Summary
➡ The article discusses the economic situation, focusing on inflation and deflation. It explains that the Federal Reserve (Fed) often prints more money to avoid deflation, which can lead to inflation. The article suggests that for a sustainable deflation to occur, many banks would need to fail and the Fed would have to do nothing, which is unlikely. It also highlights the high levels of debt in the government, corporations, and households, and suggests that a period of asset price deflation and debt deflation is needed, but this could lead to a severe depression.
➡ The text discusses the speaker’s predictions about inflation and deflation, and how they would adjust their investment strategies accordingly. They believe that the economy could either experience hyperinflation or hyper deflation, and they have plans to navigate these scenarios. They also express concern about potential government confiscation of assets in extreme economic situations. The speaker emphasizes the importance of understanding the different economic sectors and adjusting investment strategies based on the current sector.
➡ The speaker suggests that in the current financial climate, it’s possible to protect your money and even make a good profit without taking much risk. He also mentions that he wouldn’t advise shorting certain stocks, something he had previously recommended on a TV show. Lastly, he humorously discusses who might play him in a movie, mentioning that some people think he looks like a younger Robert De Niro.
Transcript
Link in the description below. And it was a pleasure to have him on my channel and a privilege. And I hope you enjoy this interview with Michael Pento in the. The way that I understood. What you’re saying is, your proposition is, yeah, we could go to hyperinflation. We could go to hyper deflation. I have this way in my portfolio of figuring out where we’re going to be on that journey so I can take advantage of the journey as it’s happening.
And either way, we’ll end up in the same spot. Correct. And it’s not a good spot to end up in. Hey, guys, RAF here from the endgame investor. I’m here with Michael Pinto and my co host for the show, Phil Lowe of the bitter draft. And we’re glad to have Michael on. So, Michael, Phil’s going to kick this off. He’s got some curious questions for you and let’s go.
So I’m actually a big fan. Michael, I watch you on Liberty and finance and some of your other channels, and you do, I think, great work. If I was to design a portfolio based on what I’ve heard of yours, it would probably look very similar to yours. So I was curious if you would walk us, because Rafi and I are both heavy austrian economists, and I think your portfolio follows what our theory would tell us would work in the austrian school.
So why don’t you tell us about your portfolio first for people who don’t know who you are, and then we can go from there. Well, thanks for having me on the program, guys. It’s a five sector model that ranges between deflation and intractable inflation or hyperinflation. And each particular sector is divine from 20 macroeconomic components. So you look at the second derivative of those components and that’ll tell you which sector you’re in.
And each sector has different investment opportunities for you. For example, like I like to say, well, when would you want to overweight bonds in deflation or hyperinflation? Obviously, you would want to underweight bonds and be short bonds in hyperinflation and overweight bonds and deflation. Thats just one example or when would you want to be overweight commodities in hyperinflation? When would you want to be short commodities like energy base metals? That would be deflation.
So five sectors go from deflation, disinflation, stasis, inflation and hyperinflation. Thats the readers digest version of how I invest. The portfolio was designed to handle both extremes of a deflationary crash or a hyperinflationary crash. So my question I guess would be how heavy in gold is it and do you plan to have when a crash happens, do you plan to be just 100% in gold or whats the, what’s the crash? What’s the crash defense mechanism? Speaking of gold in a portfolio, if you want gold and silver in your portfolio, this interview is brought to you by Miles Franklin, precious metals Investments.
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Call 855 Game end or email endgameinvestorilesfranklin. com and one of our guys will lead you through the order process as if it were yesterday or today. And with that, back to today’s interview with Michael Bento. So when you think about crash, I look at the Zimbabwe stock market hyperinflation. Stock market is up 800% in the last couple of years. So you would not never, I would never personally out and out short the s and P 500 in hyperinflation if we ever got forbid get there.
But judging by what I hear lately from the obdurate Federal Reserve members, they just are hell bent on ignoring inflation and they’re hell bent on cutting interest rates and ending quantitative tightening as fast as possible because they know that the economy cant handle it so well. Talk about that in a second. So just to finish on your question, I would only short a deflationary market. Thats when I would be net short the portfolio, because thats when bad things happen.
Everything gets wiped out. I would go mostly into cash or cash equivalents. So youd have cash, short term us treasuries, the US dollar, and I would short the market. Those would be the four things that I would do. I would not own any gold stocks, and I might own some gold, but even in a deflationary, what I call a credit crunch, everything gets sold for the ownership of us dollars.
All currency trades get unwind. So those are the only four things. I call them the four horsemen of the economic apocalypse. You said hyperinflation of God forbid we ever get there. But theoretically, how do we not get there? I don’t. Because if we. Look, I’m not saying we might have differences in the timeframe. I might say it’s next year, you might say ten years, whatever. But regardless of the timeframe, how is it possible that an inflationary system stops the inflation and then goes back to what should be considered normal? And what is that even? It’s never happened before.
Yeah, I didn’t really. I don’t think I ever said that. We’re. We have a massive problem in this country. It’s just not being dealt with, because the natural outcome of what we should expect is the gravitational forces of deflation to heal the economy. So the Wall Street Journal just published a piece about how much food prices have gone up 36% since the outbreak of COVID That’s a massive increase in the price of food.
And the Fed is supposed to be. It was engineered supposedly, ostensibly to protect the lower and middle classes, but that’s where you’re spending 30, 40, 50% of your income on food, clothing, and shelter. So that’s the people they’re hurting the most. So we have asset bubbles like we’ve never had before in this country. If you look at home price to income ratios, never before higher, much higher than they were even in 2006, the previous apex.
And when you add in things like insurance and taxes there, they’re totally out of reach, especially for first time home buyers. Feel good. Total market cap of equities as a percentage of GDP, it has never been higher outside of a brief period post COVID. And so that ratio right now is 188%. That ratio should be closer to 80%. It was only 100% in 2104% in 2007. And, of course, you have a massive bubble in the bond market, which is breaking.
I even wrote a book about it in 2013 about how eventually we’re going to head for this breaking point, Watershed point, where there’s just bond yields become unhinged. I never even imagined at that point that we would go to zero interest rates. I think the ten year treasury was trading at 0. 33% at an all time low. And so, of course, bubble has to break, either because the Fed breaks it because of it.
Why? Because of inflation. Well, now we have an inflationary crisis and we have a debt issuance crisis. We’re going to be paying $1. 6 trillion in interest payments in 2025. I mean, my God, you asked me eventually, I think this is where we’re going to end up in a dollar crash. Not against the euro or the yen, although even against those flawed fiat currencies. I think you could take a hit in the dollar.
But the dollar against hard assets is going to crash, and that’s where we’re headed. We have abused our world’s reserve currency status just long enough. We’re living in the environment where it’s ending. When you’re talking about, we have to fix the economy and basically deflate all the garbage. The economy, whatever you want to call that, the conscious force behind it, homunculus, whatever. It tried to do that in 2008, tried to clear the system, but the Fed wouldn’t let it clear because it reinflated everything.
Same thing in 2020. You could blame it on the lockdowns, whatever. That makes a lot worse. But if we enter the situation where it looks like everything is going to deflate, the banks are going to panic. And if the banks are going to panic, the Fed is going to inflate them out of it, because even for fear of their lives, they would do it. And these oscillations between extreme deflation and then mega inflation, by which I mean the money printing, I don’t necessarily mean the price increases.
Those happen later, but with the money supply shrinking and then growing again, it gets more and more extreme. So in order for us to enter a real deflation, like sustainable deflation, banks would just have to fall one by one by one, or ten by ten by ten until a lot of them just die. And then the Fed would have to do nothing about it. You see, that’s possible.
No, of course not. See, I mean, deflation is a natural, healing, cathartic phenomenon. And it works great when, you know, when asset bubbles aren’t disinflated or we don’t have a massive amount of debt in this country. I mean, we have a government that’s insolvent. Right now, it’s an insolvent government. Corporation corporations have a massive amount of outstanding debt. Their debt, the outstanding debt to GDP is at an all time record high.
And even in the household sector, we have $20 trillion in household debt. It’s not like the consumer has deleveraged. They’ve deleveraged on the margin as a percentage of GDP. So come down from say, 100% to say 75%. But that ratio was 40% in 1980. So we haven’t deleveraged at any level of the economy at all. And that’s what’s really needed. A period of asset price deflation and debt deflation.
But when debt is so onerous and asset prices are so dislocated from where they can be supported by the free market, you’re not going to get a recession. You’re not even going to get a serious recession. You’re going to get a very protracted and acute depression. And it’s just, it’s not politically possible to have one. After all. This is what we’re dealing with. We’re dealing with politics here, guys, and it’s like, how do I remain in power? Here’s my acceptance speech.
Thank you for electing me president of the United States. We’re going to have a period of five years, three to five years of a steep depression. But then at the other end of this, we’re going to have a viable, long lasting economy with stable prices, stable currency, you know, low taxes, low interest rates and low inflation. That was Millet’s speech. But yeah, that is how me and they got elected.
Yeah, that’s the great reset that’s needed. It just can’t happen. You know, when, when the sheer. When corporate defaults are soaring by 80% a year. Corporate debt supply has increased by 115% since 2007. It’s a record 50% of GDP. So go ahead, try to. 40% of the Russell 2000 is unprofitable. So go ahead, have a debt deflation and tell me how many banks are left standing, how many people are paying their mortgage when home prices drop by 50%, how many retirement plans are solvent, how many pension plans are solvent when stock prices drop by 45 50% to bring them back to historical averages.
Clay, so how does your portfolio move from? The way I logically follow is it’s going to be a deflationary crash followed by a crack up boom whenever the Fed its going to deflate until the Fed steps in with the candy and then were going to march into a crack up boom. So how does your portfolio adeptly move from dodging the deflationary crash? We want to be in these assets to suddenly, you dont want these assets at all.
You want to be in these other hard physical assets. Well, first of all, and maybe thats proprietary, but if you can tell us without getting into your set it, you can’t have a set it and forget it portfolio. If you followed all the instructional material, you just set it and forget it. Most of Wall street are just what I call used carpet sales. So they’ll say, let me say, let me design a portfolio of some percentage of stocks, some percentage of bonds.
I’ll try to closet index the S and P 500. Maybe I’ll throw some chinese shares in there over EEM, spy TLT. And then, okay, then I’ll go out and try to raise money so I can increase my aum. That’s what they do. So you have to be very vigilant about the macroeconomic conditions. So here’s the problem. Here’s what I see. So I was hoping for, and I still hope for a deflationary environment because that’s what’s necessary.
But I just don’t see it happening. And you could see already by the rhetoric coming from the FOMC that theyre just not going to let it happen. So heres some things I want you to keep in mind. So the Fed used to be, purportedly so, that they would provide for stable prices. Stable prices means what? To mean that the rate of change of prices would be 0% inflation, right? Zero.
We agree on that. Isn’t that stable? 0% change, that’s stable prices. That definition changed to 2% inflation, and it was universally adopted. Magically, every central banker on the planet, that cabal just said, okay, you know what? Let’s not have stable prices. Let’s have a 2%. Now, the Federal Reserve has had, this month it will be three years of having an inflation rate above 2%. Three years. And the rate of change, of the rate of change is now increasing from 3.
2 to 3. 5% cpi. So it’s going further away from their target, and it’s going away at a faster rate, and it’s been above their target for three years. And in that environment of spiking commodity prices, credit spreads that have narrowed to one of the thinnest ever financial conditions continue to ease. And in that environment, the Fed is still, as of this morning, coming out and saying, this is John Williams from the Federal Reserve.
Say, you know what? I don’t see any problem with inflation. I think our interest rate policy is fine. And they’re discussing cutting the interest rate overnight interbank lending rate by three times to 70 by 75 basis points and ending quantitative tightening. We’re good. We’ve reduced the balance sheet. The balance sheet went from 700 billion in 2007 to 9 trillion, and now it’s back to 7. 4 trillion. And that’s.
We’re good. We’re good. Base money supply and that environment, they’re talking about adding to the rate of inflation. I think that is so disgusting. It should. You know how many Americans understand what I’m talking about? I don’t know. Hopefully your audience does. Do you understand the words that are coming out of my mouth? But the fact that home prices, home prices have gone out of reach and stock prices are out of reach and commodities are, you know, they can’t fill up your gas tank.
And 78% of Americans, this is a recent poll, 78% of Americans are living, are now living paycheck to paycheck. And now you want to increase inflation further because you have no choice. Because the government can’t pay $1. 6 trillion in interest payments because you can’t have the Russell 2000 companies roll over their debt. Unprofitable Russell 2000 companies roll over their debt at much higher interest rates. You can’t have consumers pay credit card interest at this rate any longer.
So that’s your rationale for providing us with intractable inflation and inflation? I think this is the problem here. I already mentioned a lot of problems, but here’s the surprise for the Federal Reserve, what if, and this is a very significant risk, what if the Fed starts to cut rates? Short term rates drop, of course, because money market rates compete with each other. So the Fed funds rate comes down, short term t bills go down in yield, up in price, but long term interest rates start to soar.
That’s what the ten year note is only like four point, I think it’s like 4. 64. 7% right now. The ten year yield. Yeah. Up ten basis points today. Yeah. Yeah. Guaranteed to happen. Almost guaranteed to happen, Phil. You’re exactly right. It’s almost guaranteed to happen. But it might not just stop at like 5% because you have inflation running intractable, going five, six, seven, up to double digits.
What would the ten year note? Who’s going to buy this? So the Fed is going to have to buy all this yield, just like they’re doing, just like the bank of Japan does, and then try to engage in never ending regime of interest rate suppression. I think that would kill the dollar and send commodities to the moon. And it might not even be that bad for stock prices either.
It should be bad for the american middle class. I mean, there’s going to be a funeral for the american middle class, and I hope the Fed intends that. How does your portfolio navigate that, I guess, was my original question. Well, how do I navigate it? My portfolio model updates every day, and I analyze a second derivative of the rate of change, of the rate of change inflation, and ill adjust sliding across those five sectors between, in one and five.
Right now were in sectors, right now were in sector four. We are in a condition, we are now in a period of reflation. I was hoping because the model was, and I predicted that the rate of, when inflation was 9%. First of all, I said inflation was going to go run hot. Then I said it was going to be a people, everybody was saying it was going to be flying and never ending.
Higher, higher. I said, no, we’re going to go into a period of disinflation. That was exactly correct. And now we’re in a period of, we were in a period of stasis, which is sector three. We’ve gone from stasis to reflation, and that’s where we are right now. We have a risk of going into more, into sectors from four to five, which is intractable. Trey, so what would convince you that we are indeed on the way to a crack up boom, hyperinflation.
And what do you plan to do in your portfolio then? By which I mean, like, are you, I’m not talking about allocations, percent this, percent that, but like, more of a broader question. If we are on the, on the way to hyperinflation and you’re convinced, whatever might convince you that that’s where we’re headed in the short term, are you worried about a government confiscation? Let’s say you have a position in GLD or IAU or something like that.
Are you worried about government confiscation of what’s in the ETF or are you going to buy physical gold for a client? So what’s your plan? So, in sector five, and first of all, when you have a confiscation, that would only happen. Confiscation of assets is very deflationary. We had it with Russia. We had it with Russia. Russian ETF. Russian ETF. And it was taken from me. Yeah, we had one.
If we had it in cypriot assets, too. So it does happen. It’s very unusual, I think, what happened in this country only after the Fed and the treasury all assent that inflation has gone so hyper for so long that theres no other way around this. But then just a currency reset and a debt default reset. So bail ins so were so far away from that. Yet at this point, the Fed right now is more afraid of deflation than they are inflation.
And thats what their actions are saying. I mean, if you have inflation running double digits, triple digits for many, many quarters, and you have a case where revolution is on the brink of happening in this country, thats only when youre going to get bail ins. You’re not going to get them before that because bail ins are very deflationary. They destroy the economy. Im not talking about an isolated one off case.
Im talking about systematic. Do you have a plan? Were that to start to look like a possibility, do you have a plan for your portfolio in that case? Yeah, of course. That would bring us back to sector one. So I’d go back into the four horsemen of the economic apocalypse. But if I was in sector five, remember, that would only happen after we were in sector five for a long period of time.
So I’d be short the bond market, I’d be long base metals, I’d be very long energy, and I would be very long physical gold short. And I would be short to us dollar, too. So short bonds short the US dollar and long those other things, Mike. Okay, so I’m going to challenge you for a second, and my way of thinking is slightly different in terms of inflation. Deflation.
I see inflation, and I think Phil agrees as a complete illusion. It’s not really, it’s not, it doesn’t really exist because if you redenominate all these prices in terms of gold, then the inflation pretty much disappears. So what you. So essentially, I agree with you when you say that the economy needs deflation. Deflation is, I wouldn’t say a panacea, but it resets things. It’s healthy. But really, the way I see it, hyperinflation in dollar terms and deflation is really the same thing because everything gets cleared out in terms of gold anyway.
I mean, let’s say, theoretically, in a hyperinflationary scenario, gold goes to, let’s say, $35,000 an ounce. Right. And then what happens? Well, then you lop off three zeros, you’re back to 35, and it would be the same thing as everything falling and gold falling to $35 an ounce and all the assets getting wiped out. But either way, it’s the same thing. What do you think of that? I think what you’re conflating is you’re saying that intractable inflation leads to balance and debt deflation and a reset.
I agree with that 100%. But what were saying as an investor, you cant invest the same way in sector one, deflation as you would in sector five, because different things work. The way I explained on my channel was the destination is the same, but the journeys different. So a deflationary crash. You end up with everybody poor and nobody having any money. Its exactly the same as the hyperinflation.
But theres a very different journey, Preston. So Phil said it better than I could. You end up in penury, the country is destroyed, the middle class is destroyed, but the journey is different. So like I said when we started the program, would you want to be overweight bonds and hyperinflation while youre in hyperinflation? No. You will get wiped out. You should have no bonds in your portfolio that lasts longer than a day.
Maturity duration has to be one day, thats it. But if you’re overweight, bonds in sector one or deflation, you’ll make a fortune. The same result. The same result is a total wipeout of the middle class, of your country, of your economy, but the journey is different. Okay, so to close it up, I’d say that the way that I understood what you’re saying is your proposition is, yeah, we could go to hyperinflation.
We could go to hyper deflation. I have this way in my portfolio of figuring out where we’re going to be on that journey so I can take advantage of the journey as it’s happening. And either way, we’ll end up in the same spot. Correct. And it’s not a good spot to end up in. Right. It’s so sad. And the reason why it’s so sad is it’s not necessary.
If we didn’t have. If this country, and not just this country, it’s Europe, Japan, China, they’re all the same. It’s about hubris and arrogance. When you went off the gold standard, and then we had this idea, this tool that, wait a second, we are so arrogant, we can abrogate the business cycle now. We can never allow the stock market to have a downtick. We can never allow a recession because we could just print money and we could do all these things.
We can have wars, we could offer bread and circuses to our economy, to the populace, and there’s no problem. And that’s how you get into a situation where you wake up and this is the epiphany. It was like, wait a second, we’re in such deep doo doo that we can’t fix it now without a depression. That wipes out the economy. We can’t just have a recession any longer.
We can’t, because like I said, if home prices were up, were 5% above where they are, where their normal ratio, home price to income ratio, 5%, well, then maybe you could have a recession. Home prices fall, you dont wipe out the banking system. But when the home price to income ratio is 5. 5 times an all time record high and it returns to its average of 2. 8, you wipe out the mortgage backed security market and you wipe out the banking system.
That’s the problem. And I think you also wipe out the dollar because the dollar is backed a lot by MBS. But yeah, Phil, what were you going to say? I have a final question. So there’s an adage that profits are made during booms, but fortunes are made during crashes. So my question is, what’s your risk tolerance in your portfolio? Because there are chances to make in the just ungodly profits if you can navigate the treacherous waters.
Do you tell your clients, like, I’m going to, you know, we’re going to. We’re going to take a spin at that roulette wheel and I’m going to make you, I’m going to hopefully make you a billion, billion dollars? Or are you, are you, like, I’m going to protect your money through hard times? What’s your, what’s your risk portfolio like? What’s your risk? So we are mostly, we’re a monolithic cohort of people here.
We’re successful people, multimillionaires. We’re either in retirement or approaching retirement from the vast majority of my or conservative clientele. So we’re, so we don’t want to gamble on bitcoin options. We don’t have leverage, we don’t have margin, we don’t have options. What we do is, what I would say to people is like, if, if, and this is a big if now, I thought it was a base case scenario, but it’s changing now.
I don’t think we’re going to have voluntary, voluntarily, voluntarily. We are going to have a deflationary environment. But if we did enter into one, what you could and should do is raise cash levels, buy t bills, own the US dollar, and short the market. And those weightings are proprietary, but you’d be much more in short term t bills waiting than you would be short to market in that environment, given where we are, you can not only not lose any money when everybody else is getting half, you know, having their retirement plans, years to retirement will double if you’re 15 years away from retirement.
Make it 30. So you not only protect yourself, but you’ll make a significant. Probably make a substantial amount of money in that environment, but without taking hardly any risk at all. So that’s where I am at. I would not short, you know, I don’t do, in a type three margin account go short. Fannie and Freddie. I advocated doing that on Kudlow and company in 2006, but I wouldn’t do it when I was a regular guest on CNBC before they threw me off.
I would not do that. Now, in this particular rubric, one final quick question. What Hollywood actor do you want to play you in the big short two? The Michael Pinto story. Oh, my God. Well, uh, I. Some people say I look like Robert De Niro, but, uh, yeah, maybe when he was a little younger. Younger? Yeah, yeah, yeah. You need it. You need a mole. I I had one, and they removed it to check it for skin cancer.
And it was Benign, but now you can’t put it. You can’t put it back. So you should get your money back. Hey, thanks, guys. A lot of fun. All right, thank you. Good day. .
See more of Rafi Farber on their Public Channel and the MPN Rafi Farber channel.
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