Last year saw a record for insider stock sales. This year's pullback in stocks is just the beginning of the disaster ahead, according to portfolio manager Michael Pento, who is not only seeing a major pullback in stocks, but also bonds and real-estate. "The insiders are already out," he says of this "triumvirate of bubbles."
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Find Michael online: https://pentoport.com
1:46 Fed policy
7:23 Hidden risk
10:08 Housing market
11:30 Fed tightening
12:56 Fed's balance sheet
15:44 Crack up boom?
20:46 "Triumvirate of bubbles"
27:03 Money velocity
28:27 Gold update
30:37 Silver update
31:48 Pento Portfolio Strategies
34:32 Miles Franklin
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See Full Interview Transcript Below
Dunagun Kaiser: Welcome to Liberty and Finance we are always delighted to have this returning guest Michael Pento is the founder of Pento Portfolio Strategies he's an active money manager and he joins us this Friday January 28 2022. Michael thanks for coming back on Liberty and Finance
Michael Pento: Always a pleasure to be with Dunagun
Dunagun Kaiser: We always have a lot more questions submitted prior to arrival than we ever have a chance of fielding while you're with us and in fact I think you told me about a year ago when we had you on and had been several months at that time and we said what are we going to do we get disconnected you said well you have to have Michael Pento back on more often so we've been trying to and our viewers always appreciate that they are looking for because a lot of people are trying to position themselves to be in a safe spot or the best spot or to be both potentially able to thrive and survive the major changes that are coming, and a growing number of people consider that the changes may be more volatile bigger in nature that may be coming soon we've certainly seen a lot of that in the last couple of years, so could we first turn our attention to one of the areas that people look to for clues about what may be happening next and that's the Fed's actions that can affect monetary policy, it can affect interest rates et cetera you've been watching that closely as well, we just had an FOMC meeting and what are you seeing that you think is important that people need to understand about the outcome of that
Michael Pento: Well I think a lot of people were anticipating a very dovish Mr. Powell and I heard a lot of people especially people in the I call them Deep State of Wall Street you know these wire houses you know the JP Morgans of the world well you know Powell could never raise interest rates you know you could never do this he's got to be dovish because of the story of the stock market, well and this is the way I was thinking about it I said that's completely ridiculous and here's why, so Powell's spent all of 2021 telling everybody that inflation was transitory and inflation waxed higher and higher throughout the year and then in December we had a print of seven percent year-over-year consumer price inflation and it was that December print along with other factors, reducing unemployment rate, that caused Powell to be become very hawkish, he said we're gonna accelerate the taper and we're gonna you know we're gonna be raising interest rates in 2022, so he did that pivot, so you know a month later the FOMC meeting in January comes out and people were telling me again that he's going to turn to a doe and I'm saying to myself wait a second, there's been no new information about inflation officially from the Bureau of Labor Statistics, Department of Labor whatever none it's still seven percent and energy prices continue to go higher along with wages and home prices and owner's equivalent rent, so how in the world I mean Powell would look like a schizophrenic monkey if he was to say oh you know what maybe inflation is transitory and I don't have to, I don't have to stop QE and I don't have to raise interest so he said exactly what I thought he was gonna say, but here's the thing now Wall Street is you know tripping over themselves to get positioned for rising inflation and rising interest rates and they seem to be always behind me, I mean I've come on your program I'm a regular guest and my track record is very clear for everybody to see I said last year in the middle of last year beware of Q1 and especially Q2 of 2022 and just based on year-over-year base effects with inflation and growth, I said inflation was going to slow a little bit throughout 2022, but more importantly growth was going to decelerate and that's exactly what's going to happen and I said beware of this first half of the year especially the second quarter, because I think we have a very good chance of a crash and we've had, by the way we've had a crash already and I think it's just getting started now let me be very clear, we've had a crash I think February could still be a rebounding month or at least a plateauing of asset prices but once we get into the second quarter, so let's just be specific please, understand that in March we're going to have the first rate hike and then we're going to have in the second quarter, sometime in the second quarter so April, May, June we're going to have the second rate hike and the beginning of the draining of the balance sheet which I believe is going to be about 90 to 100 billion dollars a month, Powell said he wants to have mostly mortgage-backed securities out of the portfolio, so he just wants treasury, so is he right, right now the Fed has 2.7 trillion dollars of mortgage-backed securities, but it has to dump expeditiously which is gonna cause interest rates for homes to skyrocket in my opinion and you're going to have the same thing and I'll leave you with this and I'll let you on a question Dunagun, he said this is this is what makes me laugh so Powell said in his FOMC conference meaning that oh we're going to have the the draining of the balance sheet just run in the background well the last time they did that was 2018-2019 when the you know the market just absolutely crashed, so we're in for another very, very difficult time in the stock market, we've been through one already, I think it's just getting started and I just and I just want to say one more thing about my portfolio I came into 2022 with some shorts in the portfolio as a buffer and that is why we're doing very well here at the Pento Portfolio Strategies minor loss in the portfolio as compared to 14% down on the Nasdaq and 9% down S&P
Dunagun Kaiser: You've got other people besides yourself that are watching things roil and roll and wondering if we're going to see a big turnover actually I've got a question in each direction here one person talking about if there are opportunities that present themselves from that what risks might lie within those opportunities I remember when I was a kid I would always play checkers and I'd always think I was setting up a double jump and I'd end up getting double jumps, so TM8155 is asking since refinancing is available with a 15-year fixed rate at 2.75% a loan equity ratio about 50 percent, what kind of risks might be overlooked if it's refinancing to pull out cash to raise cash in order to take advantage of a potential drop in precious metals and/or real estate prices so for people who are thinking gee I got to gather up a lump of cash here because I feel like there's going to be some opportunities coming either in low metal prices or in low real estate prices but if they're rate if they're using their own home as the equity to pull that out what hidden risk might people need to be thinking about
Michael Pento: Well the hidden risk you know first of all I can't recommend anything for this individual because I haven't done my due diligence but just for a rule of thumb it's never a good idea to take money out of your house to invest in the stock market I mean you know I just don't like that trade especially when I think that real estate is in a echo bubble there's a triumvirate of bubbles out there right now as you know real estate stocks and bonds so I'm you're speaking to someone right now who's actually renting a house before I go and buy a house because I did this before in 2005 and 2006 when I sold some property I had in Florida Sarasota because I knew we had a bubble in real estate back then so I'm doing the same thing now so I'm waiting deferring my purchase because I think we're going to have a very big problem with real estate mortgage interest rates in the very near future as I just went through about the Fed dumping 2.7 trillion dollars of commercial mortgage-backed securities but so when you talk about the interest rate interest rate complex you have to be very specific so I do believe that short-term rates could rise a little further, long-term treasuries are in a topping process in my opinion, because as I said before in this it's answering the first question the Fed is always fighting you know the last war, I mean now they're gonna starting to fight inflation now they should have been starting inflation years ago, I mean right after right after we had a vaccine come out that was a great time to end quantitative easing, but they kept up 120 billion dollars a month for way too long, many, many, many quarters too long and we won't even talk about what you know Ben Bernanke he wrote a book about the courage to act the courage to destroy the middle class is what the book should have been called so I'm looking for treasuries long-term treasuries to act a lot better and a lot different than junk bonds in commercial CMBS Commercial Mortgage-Backed Securities that residential mortgage max secured
Dunagun Kaiser: The other side of this is people are concerned about the potential for a meltdown in the housing market, Chris asks what is your outlook for the global housing market when this thing blows how far down will it go how will the World Economic Forum quote own everything any thoughts on this
Michael Pento: I have a lot of thoughts on that like I just mentioned to you I am waiting I'm deferring a purchase on a home and home prices could very easily drop 20% in the United States and worldwide, but the student of every single housing market but certainly you know you look at the problems they're having in china with their massive fixed asset bubble that's unwinding, I don't care if Xi Jinping lowers you know the the RRR lending rate, he's not gonna be able to prop up that bubble much longer, so yeah I mean I think that as real estate prices come down along with the stock market people who have overextended themselves again owning multiple homes with very little money down it's not quite as bad as it was in 2005-2006, but it's an echo bubble, they're going to be in a world of hurt, so if you can I would hold off on purchasing a home until home prices correct
Dunagun Kaiser: You mentioned a few minutes ago about the kind of I don't know what to call it the letting the paint dry is that what they used to call it at the Fed here
Michael Pento: Oh so it was both it was running in the background or watching paint dry that was the that's what they tried to convince investors, that was the dynamics behind Quantitative Tightening, didn't quite work out that way and when they and when they did that before which was you know 2000 to 2018 2019 this balance sheet is was nowhere near where it is now we're at 8.9 trillion dollars but before 2008 it was 800 billion dollars with a "B" now we're 8.9 with a "T" trillion and Powell says he wants to and I'll quote him he wants to there's plenty of room to significantly drain that balance sheet never use words like that before, so you know I warn people on your program I said watch out for 2022, I hope they listen to you, I hope they listen to me, they have another chance of a small rally here before we get to March, April manger because that's when I think the real poop hits the van so if you haven't already raised some cash you should use any balance to do so
Dunagun Kaiser: We have a question here about how much can we trust like you we've talked in the past about whether the headline CPI numbers are reflective of what's actually going on in the real economy etc., Dad Bod Way says is the Fed really reducing its asset purchases balance see she seems to say yes but what about off balance sheet is there anything that is knowable about off-balance sheet actions by the Fed
Michael Pento: So just to be specific the balance sheet is still increasing the rate of change is slowing okay so it's growing at a slower rate but it's still growing it's not going to shrink until probably May, so I mean off-balance sheet, who knows, what you do know and should be aware of is this balance sheet is going to come down faster and harder than any time before and they only they only tried to reduce the balance sheet once so it's not exactly an earth-shattering statement but it's going to come down into the tune of trillions not just a few hundred billion, trillions, that's the goal of Jerome Powell it's not me saying it's not Dunagun Kaiser, Jerome Powell wants to raise rates, aggressively reduce the size of his balance sheet into an economic slowdown which is global in nature and inflation which is also going to come down albeit more on the margin that's a disaster for equity prices and let me just say I run I run money professionally, I have some shorts in the portfolio I'm not yet net short in the portfolio because of my 20 point model which I created rigorously back tested, I look at commodity prices, CRB Index is still rising you know you can't have a collapse in the economy when the demand for commodities is rising, so I want that to start to roll over, I'm looking at a lot of spreads break even spreads Libor, OIS, BSBY, junk bond spreads they're still they're flashing yellow, but they're relatively quiescent up until this point, what I try to do is protect and profit from huge and significant trenchant declines in the stock market, so every little you know sell-off nobody knows, but nobody knows if this eight nine percent drop in the S&P is the start of something very big or if it's just a normal correction from a very overvalued stock market I'll know because of my model and that is when I'll get net short in the portfolio, it's based on data and math, not my emotions or a CNBS headline
Dunagun Kaiser: Tim Sandman asks related to this, Michael is there now going to be a final quote crack up boom until the market finally corrects
Michael Pento: You know if there was somebody who emailed me I don't want to mention his name but I think I he was on another program, he said that he predicted a 40% boom stock market before it dropped 80%, well I mean it's pretty specific numbers that he's throwing out, what would it what exactly would engender a 40% rise and I by the way I don't know maybe you know I don't know the duration I don't know if he said it was going to be this year or next year I don't think any any timing for this, I said I thought the second quarter the first part of this year and particularly the second quarter could bring a significant decline in the stock market of about 30%, I'm almost there already especially if you look at you know the disrupter you know the disrupter stocks and the Nasdaq most of the Nasdaq stocks I think the majority of them are down you know significantly since the start of this year and I mean you know 30%-40%, so but you know a boom of 40% predicated on what a massive fiscal and monetary drag on top of a stock market that is 185 percent of underlying GDP, what!? There's just I mean let's listen god only knows and I'm certainly not god anything can happen but the odds of that happening are virtually no
Dunagun Kaiser: well there's a lot of things that have happened in the last two years or the last couple of decades that people think defy logic, defy gravity, defy conventional wisdom, defy proper fundamental analysis of value, so you're describing fundamentals about you know economic activity and that sort of thing but if there is a concerted effort by The Powers That Be to pull out all the stops in throwing basically plunge protection at the market to make sure that it that it doesn't get a chance to really cleanse itself that could that could continue to engender additional momentum riding, momentum speculation by how it leveraged our you've told us in the past people speculators whether they're small retail or hedge funds or whatever are how leveraged margin wise currently
Michael Pento: The exact figure it slips my mind but the total margin debt to GDP on the NMRC is an all-time record not nominally, nominally it's all-time record but even as terms percentage of GDP it's all-time record, so there's a lot of room left on the downside, but again as I talked about before this that the idea that this could be some plunge protection team it's still there it's gonna be you know called upon but when? When credit markets stop you know functioning when the repo market freezes and the standing repo facility gets tapped to the tunes of hundreds of billions of dollars a day when you can't issue a junk bond anymore, when the commercial paper market dries up, that's when Powell will say oh gee, now I got a problem inflation's come down from seven to maybe five percent the stock market's down 30% on the headline S&P 500 apple and Microsoft, well Microsoft already say but apple is still doing pretty well when that and that's in every single ETF out there practically, when that finally breaks then Powell will come you know ex/post/after the crash I you know I don't want my investors to go through that and by the way there is no guarantee that the next time that the Fed and the treasury turn dovish that the market's just gonna rip higher I mean it could but you know you just can't start printing money and sending money out to people when the inflation is running at two to three times the acceptable rate of the Federal Reserve which is already ridiculous, you know when the Fed says inflation's running at seven percent where the labor department says it's only a seven percent year over year you can best believe you just double that now I'm more on the free buskin commission you know mid mid teens the way you factor into real inflation so I mean do you really want to start sending asset prices higher and destroying the middle class at a faster clip just for the sake of rescuing wrestling rescuing Wall Street well you may you might make that calculation but at what point it has to be not just the fact that stocks are down a little bit on the margin it has to be some kind of dysfunction in the money markets that's my that will be my trigger to cover my shorts not until then and that won't happen until the stock market probably drops around headline averages are down 30%, that's usually when in the past that has triggered a credit market event
Dunagun Kaiser: Well I don't know some people are of the opinion that the bubble of everything that we're currently witnessing is a Frankenstein that was created by the money policies whether they're on books or off books of those managing our money our currency and that in a sense there's a rotation away from middle class, you know earners investors, baby boomers that sort of thing into those who are in a much more elite position and somebody's gotta hold the door open of the casino long enough for you know for everybody who needs to get out to get out at the right time before you let the whole thing come collapsing down so it may not be just, you know not the only scenario is after a 30 plus percent decline in the markets, but you could come up with a scenario where the where the markets appear to be flush after they shouldn't be anymore, so that those who need to can exit well
Michael Pento: You're exactly right first of all the first thing you said it's not even debatable I mean you know the treasury and the Federal Reserve has created a triumvirate of bubbles like has never existed before on the planet that I'm the first I mean I'm one of the first people to ever identify it and talk about it talked about it for years, but insiders have sold more, this is 2021 insiders, corporate insiders have sold more share shares last year than ever before in the history of records being kept so yes the insiders have for the most part already dumped their stock, think about you remember Elon Musk when he was selling and you know so the insiders are already out so you know, where are you where are your where are the other investors where's the where are the Robinhood you know guys the people I see on TV said hey you know let's just you know let's start let's start saving and investing what's a wonderful idea, but getting the timing right is essential because like I said we could be in a situation where we look like Japan in 1989 or Shanghai Composite Exchange in 2007, those indices still haven't come back so don't I just don't want to have a reflexive thought that hey once the Fed becomes dovish then we're gonna just restore to the new highs because the message you're going to be sending the bond market at that point and the message you're going to be sending the currency at that point is hey we will never drain our balance sheet, we will never be able to fight inflation and we're all in on creating these asset bubbles, well maybe you know maybe that's true, but what interest rate do you ascribe then to junk bonds at that point I mean they're trading at you know the tightest spreads to treasuries ever so unless the Fed is going to go out and buy everything you know municipal bonds, corporate bonds, junk bonds, treasuries, I mean maybe they will I mean then you're talking about maybe they were looking more like you know Weimar Germany or the you know the Hungarian Pango I mean at what point at what point does the Fed say listen do we want to be a complete 1 unadulterated avowed banana republic or do we want to you know try to get back to some kind of sense of normalcy I think they try to get back to some sense of normalcy until chaos breaks out don't forget the voting contingency of Mr. Joe Biden is mostly the lower middle to lower classes they're the ones that are getting crushed by falling real wages, you know real wages fell by five, this came out yesterday real disposable income fell by 5.8% on a seasonally adjusted annualized rate, I mean and that's adjusting for the inflation that doesn't really tell the whole picture these people these are voting people, why do you think Joe Biden's approval rating is so low because the people that voted him in place are getting destroyed by higher energy costs, housing costs, they can't even buy a house they're renting, they can't afford to heat and cool their home, food it's gone through the roof, so you know there is a calculation there like what do I do, I how do I placate the middle and lower classes and the one percenters on Wall Street at the same time well you can't do it to choose one well they've chose to defend rightfully for a change I believe for a very trunkier truncated period of time but for a period of time the Fed is hawkish, they will prosecute on their plan until the whole darn thing blows up
Dunagun Kaiser: Some people have been watching the yield curve for the last couple of years especially looking for an inversion as a signal that we're entering a big time of change Brent Peterson asked did the yield curve invert
Michael Pento: Parts of it did but now the 210 treasury spread is now about 60 basis points, very low, it's coming down, so that's part of my model that the spread between the 10 year and the two-year note as that contracts that's a signal that two things are happening inflation and growth are decelerating on a rate of change basis that's all you have to that's what you have to know so that tells me where I should be investing so parts of the curve didn't invert but very, very briefly and not and not very significant I look at the 10-2 spread, that tells me when that inverts 100% of the time it tells you the recession is nigh in the next few quarters so we're not there yet, if Powell is going to raise interest rates five times, five to seven times that's the base case scenario for most of Wall Street all of a sudden they're saying that the Federal Reserve will raise rates five to seven times this year well with a 60 basis point spread between the two and ten year note I think that spread contracts and that'll be one of the signals that tells Powell hey I've done too much the stock market probably would be wiped out wiped out being 30% plus decline
Dunagun Kaiser: Another aspect that people have been watching with great interest in those last two years when we heard originally about 40% of all dollars ever created were created in the last few years now more recently it was restated at 70% to 80%, so I haven't done the investigation to see why these numbers are moving but the direction is the trend is higher in that statistic, Hood says if inflation is a result of fiscal and monetary responses to the crisis, then why and how is the velocity of currency at all time lows?
Michael Pento: You know I could spend a half an hour on this question so first of all dollars created the fine dollars you mean physical currency or do you mean base money supply if you look at the base money supply it's ballooned to eight almost nine trillion dollars so it's up about 90%, but that's just base money, I mean I don't know if you're mentioning M1 or M2 or M3 they don't even keep track of M3 anymore they barely keep track of M2, when you look at the velocity of money it's velocity based on the monetary base well that's declining because GDP growth is slow and you've increased the amount of the monetary base such a huge amount it's crashing, so that's telling me two things the monetary base has been blown up to the moon but the velocity of money is slowing because economic growth is slow and because it's slowing off a very, very large base you get a lower percentage
Dunagun Kaiser: You've talked to us a couple of times well usually over every visit actually over the past year or so about where you see the role of precious metals potentially playing in this whole scenario, there's a question here from EC660 it says it's very easy to see the manipulation in the silver market but just the last few days it seems to be even more in your face with the so-called dollar strength forcing down the metals what are your thoughts on this?
Michael Pento: So you're talking to someone who actually increased their holdings of gold about two days ago so I brought them up and the reason why I did that is because everybody now has become you know enamored with the position that the Fed is going to be very, very hawkish and raise rates five to seven times in 2022 and the 10-year note yield's gonna go to the moon, well I believe you know I was the one saying that the 10-year note was going to the moon which is why I sold gold now that everybody believes that it's going to the moon, I'm on the other side of that I think nominal treasuries nominal long-term treasuries will begin to top out if they haven't already done so, so I think nominal interest rates are going to fall which means that I want to be a holder of gold, so I'm starting to accumulate more and more of the precious metal and I've been on your show for years now right I've told you when I sold it I've told you when I'm buying it back I am now buying it back because we're starting to reach the point of peak hawkishness as far as long-term interest rates are concerned, so I'll be more of a buyer of long-term issue of long bonds okay rather than a seller into this panic, because the Fed let's I just laid out the scenario very succinctly on this on this interview the Fed can't move very far you know they moved five or seven times this year, well two-year treasury note is already at 1.2 percent, so they're really pricing in the Fed funds futures market is already priced in four or five rate hikes, I think if the Fed does that this year they'll invert the yield curve and the whole thing online and gold should sniff that out in the next few weeks or months at the most, at the most it might be
Dunagun Kaiser: Related question here from John Crockshank who says everyone seems to have gotten the silver price wrong so far what's different this time?
Michael Pento: Well I'm one of those people has not gotten the silver price wrong I've never I've told you over the years I've been on this program I have not been yet a buyer silver I want to buy silver when the rate of inflation globally is increasing, because silver is a monetary metal, it's also an industrial metal the last thing I would want to do now, I'm buying gold, I didn't say I was buying all precious metals, so I mean you have me on your program you want me to be honest because you are a very honest person and I'm telling you that silver is a buy after, after the Fed and the ECB and the Bank of Japan I think they can't get any more dovish but the PBOC and they've started to become dubious, but I would like to see the Fed and the ECB become much more dovish than they are right now which if that engenders a period of global growth accelerating rate of change basis then I would want to be a buyer silver and gold until then it's just gold
Dunagun Kaiser: Michael if people want to follow your work because you are on top of these trends in a forward looking at the leading indicators you're trying to position people so that whether things go up down or sideways you got them in the right places where can they keep track of you and follow your writings and take advantage of your services
Michael Pento: So the website is pentoport.com, you can email me directly at mpento@pentoport.com, the office number is 732-772-9500 on the website I record a podcast called the midweek reality check, it's a free trial subscription for five weeks it's $50 a year you're so inclined to listen to me and I give you a lot of good information from a high level about what I think the direction of the economy is and what's the direction of interest rates and what's the director of the direction of inflation and growth so if that's something you want to do, if you have around a hundred thousand dollars to invest please reach out to me contact the firm there's an info button on my website, listen let's just end with this done again the days of buy and hold it's dead, it's over you're gonna have more and more iterations of a collapse of the boom bust cycle, so the boom is you know massive increase in asset prices followed by very trenchant, steep collapses of the same followed by more of us you know attempt to reinflate things as we've waxed further and further away, further away from a real economy this is a complete artificial edifice that we've built predicated on asset bubbles, debt and you know interest rates that are just in the twilight zone I mean really junk bond yields at you know three and a half four percent it's absolutely ridiculous, so if you want to be someone who says I want to just buy and hold a 60/40 portfolio stocks and bonds you've been wiped out already, it's too late, but it's not too late it's never too late to start doing the right thing, so get into a active management strategy someone who has a robust model that can help time these you know inflation deflation dynamics
Dunagun Kaiser: Well Michael we are so grateful for your presence here always on behalf of all of our viewers just always glad to have you join us here on Liberty and Finance and thank you for joining us this first time in January it sounds like we're heading into an eventful year we'd like to have you in our corner throughout that process and thanks for being here today
Michael Pento: My pleasure Dunagun
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