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