at interest rate differentials, you look at where the U.S. 10-Year, it’s at 2.45% as opposed to Japanese bonds and German bunds and European bonds… there is more value here in the United States, that flows into the United States and the U.S. dollar.
You have different monetary policies; the Federal Reserve is on record saying they want two or three or four rate hikes depending on who you talk to. I even heard five this morning from one of the governors. You have a rate hiking mode here the United States as opposed to the continuation of QE, albeit from 80 billion euros to 60 billion euros in the Euro zone.
Of course, Shinzo Abe and Mr. Kuroda in Japan, they’re stuck at printing money forever. They can never even hint at stopping because the market would collapse and the economy would collapse. In addition to that and those reasons I just gave you, we just heard this morning from Larry Kudlow, and a friend of mine who is very well connected into the White House that the border tax adjustment is back on the table. So that’s the strategy they’re going to go with in the Trump White House.
They’re going to border adjust taxes. So basically, domestic revenue minus domestic expenses. It encourages people to sell things overseas and to source things here in the United States. So that would in theory lower the trade deficit in the United States and that should be dollar friendly. At least the trading algorithms are programmed to buy dollars when they hear that.
That’s what I see happening for the immediate future. I’m not saying go long the dollar and then go on vacation. What I think is going to happen is that I believe that Mr. Trump, as well intentioned as he may be, is going to fall into the meat grinder of Congress.
He’s not going to be able to get through all of his policies, and that I believe while that is occurring, the Federal Reserve will slowly be behind the inflation curve, but slowly raise interest rates. What I think is going to happen in our near future, in the next several quarters will be a flattening of the yield curve and a recession in the United States. And that is when the dollar is going to absolutely tank.
Mike Gleason: Isn’t all this business about a strong dollar vs a weak dollar a bit of a red herring? I mean when you look at real things, whether it’s real estate, gold, food, whatever. It seems pretty clear that the purchasing power of all currencies has been steadily falling over time, although it does happen at slightly different rates.
Why is it that people have seemingly no clue about what’s going on the Federal Reserve Note, Michael, and really all of today’s world currencies for that matter?
Michael Pento: Well, I guess it’s a lack of education. I mean, I can’t speak why people are so ignorant about what’s going on with the Federal Reserve. You look at the Fed’s balance sheet, what do they control? They control, and all central banks control, base money supply.
That’s physical currency, and central bank credit. If you grow that base money supply, you’re going to get inflation. If you look in Germany. Their inflation just was reported this morning. Up 2.2% year over year. That was the highest level in 4 and half years. Even in the Euro Zone as a whole, 1.8% year over year. In the United States, 2.5% year over year CPI – Consumer Price Index.
So, they’re getting their inflation as crazy as it is. These central bankers have pursued inflation targeting fervently. They’re so enamored with their own prowess to engender inflation that they think they can actually engender the exact 2% inflation target, and that it will just stop there. They’re completely in for a shock when they come to realize that they cannot hit an inflation target and stick the landing right on the head.
So, they’re going to get 2%, they have achieved that as they just showed you. And it’s going to wax higher and higher and I believe that’s where they’re going to have their real problem because if you have inflation that sits on top of record low interest rates, and record high levels of debt, they’re going to bring about – global central banks – are going to bring about a crisis much greater than what we experienced in 2007.
Mike Gleason: Getting back to interest rates. We’re continuing to hear the Fed talk more about these small hikes. You said four, maybe even five this year. Do you think they’ll follow through on several of these different rate hikes?
Then how do you think the Fed’s moves over the next year or so will impact things like precious metals and