Mike Gleason: It is my privilege now to welcome in Michael Pento president and founder of Pento Portfolio Strategies and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. Michael is a money manager and who ascribes to the Austrian School of Economics and has been a regular guest on CNBC, Bloomberg, Fox Business News, and also the Money Metals podcast.

Michael, it’s great to have you on with us again, and thanks so much for joining us today. Welcome back.

Michael Pento: Thanks for having me back on Michael, and great to be on with Money Metals.

Mike Gleason: Well the last time we had you on was right after the election back in November, and a lot has happened since then in terms of the Trump administration taking shape. Now on that front I want a zero in on the monetary policy side of things here first off.

Now we’ve been hearing Trump and his Treasury Secretary Steven Mnuchin make lots of little comments lately about wanting a weaker dollar. Now we used to hear US officials talk up a strong dollar even through we never really believed them. It sounds like you don’t believe them this time around either.

You’ve written at least if you look at the policies they’re pursuing, despite saying they want a weaker dollar, they seem more likely to get a stronger dollar. At least vs the other world currencies. Am I understanding it correctly, and why do you think that?

Michael Pento: Well, first of all just to be clear, no fiat currency regime ever wants stronger currency because in the modern Keynesian group think they believe you grow through exports. How you engender exports is by crushing your currency. You grow the stock market, you grow wealth by ruining your currency. Completely antithetical and illogical, but that’s what they think.

But why do I think the dollar should be strengthened? By the way, the dollar’s up to a 14 year high. I’ve been long the dollar, and I’ve been right. The reason I believe the dollar should strengthen here for a while longer is (because) you have a more aggressive Fed. You look at interest rate differentials, you look at where the U.S. 10-Year, it’s at 2.45% as opposed to Japanese bonds and German bunds and European bonds… there is more value here in the United States, that flows into the United States and the U.S. dollar.

You have different monetary policies, the Federal Reserve is on record saying they want two or three or four rate hikes depending on who you talk to. I even heard five this morning from one of the governors. You have a rate hiking mode here the United States as opposed to the continuation of QE, albeit from 80 billion euros to 60 billion euros in the Euro zone.

Of course Shinzo Abe and Mr. Kuroda in Japan, they’re stuck at printing money forever. They can never even hint at stopping because the market would collapse and the economy would collapse. In addition to that and those reasons I just gave you, we just heard this morning from Larry Kudlow, and a friend of mine who is very well connected into the White House that the border tax adjustment is back on the table. So that’s the strategy they’re going to go with in the Trump White House.

They’re going to border adjust taxes. So basically domestic revenue minus domestic expenses. It encourages people to sell things overseas and to source things here in the United States. So that would in theory lower the trade deficit in the United States and that should be dollar friendly. At least the trading algorithms are programmed to buy dollars when they hear that.

That’s what I see happening for the immediate future. I’m not saying go long the dollar and then go on vacation. What I think is going to happen is that I believe that Mr. Trump, as well intentioned as he may be, is going to fall into the meat grinder of Congress.

He’s not going to be able to get through all of his policies, and that I believe while that is occurring, the Federal Reserve will slowly be behind the inflation curve, but slowly raise interest rates. What I think is going to happen in our near future, in the next several quarters will be a flattening of the yield curve and a recession in the United States. And that is when the dollar is going to absolutely tank.

Mike Gleason: Isn’t all this business about a strong dollar vs a weak dollar a bit of a red herring? I mean when you look at real things, whether it’s real estate, gold, food, whatever. It seems pretty clear that the purchasing power of all currencies has been steadily falling over time, although it does happen at slightly different rates.

Why is it that people have seemingly no clue about what’s going on the Federal Reserve Note, Michael, and really all of today’s world currencies for that matter.

Michael Pento: Well, I guess it’s a lack of education. I mean, I can’t speak why people are so ignorant about what’s going on with the Federal Reserve. You look at the Fed’s balance sheet, what do they control? They control, and all central banks control, base money supply.

That’s physical currency, and central bank credit. If you grow that base money supply, you’re going to get inflation. If you look in Germany. Their inflation just was reported this morning. Up 2.2% year over year. That was the highest level in 4 and half years. Even in the Euro Zone as a whole, 1.8% year over year. In the United States, 2.5% year over year CPI – Consumer Price Index.

So, they’re getting their inflation as crazy as it is. These central bankers have pursued inflation targeting fervently. They’re so enamored with their own prowess to engender inflation that they think they can actually engender the exact 2% inflation target, and that it will just stop there. They’re completely in for a shock when they come to realize that they cannot hit an inflation target and stick the landing right on the head.

So they’re going to get 2%, they have achieved that as they just showed you. And it’s going to wax higher and higher and I believe that’s where they’re going to have their real problem because if you have inflation that sits on top of record low interest rates, and record high levels of debt, they’re going to bring about – global central banks – are going to bring about a crisis much greater than what we experienced in 2007.

Mike Gleason: Getting back to interest rates. We’re continuing to hear the Fed talk more about these small hikes. You said four, maybe even five this year. Do you think they’ll follow through on several of these different rate hikes?

Then how do you think the Fed’s moves over the next year or so will impact things like precious metals and mining stocks, real estate, and even conventional stocks.

Michael Pento: I like to say what’s kryptonite for gold, what’s the bane for gold? Rising real interest rates. So if you have nominal rates that are rising and if they are rising higher than the rate of inflation is increasing, how fast inflation is increasing. You’re going to get a rise in real interest rates. And that’s the death of gold.

Now, I believe this is a very truncated situation. You’re going to see probably two, maybe three rate hikes and in that timeframe, that will probably take us sometime around the full or the end of 2017. At that time you are going to get resolution to Mr. Trump’s policies.

If he gets everything through that he wants, perhaps real interest rates will not be rising. But if he cannot, then you’ll see real interest rates fall. And if real interest rates fall, the yield per flattens, breakeven spreads start to contract, and that is when you bring about your next recession.

And that is when you want to pile into precious metals and go short the U.S. dollar.

Mike Gleason: We had Jim Rickards on a couple of weeks ago. He talked about how Trump may end up appointing up to five of the Fed governors over the next year or so. He’s talked about wanting a weaker dollar. Do you think we’re looking at a lot of doves on the Federal Reserve board before long?

Michael Pento: Well, the Donald Trump campaigned through his whole campaign, his mantra was – the Fed is quote-unquote “doing political”. So they weren’t raising interest rates because they wanted to elect Hillary Clinton. That’s what Janet Yellen was accused of doing.

Now that Trump is in office, he’s championing, as he said, the stock markets up because they’re enamored with Donald Trump, and that he really doesn’t want interest rates to go higher. He really wants a weaker currency.

As I said, all of his policies, if they come to fruition are dollar positive. Stronger growth, trade wars. There’s a conflict. I tell you for myself, I’m very interested in seeing who he appoints. Because who he appoints… does he want a rules-based, John Taylor like appointee to the Federal Reserve?

In that case, I know he wants interest rates to go up and he wants a stronger dollar. If he appoints more people like Janet Yellen, then I would assume that what he says about a stronger dollar and what he does is going to be totally different. Then I will be absolutely assured he wants a weaker currency if he appoints more doves. So I’m very much interested to see who he appoints at the Fed.

Mike Gleason: Is the bond bubble you’ve been writing about in the process of bursting? Or will the seemingly bad effects of rising rates trigger another rate cutting campaign, another QE, and another leg up in bond prices?

Michael Pento: Well right now, today the 10-Year note is soaring. So today it’s working out. The bond bubble is bursting. Yields are up from I think 1.37 on the 10-Year in July of last year, so we have had a significant increase in nominal interest rates.

The question is, is this the real bursting of the bond bubble? I contend we have one more leg down in yields. Again, let me paint this picture again for your audience. I believe the Fed is going to buy into their own mantra that they can raise interest rates with impunity. They do indeed flatten out the yield curve, at that point we have a recession sometime later in 2017.

At that point we’re probably going to go into not only lowering of interest rates, because don’t forget, if we’re having a recession the yield curve is probably going to flatten out the 2-10 spread. Probably flatten out around 2%. If that’s the case, then you only have 200 basis points… figure the Fed funds (rate) will be almost about, we’ll say, 1.75, 2%… then you only have 200 basis points to remove of accommodation.

So they removed those 200 basis points, that does nothing to relieve the stress of the recession. So they probably return to QE. Maybe even helicopter money, and it’s at that point when we launch helicopter money, we’ll have helicopter money in Japan, Europe, China, and the United States concurrently.

At that point I think you get intractable inflation. And that will surely blow up the bond market. When I say blow up the bond market, I mean the 10-Year yield going back to where it was, and even higher than it was in the 1970s. So, we’re talking about 15-20% or higher on the 10-Year note.

That’s probably what’s in store for the United States sometime in our near future. And that’s what I’m really really afraid of.

Mike Gleason: Talking about getting back to a situation where they have to cut back on those rate hikes, reduce rates again. What about negative interest rates? What about the war on cash ramping up again, where do you think we’re headed there?

Michael Pento: Well, you hear more and more about the Keynesian elite, Illuminati global central planners who want to abolish physical currency. Why do they want to do that? They want to do that so you have no choice but to either keep your money in the bank, or to spend it.

If you keep your money in the bank and you can’t take cash out of the bank and stuff it in your mattress, it’s abolished. What happens then? They, and I mean they by governments and central banks, can make the interest rate as negative as they want and force you to spend money and destroy the purchasing power of your savings if they want to.

That’s where I think we’re headed. Unfortunately, I think that’s where we’re headed because as I said, the next recession, because we have record amounts of debt, and record low interest rates, those things cannot exist when they interface with inflation targets.

So if you have inflation that’s rising, and interest rates artificially pushed down to 0 and below. At one point, we had 14 trillion dollars’ worth of negative yielding debt. And you have total debt in the world at $230 trillion, which is 300% of global GDP.

You’re going to have a problem like you’ve never had before. A worldwide recession/depression. That’s going to be met with unprecedented stimulus from governments. And by stimulus I mean negative interest rates, negative nominal rates, forget about real. The banning of cash, helicopter money, and massive fiscal intervention.

So, that’s where we’re headed and if you’re not watching this and planning for this, and have a plan to protect yourself from this you’re going to be in deep trouble. And you can’t just have a plan that says “I’m going to own precious metals forever and short the market”. What I do here at Pento Portfolio Strategies, is I model when it’s appropriate to overweight precious metals and to go short the market, and when it’s appropriate to just buy the stock market in general.

I’ll say this. I’ll caveat. You should always have, in my opinion, always have 10-20% of your money in precious metals and mining shares. Always. That minimal level could be increased to as high as 80-90% of your assets once this helicopter money and next depression hits.

Mike Gleason: Looking at Europe real quick, what are you expecting there later this year? We’ve got some key votes coming up, the nationalist parties are gaining some momentum. Do you think the EU is going to last, Michael? What are you expecting over there across the pond?

Michael Pento: Well we see the ECB balance sheet has increased from about a trillion euros to 4 trillion euros since Mario Draghi took over. And the reason why he’s done this, let’s be clear, Europe is (full of) insolvent nations. Look at Greece in 2012, their 2-year note went to 350%. Let me say that again. The 2-year note yield in Greece, 350%.

That’s when their national debt went to 170% of GDP. Well look, if the ECB was to ever stop their quantitative easing program, what would happen to insolvent Italian banks? Who owns all that Italian bank debt? It’s the ECB and the member central banks. You’re talking about bankruptcy insolvency all over Europe.

Then you have this surge of nationalism which started with the Brexit, then it moved over here in America with the ascendancy of Donald Trump. Now we have Marine Le Pen in France. So you have the surge of nationalism and this growing tendency towards greater and greater involvement of fiscal and monetary policy that cannot be removed. That’s especially true in Japan and in Europe.

So you asked me if I think the Eurozone can exist in its current construct, which is a monetary union without a fiscal union, and I have to say no.

Mike Gleason: So bottom line here Michael as we begin to close, how much longer do you anticipate the euphoria in the stock market and in the U.S. economy to continue, and what in summary do you see some of the greatest potential risks, and also opportunities that people should be looking out for as we move throughout the year?

Michael Pento: Well the enthusiasm over Donald Trump is surely key to the success in the stock market. If you look at the stock market’s valuation, it’s absolutely off the charts. If you look at the total market value of stocks in relation to GDP, it has never been higher than it is today.

If you look at other metrics like price to sales or the cape ratio or the Q ratio. These metrics prove that stock market is way over its skis. It’s at very extreme valuations. If Donald Trump cannot push through significant, and I don’t mean tax reform that’s just superficial, I mean cutting the rate from where it is today to 15% and a huge infrastructure package, he has to push through everything. The repeal and replace of Obamacare, he has to get all these things done and he has to get it done by the August recess.

And if these things don’t happen by August, and as I’ve said I have my doubts. The stock market is going to roll over, long term interest rates are going to start to fall, the Fed is going to run smack into a flattening yield curve, you’re going to have a recession and then all hell and chaos is going to break loose on a global scale.

So you have to have a money manager that’s watching this that can switch from an inflationary bias to a hedge against deflation. We’re going to swing wildly between those two things. And if you intend on making money in the good times like we have today, and preserving your purchasing power when things switch, you have to be cognizant of these changes.

Mike Gleason: Well excellent stuff Michael, it’s always great having you on and I know you’re traveling later today, so we certainly appreciate you making some time and being so generous with that time today.

Now before we let you go, on that last point you made there, talk about how people can learn more about your services there, your firm. How they could potentially become a client if they’re so inclined. And also, how they can read and hear more of your market commentaries, because those are just fantastic stuff that I strongly urge people to check out on a regular basis. Tell them how they can do all that.

Michael Pento: Thank you so much for saying that Mike, I appreciate it. So, the website is PentoPort.com, you can email me at [email protected] and the phone number here for the office is 732-772-9500. I enjoy putting my commentaries out, you can subscribe to my podcast, you can order my book The Coming Bond Market Collapse.

We won’t bite here. Pick up the phone, call the office and speak to me. Learn how you can best make money when the wood is green and when it turns dark. Because, by the way I’ll tell you, what appears to be ostensibly a period of prosperity and global exuberance will not last, I can assure you of that. Unfortunately.

Mike Gleason: Well put, and great stuff Michael. Thanks so much. Safe travels, enjoy your weekend and we look forward to having you back on before long, take care.

Michael Pento: Thank you very much, Michael.

Mike Gleason: Well that will wrap it up for this week. Thanks again to Michael Pento of Pento Portfolio Strategies. For more information just visit PentoPort.com. You can sign up for his email list, listen to the midweek podcast and get his fantastic market commentaries on a regular basis. Again, just go to PentoPort.com.