But when interest rates were falsified for so long, near zero percent for most
of the last fourteen years, borrowing courts were free, and debt levels ballooned
and asset prices went to the moon. When you try to return to a
normal market, chaos breaks out. You saw that in March when the FED
had the rescue of the entire US banking system, and you're seeing it today
as bond market fractures and implodes and Joe Biden's walk in the picket line.
You're listening to Carrie Letz's Financial Survival Network where you get valuable information you just
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welcome. This is Financial Survival Network. Come your host, Carrie Letz.
We're coming to you on the third day of October. In twenty twenty three,
Will AI save us? It's going to take an AI based miracle.
According to my next guest, Michael Pento, you find him at pentoport dot
com. If you got a question for Michael myself kl Atkarrie LUTs dot com.
Please and if you're on YouTube, please like, share, subscribe,
all that good stuff. Leave your comments below, Michael. So we're approaching
an existential moment here, aren't we? Good to be on with you as
always? Kerry. You know I'm going to say this on my podcast,
I'll say it here first. You know, Nero fiddle while Rome burns,
and he've been to ride in throughout history for doing that, as well as
many other things. We am a president here who went to a picket line
while the US bond market was creating. And that's where I think the rubber
meets the road here. I think the most salient thing you have to think
about now as an investor is what's happening with US bond yields. We have
a condition now where the faith in the world's reserve currency end our sovereign debt.
It is fracturing, eroding, eroding, and cratering right before our eyes.
All right, So give us examples of what's taking place, the carnage
in the bond market, and what do you do about it? Well,
I'm I'm well, I will short the bond market when I have to.
I what I did first of all, is on August first, I sold
all of my long duration bond exposure. We have no long duration bond exposure
at all. We're rolling tea bills here, pentupport and very very short term
US government debt. That's the first thing you should have done. And let
me explain to you what the process is, what the problem is that we're
saying here. So first of all, this inflation which I called for to
occur in twenty twenty three, which we did indeed have where inflation went from
nine percent CPI inflation went from nine percent to three percent, is now coming
to something called reflation, so three percent to three point seven percent on the
headline figure. So we no longer have a condition where inflation is the second
derivative is falling. We just have a rate of change. Increase in inflation
and increase you at a faster rate. So that's number one. Number two.
If you listen to the Atlanta Fed, sometimes they do sometimes I don't.
I mean they pull them this five percent four point nine percent to be
exact headline figure for Q three GDP. That's an acceleration in GDP. So
you no longer have falling GDP. You no longer have disinflation. Those were
things that would make you want to buy the long end of the bond market.
Get gets a lot worse carried. China has been a seller of our
treasuries. Their reserves are parked in US dollars, and those dollars are parked
in US treasuries. When you want to get out of US treasuries because you
might be wanting to invade Taiwan, Okay, you sell your treasuries. You
don't only want to be a victim of US dollar hedge of money. Sell
treasury lip and all that good stuff, right exactly, Sell dollars, buy
back your currency, get out of the US dollar grip, the grip of
the US dollar and the US government. It's worse in Japan. They have
two things that they're doing. One is they're selling US treasuries for the very
same reasons, not Taiwan, but they just don't want to have be exposed
to US dollar hedgemoney. But they have to sell their recurrency, currency reserves
because their in is craishing. It took one hundred and fifty en to buy
one dollar this morning. I mean their currency is absolutely crashing because they have
this acidine yield curve control. You know, Governor Yuado over there in Japan
saying, uh, you know, inflation is not just sustainably at our target
level. It's been above their target for months on end, way above their
or. But he just lies and he says, we know, I don't
believe it'll be able to stay there, So we're going to cap yields at
point seven percent. It was capped at a quarter percent, and now they're
point seven percent point seven percent for a ten year Jerry. The inflation rate
in Japan is eight percent. If you look at their food prices, booing,
God's good Earth is going to buy a Japanese yen, a Japanese government
bond other than the thanks your paying. Yeah, so they're buying all,
They're buying everything to keep those yields. But those yields are rising. They
have to rise because the end is getting destroyed. So they have to have
some kind of comparison, you know, definitely sort of a little more amends
for it with ten year at four point seven percent here in the United States.
Otherwise their courrency is going to collapse. So they have an inflation problem.
We've got a currency problem. They're sellers, I don't let me.
Can I just finish this through the very points. Yeah, it's really very
important port Info. Oh you got so. Now you have those those conditions
of higher inflation, you have GDP of five percent, Corney Alanta Fed,
You've got Japan selling, You've got China selling for Japan selling for two reasons.
Then you have this massive issuance in supply. We are running two trillion
dollar annual deficits in peace time and when growth is accelerating. This is incredible
to me. The amount of supply that the US is dumping on the market
is rising very quickly. Who's going to buy it? Who's going to buy
it? Who's going to buy Well, here's the thing you just said it.
Who's going to buy it? The Federal Reserve was buying eighty five billion
dollars a month of US debt QE and they falsify the entire treasury market.
I mean they monetize four trillion dollars of debt. Since COVID broke out,
we had no MORTGT for treasuries. Now the FED is selling their balance sheet,
adding to the supply from China and Japan. People ever, you know,
boycotted and US debt and they're selling eighty five billion a month in US
debt. So this is what is we're now discovered. This is called price
discovery. Oh, let's have a real market's let's fight inflation. Well great,
I lawned you. Compliments to you for trying to go down that road.
But when interest rates were falsified for so long near zero percent for most
of the last fourteen years, borrowing courses were free, and debt levels ballooned
and acid prices went to the moon. When you try to return to a
normal market, chaos breaks out. You saw that in March when the FED
had to rescue the entire US banking system, and you're seeing it today as
bond market fractures and implodes. And Joe Biden's walk in the picket line,
Well, it's probably the best use of his time at this point, right,
Michael, Well, we share politic say it, listen. I am
I'm not a rebut Atletico this is I hate both parties, but I mean,
if any can do anything to help, I mean, what is he
doing to bring down the price of energy? You know, he's he's walking
the picket line in support of the United Order Workers Union to to fight for
higher wages because of the inflation that he helped bring about, and it is
the cause of of a great deal of the inflation that we have today.
Of course, Donald Trump borrow a lot of money too, But the two
of them, Biden, what was his reason for, you know, his
his money spending fiscal madness. He borrowed money like a drunken monkey. What
for there's no reason for it to fight it. He borrowed money and increase
the debt to fight inflation. Give me a break. Yeah, unbelievable.
Huh So, so you've sold out your positions in the debt. Is this
debt inferno gonna spread to corporate bonds as well? Uh? When does it
end? I guess that's the question. Oh, come on, I mean
if if US debt. So, we were at zero point five percent in
the in the immediate week of COVID, Now we're four point seven percent.
I'm talking about the benchmark US ten year note. But the spread between treasuries
and junk bonds has written. It's kind of around four point one percent as
we record this video, very very tight. Gary. When when when when
the when the market loses faith in the purchasing power of the currency and the
sovereign bond market. There isn't any way in God's good earth that you're gonna
tell me that high yield it isn't gonna absolutely blow up. Listen, it's
true that consumers and businesses have turned out their debt. That that's true.
I'm not gonna. I'm not gonna. I'm not going to say that they
have not done that. But the fact is that there is a one point
eight trillion dollar refinancing wall coming very soon in the corporate bond market in twenty
twenty four, twenty twenty five. We have to start rolling over this debt,
okay, and it's going to be rolled over at much higher interest rates.
So here's the other side of that. There's three sides to that coin.
So there is a maturity wall coming. So you say to me,
the parables say, well, you know, the consumer has turned out its
debt. It borrowed money to buy a house at three percent, and they're
good, good, And then I say to you, I say, well,
what you were saying to me is that nobody has to buy a house.
No one has to move because they don't want to change their mortgage from
a three percent loan to an eight percent loan. We're almost an eight percent
now in mortgage rate. And then I'm gonna say to you that this does
that mean ipso fatso that the archie bunker you used to say it that,
by the way, that the real estate market is frozen. Oh, yes,
the real estate arch ist frozen, mister Pentel. There's no you know,
no one selling the existing home sales, standing homesales. Third depression,
Well, does that mean that the economy really stinks? If no one could
afford to buy a house, and no one could afford a new car loan,
no one could afford their their credit card debt, which is at a
record, as you know, defaultsecies, So how could you? You can't
have it always. And here's the other thing, the third parts of that
turn the consumer and businesses have turned out their debt. Well, who the
hell owns this debt? It's financial entities. There are many financial entities carry
that own commercial mortgage backed securities and mortgage backed securities and corporate debt that's yielding
three percent, four percent, And if they had to sell it, it's
really worth eight percent. That means the price is down, the yields up.
It at eight which means you're way underwater on your on your assets right,
specially borrowed, especially if you're borrowed to buy them right like banks.
Still I'm on level. Leverage is always the is the is the is the
killer here. So, as you pointed out, but you have many financial
institutions that are insolvent in reality if they recognize the actual price of their commercial
mortgage backed security, which plunged because the yield is up, they have to
compete with the yields where they are today, there's zombies. Yeah, and
I don't know, did have you been reading my mind? Because my next
my next sentence was if you are well, and then then the probables will
tell me. Well, I'm a financial institution and I sent all of my
money, all of my assets to the said at par value. So I'm
good for a year through the bank term fund program. Okay, wonderful,
But I know that this is not QEI. It's a loan at a very
high interest rate. And calm March. The FED is supposedly gonna tell me,
uh, okay, bank, I have your corporate bonds, and I've
got you your mortgage backed securities. I gave you par for them. You're
gonna give me par back right hand to the dollar, and you're gonna take
your fifty cents on the dollar asset. The banks know this, and you
said it. These are z We have created zombie banks that you know.
The net percentage of banks that are tightening lending standards is close to fifty one
percent. Now. It's ource session territory and it's getting tighter and tighter every
day because they understand that they have to take these assets back and their assets
are underwater. So we've borrowed some time, but we have not solved the
problem. The problem is that race went to the moon very quickly to combat
nine percent inflation, which was really seventeen seventeen percent inflation, and the FED
had no choice but to do that, but they ended up bankrupt, bankrupting
the financial industry once again. So what if they start cutting tomorrow, Well,
they could start cutting to here's the thing, another great question. If
they start cutting tomorrow, wonderful because that's what they've done since nineteen eighty seven,
since the crash of eighty seven. What was the Fed's playbook. I'll
tell you you know, you can go to eighty seven long term capital.
You can go to a two thousand, Naza collapse, two thousand and eight,
twenty eighteen, Rebolt crisis, nineteen Rebroke crisis, and you go to
twenty twenty the COVID crisis twenty twenty two. What the what didn't they all
have in common? Well, the FED said, well, you know what,
inflation is not where we needed to be anyway, and the market is
blowing up and the economy is blowing up, so we'll just go back to
good We'll just cut rates and buy some bonds from the best. If the
Fed did that now they would lose well, they wouldn't lose any credibility with
me. I already I get. I get that they have zero credibility.
Their models think and they're there's there's no there's no information there for me to
gain from the Fed. But if anybody else on Wall Street believes that they
have the ability to put interest rates up to a level that's higher than inflation,
so to provide a real interest rate for investors, that anybody would would
still believe that it would be dead. They would now understand, they would
be inculcated to everybody that this is this, this entity, this institution can
never provide investors with a real interest rate, and inflation would take off like
a rocket ship. Which I was in New York City. I think they're
in the midst of hyper inflation there. Everything is shooting through the roof.
I mean, a camera that a few years ago was ten bucks is now
thirty bucks. Michael. I mean, it's it's unbelievable. And I you
know, my one of my friends ordered a sushi from a restaurant for me
to pick up, and you know, it was for basically three of us.
It was one hundred and seventy five dollars. I picked up a bag
that it was like a court ziplog bag. There was nothing in that bag.
Michael. It was unbelievable. And it's all going to pay debt.
Well speaking of well, exactly correct. And that's why the Fed. The
FED has now jumped the shark with inflation. So it's impossible for them.
We're virtually impossible for Chairman Powell to now just suddenly say, you know what,
we're now going to NQT and lower interest rates. He'll do that,
I think, And that's what I where I was sort of the show with
I think this quanti tightening program that they're having right now. It's a quantity.
It's tantamount to selling treasuries. They used to be a big buyer of
treasury Now they're unloading them. Because you know, if if a Treasury bill
comes due and the FED doesn't roll them over anymore, somebody has to buy
that debt, right and that means the public, the market has to buy
that debt. They send it to the Treasury and surgery sends it to the
FED, and the Fed destroys the money. That's what you need. That's
what quantitative tightening really is. Infuation. No, it's it's it's it's the
market accepting or determining what the price of this bond should be from the government.
And it's a lot lower. It yields a lot higher than what it
was. But so they can't go back to zero, and they can't go
back to QB very quickly. But the interest on our debt we have a
thirty three trillion dollar national debt now, the interest on our debt is now
seven hundred billion dollars a year semilar billion dollars. That's seventeen percent of the
total income to the Fed. Now that is going to go much higher.
It's going to be thirty five percent because the debt rolls over at much higher
rate. So in a few years a lot of that debt's short term too,
but they're rolling it over at what used to be almost nothing at five
percent, So you're going to see the interest payments go doubling in the next
few years, thirty five percent of all income. And that means that by
two thousand and forty, if we don't have a recession, which is I
will say, if let's just do let's put on your put on your blinders
and your rose color and glasses, and imagine a world where the US economy
does not have a recession till two thousand and forty. Last time I checked,
we're in twenty twenty three, okay, sventeen three years, seventeen more
years of no recessions. Never never happened, but we will. If that
happens, it'll be two thousand and forty where we spend one hundred percent of
our entire income on entitlements and interest payments. It's in reality it'll be much
sooner than that. We'll have no money for anything else, but in titlments
an interest on the debt. That's how this is a bond market is rebelling
against the global market for our bonds is imploding. And we have I'm not
blaming just the president, but we have a president who's fiddling on a picket
line try to get wages higher. These people don't need higher wages if they
didn't have to battle twenty percent inflation, seventeen to twenty percent, if they
could, if they were able to afford a house. And that all lies
at the feet of what they did. You know, you know when COVID
broke out, we send people more check. We actually gave them more income,
more and then they have the chore what they had before three COVID.
Why what was the point of that? We're so afraid of a downtick in
the stock market. You know, it's something called creative, creative destruction Joseph
Schumpeter, Right, so happened. We don't have price discovery, we don't
have freedom, but we have is manipulated markets across the planet. So true
that and they are starting to break right now. And the lynch pin to
the grenade. They know the gray pin was inflation. They finally did it.
Remember for many many years they said, we can't where's inflation. We
know what we do inflation. If we don't get two percent. If inflation
is one point seven percent, it's a disaster. It has to be two.
They finally got two, and they made two twenty that we're paying with
the consequences for the album. That's the truth here. Hey, what about
the connection beach between the two year treasury and the Fed funds rate? Because
the Fed funds rate has to stay ahead of that two year treasury, right,
Uh, yeah, that's that's that's what I was just talking about,
having a real Fed fund Guess what, when you have a real Fed funds
rate, the pressure on the economy is immense, and especially that is the
case when you have record amount of debt. Now I'm talking about nominal terms
and as a percentage of GDP. We have record corporate debt not only in
nominal terms but as a percentage of GDP. And that's why all these zombie
companies are going to go Many of them are going under because they have to.
They have to flow new debt just to pay interest on existing debt.
And that new debt is eight percent ten percent, not four. Yeah,
you're gonna see this. So it's all about time, man, I mean,
where's the rubber meat the road. What did I do on August first?
I sold all of my long duration bonds. We are seventy percent of
our portfolio is short term treasuries, and we have very little exposure to equities
with hedges. With hedges we are we are actually long the dollar, long
the dollar against really we've been. We've been loan the dollar for about two
years with a huge profit in the portfolio. Why because I love the US
dollar. No US dollar is doomed, it will go down significantly, But
when it's all about timing, I'm loan the US dollar against the Euro and
the yet not against hard assets. I actually have a five ers I have
a five percent now position in physical goal. No, I haven't had any
minors. I actually sold some of my physical goal a little bit ago because
I one thing goal, the one thing goal market does not like. Yeah,
the one is rising nominal rates and rising real rates, and we have
that right now. So but that's going to change quickly because we just talked
about that maturity. Will I don't know the exact date, but I will
know when real interest rates start the fall. You could just back up the
truck on physical goal and the minors, but not uxil back. You got
to get that's why, you know, philosophical investing and stole clock investing doesn't
really work for me or my investors, right right? Got that you want
to own? You want to own the sixty to forty portfolio, you know,
Kerry, this year will mark the third year that US debt US treasury
bonds have been in a bear market that has never happened before. Do you
know if you will if you said to yourself, you know, I'm close
to retirement. I want to have a sixty forty portfolio, but I want
to have sixty percent bonds and forty percent equities, not just sixty percent forty
percent bonds. I want to overweight bond. Even those bonds are down fifty
percent, fifty percent in the last two years. It lost half of your
money in the world's safest asset, supposedly half of your bunny. Now,
you could hold that thirty year bonds so maturity, and you'll break even.
You're holding your thirty year bond that's yielding one percent thirty years. Well you
could do that and get your principle back, but you're gonna get wiped out
because like inflation. It will not be if Kerrie inflation will not be one
percent for thirty years. So that I'm just trying to tell you the this
way shows like yours are so popular, and active money managers who have a
brain are becoming popular too, because you just can't sit here and say,
you know it's you know, nineteen sixty or you know it's sixty to forty.
Portfolio is wonderful. Everything always comes back, blah blah. You're going
to have volatility, you've you've had and are going to have with increased intensity,
volatility in the bond market and in the stock market. So what sectors
do you want to own the stock market? Where do you want to invest
along the yield curve? Do you want to own high yield or do you
want to own T bills? You have to know the right answer otherwise you're
going to get wiped out. Yeah, all right, Well it looks very
bleak. Is there any bright spot on the horizon at all? But you
know the bright spot on the horizon is perhaps you know this AI thing is
going to be spectacularly good for productivity. I know it's a possibility, and
you want to you want to hope for that. But on the other side
of that short term, if let's just say that's true, it couldn't be
true. You know, AI is going to boost the productivity of America.
Let's just say that's true. Yeah, on the road to that, there's
an awful lot of people they would be on the unemployment line. Yeah,
it's going to replace a lot of people. And that's so that's the thing,
you know, I keep I hate to be like, I'm not a
conspiracy theories, but yeah, we kind of broke the model. We said
to investors and to consumers, go to your mailbox, there'll be a check
from the government for you, and it'll be you know, a universal basic
income, and maybe we'll get rid of physical currency and coins so you can't
take your money out of the bank. We'll just you know, we'll send
you your money, we'll tell you what your interest rate is, and you
go out and spend it, and you won't have a job because AI replaced
it and we'll take care of you. That's reassuring. How's that for some
good news? Uh? Well, yeah, and like you were saying,
pre cal we might have Skynet as a result. Yeah, I said,
bring it on. I think Skynet would be able to replace our species with
something better. You know, maybe the cockproaches the metal in the United then
be human nature is odious, to say the least, with the neurolinks and
all that good stuff right to single larity. We're approaching that moment. Yeah,
well that's why we need. We need a renaissance, a rebirth.
Uh. In religion, in this company, in this country. Faith in
God and prayer can help us too. But the current course we're on is
a disaster. It's unsustainable by all the pounts here, right, I mean,
and it's and the one who gets hurt the ones who are going to
get hurt the most are the people in the middle to lower classes, though
those ones we know that they always do right. Yeah, it's the oligarchy
and the elites, the one percenters who have their multiple houses and they're you
know, listen, even be out of the picture. I don't want talk
aboutes. I'm just saying, if you care about people, you got to
care about what's happening. And the idea from the Federal Reserve and the Treasury
and from government, the upris to believe that they're better than the market.
They know what the interest rate is they can because we have a new technology,
it's called the printing press. We don't have to let money to gold
any longer. Why would we do something so stupid? We want that,
But I mean, I hear I hear some people who who actually proclaim I
want I want to mention names. They're saying, well, why do we
need to fund the deficit? Yeah, money to do ourselves correct money.
Well, if you do this is like insane. What well Krugman is a
guy, an economist. Nobel rises when the econos said, why would you
start a war with Martians and just fire fake missiles at them? You know,
whole digging and filling is wonderful, but it leads to stagflation. It
destroys your currency. It leads to a bond market collapse and the destruction of
your country. This is not something that's never been tried before. It's tried
over and over again. If you cannot sub supply the market with the faith
that your debt will be repaid and that your currency that you're paying that debt
is sound, your nation will be that that might be not someday is in
the danger of it will be destroyed, and it's never not happened before.
So we do have to fund our deficits. We do have to have a
currency that means something. Maybe someday we'll get back to that at but but
I don't know. We can only hope and pray. Michael, it's definitely
a bleak picture. Do you think we've ever been in as bad a situation
as we are now? I'm gonna my reflex response is no. And people
say, well, well, you know, the banking system is much better,
blah blah blah blah. You know, we have never had this level
we have. We have had a triumvirate of ascid bubbles. We have never
been a situation. We have a massive bubble in bonds. Seventeen trillion of
negative yielding debt around the world. That's a bubble in bonds. When you
get paid to borrow money, that's a bubble. And that bubble and bonds
existed concurrently with a record level in home prices. This is pretty much globally
to carry a whole price to income ridge has never been higher. And the
stock market, so the stock market has outside of twenty twenty, if you'll
get price to sales, if you look at total market captain GDP ratios if
you look at earning yields as compared to treasury so that risk premium it never
been worse. Yeah, So you have that trevert of bubbles that's bursting on
top of a record amount of debt. It's hard to imagine a time worse
than this coming unfortunately. All right, Well we will leave it at that.
If you got a question for Mike or myself, shoot me an email
kl at Carrie LUTs dot com. Find Michael's website at pentoport dot com and
there's a link in the show notes to this interview on Financial Survival Network dot
com. Make sure you sign up for your free newsletter. Michael, I
know we'll be talking to you again soon and let's see what they're up to
next. All right, Kerry, good to be with you. Take care,
Thanks for listening to Carrie Letz's Financial Survival Network, your solution to today's
trying times. For the latest, go to Financial Survivalnetwork dot com. Financial
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