Mike Gleason: It is my privilege 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 well-known and successful money manager, and has been a regular guest on CNBC, Bloomberg, Fox Business News, and also the Money Medals Podcast, and shares his astute insights on markets and geopolitics from the perspective of an Austrian school economist viewpoint.

It’s always a real pleasure to have him on with us. Michael, welcome back and how are you?

Michael Pento: I’m doing fine and thank you for having me back on Mike.

Mike Gleason: Well Michael, let’s start out here with the topic that is dominating the news. Hurricane Harvey has laid waste to Houston, and the Texas Gulf coast. But Wall Street doesn’t seem to be bothered. Gold and silver have got a bit of a boost, but the equity market shrugged it off. This all makes me think back of the parable of the broken window, which was introduced by the well-known 19th century economist, Frédéric Bastiat, where he described why the money spent to recover from destruction is not actually a benefit to society.

But Michael, it appears as though Wall Street and the financial world might be buying into the idea of the broken window fallacy and viewing it as truth, and that all the destruction will somehow be good for the economy. What are your comments there, and what do you makes of the markets initial response here, to this terrible, terrible tragedy?

Michael Pento: I guess it’s part of the hyperbole and hysteria that encompasses Wall Street right now. Nothing can knock down the stock market. You didn’t even mention the fact that North Korea Kim Jung-un, his new regime, launched his 80th scud missile, and they’re ICBM’s, ballistic missiles, into the Sea of Japan and over Japan, and towards southern, south Sea of Japan. And nobody seems to care. As a matter of fact, the market rallied, from being down about 150 points in the pre-market to, I think, plus 58 on the DOW, yesterday (Tueday).

There’s nothing (that) can harm this market. The reason for that … The simple reason behind that, is that central banks have printed 15 trillion dollars’ worth of confetti and counterfeit money, leading out of the financial crisis, from 2008 to today. 15 trillion and counting. You know, don’t forget you still have 60 billion euros per month, over in Europe, and you’ve got the Swiss Central Bank. You’ve got the Bank of Japan, which is hopefully enamored with money printing in it, at least Mr. Kuroda, the head of the BoJ, understands that he can never, never, even think about, or hint about reducing his quantitative easing, or QQE program that he has.

Going back to Frédéric Bastiat … Wall Street, very low level of thinking, very idiotic group of individuals, who actually … I was listening to CNBC, comment about how … By the way my heart and my prayers go out to the people in Houston, and now in Louisiana. I heard a commentator on the show saying, “Hey, but let’s look at the good news here. Look at all the construction that’s going to happen, so this is actually a boom for the economy.” Well, you know, if you follow that philosophy, then we might as well just bulldoze all the houses, and all of the physical structures in the United States. That’s how you grow GDP. You don’t grow GDP through productivity, and you don’t grow GDP by increasing and boosting your labor force.

The new way of growing productivity now, is to break things, and to pray for catastrophic storms. Of course, they never think about where the money comes from. In other words, if I was going to fix this pane of glass, in the analogy that you brought up, the broken window analogy … Well, I was going to buy a pair of shoes, and now I have to spend that money on fixing the pane of glass. Or, if I have to just borrow that money, that money that’s borrowed, to fix the glass, would have been borrowed to, perhaps buy capital goods, and expand the economy. And of course, if that money is just printed, well then, we have the scourge of inflation. There is no magic. There is no free lunch, in anything, and especially in economics. That’s true.

Mike Gleason: When the flooding in Texas moves out of the news, the coming fight over the debt ceiling could be front and center. Now, it looked like, to us a fight was brewing with a contingent of conservative Republicans revolting on one flank, and Democrats looking to thwart Trump and his agenda, everywhere possible, on another. Trump and GOP leadership have their hands full, getting a bill to hike the borrowing limit passed. But it could be that Hurricane Harvey will be used to prevent a big fight here, relief for Texas, might be inserted into the bill to raise the borrowing cap. And few politicians will object for fear of being criticized. With that said, are you expecting a fight over the debt ceiling to be significant Michael? And any chance, we could see a government shut down here?

Michael Pento: Well, at first glance, a prima facie look at this, is that I expect more dysfunction in DC. I predicted this when Donald Trump was elected. I said that his massive reform of healthcare, his tax reform packages would be both, deluded, and delayed, and that’s exactly what has happened. And of course, Wall Street likes to look at every event as a positive. The glass is always half full. So, now they’re saying that we have hurricane that we have to pay for, that this is going to somehow make the passage of everything, tax reform, construction spending, infrastructure, the debt ceiling, the budget. Everything’s going to go smoothly.

I have my doubts. I run an actively managed portfolio. So, the base case scenario is dysfunction in DC. That has been very, very prudent, and a correct path to assume and to take. I believe it’s not going to go smoothly. I believe that we have to pass the budget by the end of September, and raise the debt ceiling by middle of October. Now, Mnuchin and Mulvaney, they were on opposite sides of this, but now they’re on the same talking points as Trump. They just want to raise the debt ceiling cleanly. But I don’t think the Tea Party Republicans, in the House of Representatives are going to go alone with that, so yes there will be a fight, even if they try to attach this hurricane spending bill, infrastructure bill to it.

Mike Gleason: The U.S. dollar isn’t looking too good these days. We’ve seen pretty steady decline, since the beginning of the year. Of course, the dollar is a terribly flawed instrument, and the fact that the DXY index traded at an all-time high late last year, was more a testament to just how bad other major world currencies must be. Where do you think we’re going from here? Is the dollar going to head lower?

Michael Pento: Well, we went from about 80 on the DXY … which is heavily weighted towards the euro … from 80 to above 100, in anticipation of what? Anticipation of Mr. Trump getting a lot of his agenda passed, rather quickly. And also the divergence between the two major central banks, between ECB and the Federal Reserve. And where, as we see now, things not shaking out that well at all. We see the dollar index has dropped from above 100, now at major support around 92. If it breaks through 92 on the DXY, I think it could head towards 80. All eyes are on the ECB. The ECB is primarily in charge here.

If Mario Draghi, on September seventh, announces a tapering of his 60 billion per euro a month, asset purchase program, I would expect the euro to skyrocket, and the dollar to fall precipitately, right through that 92, towards 80. And, of course if he does not taper his asset purchase program, then the dollar could catch a bid and head back towards 100.

That’s why, again, I run an actively managed portfolio, trying to guess the minds of these megalomaniac schizophrenics, that run central banks, is very, very difficult, so it’s best to have, not a passive ETF strategy, buy and hold, and then forget about your money. You have to actively manage your portfolio. So, I will react to, what Mario Draghi does. European GDP growth is very, not very strong, but getting stronger. They are missing on the inflation target, just as we are here in the United States, at least the way central banks measure inflation, if you don’t count everything that’s going up, like medical costs, and college tuition, and asset prices. So, who knows what they’re going to do, but you have to be reactive, rather than just proactive in this kind of environment.

Mike Gleason: Staying on monetary policy here for a moment. Any thoughts on where Trump goes with his Fed chair appointee early next year? Any chance Yellen get reappointed, or does he bring in somebody even more dovish? What do you think?

Michael Pento: Well, it’s hard to get someone more dovish than Janet Yellen, but … I guess, you know, I don’t have any special insight here. Gary Cohen would be my best guess, because Trump likes to put his fingerprint on everything, and he needs somebody in there who is going to really fight for low interest rates, and for deregulation policy. Yellen kind of submarines herself at Jackson Hole, talking about the importance of regulation in the banking system. So, my best guess is that, come February 2018, that we have a new Fed chair, and that person is Gary Cohen, who will really fight hard for low interest rates, and a weak dollar. Both those things espoused by our President Trump, not candidate Trump, President Trump, and there’s a difference.

Mike Gleason: Yeah. Very important distinction there, for sure. Let’s dig into the gold and silver markets here for a minute. Now, demand in the retail bullion market continues to be pretty soft. To our way of thinking. That can be largely attributed to a few factors. First off, bullion investors are more optimistic about a Trump Presidency, than the Obama Presidency.

Another is that, precious metals prices really haven’t been going anywhere for a while now. And then, also, those who have been buying gold and silver as a safe haven, have probably, just gotten exhausted. They’ve been on high alert, expecting significant fallout, resulting from ultra-loose Fed policy, massive Federal deficits, unlimited borrowing, et cetera.

But the reckoning, it never seems to come, so are bullion investors just going to have to live a while longer here, in purgatory, or do you see anything exciting developing in the months ahead for the metals?

Michael Pento: Oh. I see something very exciting developing. So, we have a condition here across the United States and in Europe – not in Japan as I mentioned – where we have central banks that absolutely believe they have solved all of the global, economic problems. And, what they have done instead, they’ve engendered, they’ve fostered a huge increase in debt. We have about a 70 trillion dollar increase in debt, coming out of the great recession. We have 230 trillion dollars of debt now in the globe. It’s about 330%, just about 330% of global GDP. And the entire global economy, as anemic as it is, and people talk about this global synchronized growth…

Global growth is not anywhere near where it was in the early 2000’s. We’re about – globally speaking, you look at the major developed economies – they’re about one percent, one to two percent. There is no big expanse in global growth, but whatever global growth there is, it totally and completely hinges on continued low interest rates. And central banks have now convinced that they’ve solved all our problems, as I said. And now, you look at the Fed, who entered QE in 2014, and now we’re getting ready for quantitative tightening, reverse QE to start this year.

And surely, I’m 100% convinced, if it doesn’t start in September, at least in the early part of 2018, Mario Draghi and the ECB, will start to taper, it’s assets. They were 80 billion. Now, they’re 60 billion. He’s going to be reducing his asset purchase program towards zero, certainly by the end of 2018. So, when that happens, you’re going to have … and the Fed likes to talk about tapering, they’re not selling assets, they’re just letting them roll off the balance sheet… assets do not roll off of a Fed’s balance sheet. When the Federal Reserve has a note due, what they’re going to do, is ask the treasury to pay them this note. Well, the treasury has no money.

So, the treasury has to sell an amount equal to the note due to the Fed. The treasury then, has to not only sell this debt, but has to now, service this debt, whereas before those interest payments were being refunded by the Fed to the treasury. And when the Fed gets this money, it’s retired. So, you’re talking about a draining of the money supply. You’re talking about that happening, not only in the United States, but also in Europe. And who’s going to buy all this debt?

Now, the debt has absolutely, as I said, skyrocketed, 70 trillion dollars increase. There isn’t any private source for this funding. No one is going to buy a German bund, yielding .37%, when there is no central bank around, and the central bank is getting ready to sell assets. There isn’t anybody who’s going to buy a U.S. 10-year note, yielding 2.2%, or 2.15 as we make this recording. Nobody is going to make that purchase, when the Federal Reserve is getting ready to sell trillions of dollars. They have four and a half trillion dollar balance sheet. If they take it down to two and a half, it’s two trillion dollars’ worth of mortgage backed securities and treasuries that are going to be adding to that a trillion-dollar deficit that we already have. Deficits go up huge, as interests rates go up. Interest rates rise. It’s a very vicious, counterproductive cycle.

If we have higher debt service costs for every one percent to 200 billion dollars. We have one trillion dollar in deficits, because of demographics. And if we have a recession, deficits will rise and buy an additional trillion dollars. We can have deficits well over two, approaching three trillion dollars, with no help from the government. This is going to cause, whatever relatively anemic economic growth to falter substantially.

And I will add this. We already have the automotive sector, and the real estate sector rolling over in this country. If we have a spike in interest rates, which will emanate from the ECB, whenever they decide to start tapering assets, and the German Bund rises towards nominal GDP, which is close to three percent, actually above three percent. You go from .37% to over three percent, that’s going to drag up yields across the globe, and that’s when the situations really going to be extremely pernicious.

And what’s going to happen then … now the gold market is already sniffing this out, by the way, as we breached $1,300 an ounce a couple of days ago … the gold market is sniffing out this: that central banks are going to have to get back into the QE programs, across the board. And when that happens, faith in fiat currencies – not just the dollar, all fiat currencies – is going to falter very dramatically. You see some of this, not only in the gold market, but you see this phenomenon in the cryptocurrency world.

There is going to be a dramatic watershed, trench and drop in the faith of central bankers. That’s the biggest bubble of all. And when that pops, gold’s going to go back to its all-time high, and well surpassing that level too. So, look for $2,000 an ounce gold. It’s going to happen rather quickly. I think it’s going to happen within the next couple of years, and you already see the beginnings of that happening today.

Mike Gleason: Well, we’ll leave it there. Fantastic stuff as always. Michael, it’s great to have you on, we respect your insights quite a bit. It’s excellent to have you join us every few months.

Now, before we let you go, as we always do, please tell people, who want to both read and hear more of your wonderful market commentaries, and also learn about your firm, and how they could potentially become a client, if they want to do that. Please tell them, how they can find out more information.

Michael Pento: Sure. You can email me directly, [email protected]. My website is www.PentoPort.com. The office number here is 732-772-9500. Be glad to talk to you.

Mike Gleason: Well, thanks again Michael. Enjoy the Labor Day weekend. We look forward to catching up with you again later this year. Take care, my friend.

Michael Pento: Thanks again for having me back on Mike.

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 that he does and get his fantastic market commentaries on a regular basis. Again, just go to PentoPort.com.