Speaker 1This is the Commodity Culture Podcast, where we interview prominent investors, fund managers, analysts, and company CEOs to give you an edge when it comes to investing in the commodity space. Michael Pento, great to have you on Commodity Culture. I want to start off with the rising government bond yields in the United States and around the world. Many are framing this as a potential sovereign debt crisis, considering we've now seen U.S. national debt surpass $40 trillion, that debt obviously now getting much more expensive to finance. Others are saying treasury yields are actually rising because economic growth in America is strong. I'm wondering how you see it and how you think this all plays out.
Speaker 2Well, I can think of a handful of reasons why treasury yields are rising. I'm trying to go through them because it's very important to understand. Yeah, I mean, we do have some growth in the United States. I'm not going to call it runaway growth. It's very bifurcated growth, meaning it's only the 20% of American consumers are really still on their feet. The bottom 80% have been wiped out. The U.S. economy is growing very, very slowly outside of AI investment. So it's CapEx, C plus G plus I plus, you know, minus net exports is the formula for GDP. So the investments are just booming. And they're debt-fueled investments. But that's a small reason why yields are going higher, but it is part of it. Let me give you some other reasons that you should know. First of all, inflation is approaching now six years of being above the Fed's asinine 2% target. And I love to say asinine because their target should be zero. But it's been six years that they've missed their target to the upside. So that's definitely a tailwind for yields to go higher. Of course, you touched on it in the introduction to this question. Insolvency. We're pretty much an insolvent nation because we have debt. So I don't look for debt to GDP. You cannot tax 100% of GDP. Someone was on CNBS the other day and he was saying that, you know, we could easily play off our debt because our GDP is, you know, we're 123. He actually quoted this person, quoted the publicly traded portion of the debt as if we could just say, oh, well, you know, we're not going to pay our social security. Medicare, Medicaid that we've already put in the trust fund. Supposedly we could default on that, but we could just pay off the debt in one year because we could just tax 100% of GDP. Well, then you wouldn't go to work. So no one would work. So that's an asinine statement. So I look at debt as a percentage of revenue. Debt as a percentage of revenue is 720%. Okay. $2 trillion in annual debts. So, you know, 123% of GDP. It's an insolvent nation. That's. Also a tailwind to debt, to yields going higher. Our foreign creditors are abandoning the US dollar and the US treasury complex. Okay. And that's because of, you know, sanctions and, and confiscations. The bank of Japan is selling treasuries to support their yen. There's a tremendous amount of pressure on the yen carry trade where people borrow in yen for almost not, you know, borrow dollar yen for almost nothing and buy dollars and buy treasuries. Well, the differential between JGBs and treasuries is closing, narrowing quickly. So that, that's cutting off the very, you know, the fuel of the yen carry trade. And when you unwind the yen carry trade, if you have to, because of a strengthening yen, then you put more selling pressure on treasuries. I got more. There's a couple of more. I'm going to try to remember. Usually the US savings rate is just 3% now, Jesse. So we don't have the savings yet. I mean, this is the basement of history. As far as a, the US savings rate. So there's not the savings to put into treasuries and the glow. And here's a very important one. The global anchors to US treasuries, which were 0% rates in Japan and 0% rates in Germany. They're gone. Those though the German boons are now well into the threes and the JGBs on the benchmark are also into the, into the 3% plus range. So the global, the global anchors holding treasuries down are, are, are, are gone. And I have one more thing, one more thing. The federal reserve has printed hundreds of billions of dollars over the last few months. Uh, since, since in Powell left in may and from December of 25 to may of 26, he printed $200 billion. So the, the, the Fed's balance sheet was skyrocketing. What does that credit created out of thin air to buy? Treasuries. Okay. Now under worse, we see an attenuation of the pace of increase in federal reserve credit creation, which is that means more debt issuance has to be priced by the free market. Jesse and less has to be taken is being taken away and, and being sequestered sitting fallow out of the market on the Fed's balance sheet. So it's a long answer. I have to, I had to give, I had to, I'm glad you gave me the time to, to expound upon it because that is it. Those are secular tailwinds pushing yields higher, which are, which are, which are the pin that breaks the bubbles that are extent in real estate equities and credit by definition.
Speaker 1How high do you think yields have to get before we face real massive issues or, or are we already there? I had James Rickards on recently and he wasn't too concerned about rising yields when it came to the treasuries because he pointed to the early 1980s when we were in double digit percentage yields. However, the U S debt situation was in a completely different situation back then. So I'm wondering how you contrast those times versus today and whether at what point you think we should all start to get really alarmed about the
Speaker 2situation. So Jim Rickards, just to be clear, he was not concerned about yields that in the 5% range because they're much lower than they were in the, is that what he said? Much lower than they were.
Speaker 1It was a much longer picture than that, but that was kind of the gist of what he was saying. That was one of his points.
Speaker 2I'm surprised. I'm surprised that because anybody who invests in this, in the stock market, you know, it's all about the rate of change. It has nothing to do with the, the absolute level of interest rates. So interest rates go from zero to 5% in a very short period of time. I wouldn't take any solace in the market. Wouldn't either because at one time they were 15% in 1980, so it's just a ridiculous, it's just a ridiculous supposition. We're getting close to be, to be, to be clear. We're getting close. I don't have the exact date. You know, I can't say at this date and this price and at this deal, the, the, the treasury complex is going to have in a binary effect, destroy the stock market. It is, it is, these rising yields are putting pressure on credit and financial conditions. When they get to that tipping point, I have a model that exactly tells me when I need to get, you know, more and more concerned and I am already getting concerned. So again, it's not a, it's not, it's not a zero, you know, zero and a one here. It's not a binary situation where you're either not concerned or a hundred percent concern you as yields rise. And as it puts pressure on borrowing costs and the, and the AI CapEx boom and high yield and junk bond debt, as that pressure continues to increase, I will get more and more bearish and I've already started to take, I take it, I've taken on some CTA exposure in my portfolio to hedge against a, a negative outcome in the stock market. That doesn't, now I am not now net negative net. I'm not in a net bearish positioning in my, in my portfolio, but I have increased that portfolio, the negative bearish hit those, those hedges. The last two weeks.
Speaker 1Some people point to long-term treasury bills as a potential defensive position in the case of a recession or broader market downturn. Do you think we're at the point where that's no longer the case or would you say there's some wisdom to, to that sort of strategy?
Speaker 2So I've been on a record for a long time saying that we're in the next, the only thing that's going to counteract those six or whatever things that I mentioned before, they're putting upward pressure. The only offset to that would be an out right recession, which would bring some buying into the long end of the, of the treasury complex. And I've been on record a long time saying that the, the amount of declining yields and the duration of declining yields is going to be severely attenuated from past experiences. And simply because, and this is, this is very, very simple in past recessions. We saw the deficit rise from maybe, you know, a few hundred billion dollars to at the most a trillion dollars. And before that it was from in the 2000, we had a surplus that went to a couple of hundred billion dollars in the next recession. We're starting at an insolvent place where, as I said, that the debt is 720% of our annual revenue and $2 trillion annual deficits, $1.2 trillion interest payments because of the autumn, automatic stabilizers that kick in. the tax revenue gets eviscerated when you have a recession. So you think about the unemployment insurance kicks in and welfare, food stamps, all that other WIC and all the SNAP programs, all that money has to increase and the revenue declines. Deficits should go to close to $6 trillion in the next recession, annual deficits. So after that Pavlovian reflux response into the long end of the yield curve and treasury yields fall a little bit, I think the response, and I'm talking about $6 trillion deficits before that we have a TARP program or universal basic income or some kind of program, bread and circuses kicks in, yields are going to go much, much higher. And so they're not going to stay down for very long. They're not going to fall for very long or very far. And that, that means the, the mollification process or the remediation process of fixing the problem, which means, you know, lowering yields across the yield curve, lowering borrowing costs across the yield curve, which usually happens when the central bank gets nervous and the treasury gets nervous to try to fix an asset bubble in closure or in recession, that will no longer be the case. So it's a long answer of saying, I don't expect, I don't expect the government to easily bail out the recession or the asset price implosion. It won't be very difficult for them next time this happens. Gold has historically
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Speaker 2Yeah, well, how are the efforts of Scott Bessing to use the TGA, threatening to use the TGA and to perform some kind of operation twist? How's that working out so far? It's not so good. Not so good. The yields are much higher from when he first, when he first bragged about, I am the house, come challenge me. And they're like, okay, let's see what you got. And not working out too well. So I expect the government's response will be slow. I think the Fed will be very reticent. I mean, Warsh has been on record saying he, he blames QE. It was, it was too intense and too long in duration. So he's going to be reticent to go back and launch another QE program. So it'll be too little, too late. And then after we have a complete meltdown in the stock market and in real estate and the economies in free fall, he's going to have to acquiesce. He's going to have to print trillions upon trillions of dollars to stop the long end of the bond market yield from rising. And to refill, you know, to reliquidate the banking system. That's my opinion. That's what he's, that's who's going to have to do. And it's going to happen. It's going to happen for a very long time because you just don't have the savings. There's not enough money being made available to finance the trillions upon trillions of dollars in annual deficits. I just said sick, just let that number sink in. We're already at two. This is not, not my opinion, $2 trillion and deficits. We go up 200% in recession. So that's, that's $6 trillion. And then you have, like you mentioned, you alluded to UBI, TARP, you know, some kind of helicopter money, direct, direct handout to citizens. So I'm looking for a period of, I call it hyper stagflation after the next recession for many, many, many years, because, because we're going to have people, people will lose trust in our ability to ever have a normal economy where you can raise interest rates to a real level, you know, above inflation and have a viable economy. We have so much debt outstanding. It just can't happen anymore. Total non, total non-financial debt as a percentage of GDP is the, is the second highest in US history right now. The only other period higher was right after COVID when GDP collapsed. So we go back pre-COVID, it's the highest ever. It's, we have a very over leveraged economy. And what's the, what's the, what's the worst thing that can happen in an over leveraged economy? Interest rates rise. And I don't see that happening. I don't see any way around that
Speaker 1from happening. Now, many point to the fact that ultimately it's the fiat currency system that we're under that allows governments to engage in all of this reckless fiscal policy, impoverishing citizens for the benefit of the political class and essentially keeping that machine going. Gold, seems to be acting as an honest unit of account in terms of tracking this malfeasance, despite its run to all time highs. However, at the start of the year, we're seeing it basically flat. It has now been falling recently. I think we're about 4,200 as of the time of this recording. Why hasn't gold held up here? Is this just a cyclical correction in a longer term secular bull market, or are there real headwinds holding gold back right now?
Speaker 2So there are real, real headwinds holding gold in the miners back right now. And the short answer is what we'll be talking about this whole interview so far. It's interest rates. So nominal rates are rising and real interest rates are rising. That is not an environment that gold thrives in. Gold really thrives in recessions the most because nominal rates are falling. That's competition. Gold doesn't pay any interest. Okay. So, you know, I always have a choice. I can put my money in the bank and earn an interest. And as long as that interest is higher than inflation and real interest rates are rising, it makes gold less attractive. That's the, that's the bottom line calculation you have to understand. So in a recession, nominal rates are falling and people understand that in a recession, what's coming next? Massive money printing. So nominal rates are being capped by money printing, which means inflation is higher. So nominal minus inflation is a real interest rate, which would be negative and growing more negative. And that's when you pile into gold. I love gold. I mean, I've been accused of being a gold bug, but I have a miners on friday i made some you know it was it was end up to be a decent trade for uh for the firm but um you know what do you want gold gold miners are a leveraged play on gold i think they're going to have a fantastic future so for those people who are watching this and say i don't really want to time this i think you'll be fine you know two three years from now you're gonna be wow i'm so glad i didn't sell my goal but if you're an active manager like myself i just can't sit here and i don't know when the economy breaks it will i think it's 2027 i don't know if it's early 27 or mid 27 but we're all you know we're just just entering october now which is you know end of september early october that's a long time and there's gonna be a lot of damage done in the precious metals compact complex between then and now i would use that weakness to buy um but the weakness i think is here and it's coming and it's gonna and it's gonna get more uh intense i'd love to
Speaker 1follow off on the selling the gold miner positions because this is something we've talked about on a couple of our last interviews what what is it that made you exit the space you're saying because you're managing a fund and you need to show results to your shareholders that um or not shareholders but your clients uh that you see weakness coming in in the kind of near to medium term although on a longer term time horizon you're still constructive the miners is that correct
Speaker 2exactly correct um i i think the i think the environment for golden miners is never going to be better in once the recession becomes manifest right now we don't see it there's going to be a collapse in the ai spending bubble there's going to be collapse and credit and financial conditions and that's when you want to just jump in with both you know both arms and legs into the world and that's when you want to just jump in with both you know both arms and legs into the world and that's when you want to just jump in with both you know both arms and the gold mining sector um but like every i have a model that has five sectors in it they range between deflation and some form of stagflation or hyperinflation and you don't want to own gold when you are in a reflationary environment right now we we don't see economic growth at least you know in aggregate falling yet you all you see those massive headwinds to bond prices and tailwinds to bond yields so when that's when in that scenario that's when gold tends to to suffer and that's exactly what's happening so i'm just trying to be more a little bit more tactical in the portfolio but on the other end of this next recession which is going to be the most intense recession slash depression i think we've ever seen in this country just given the level of asset prices and the over leveraged nature of the economy you know record record margin debt and uh record debt to gdp from on the national on the on you know national debt to gdp we have things like private credit and um junk bonds these you know trillions of dollars in these in these loans outstanding um they're all going to have a problem banks are going to have a big problem and the crash is going to be epic so um the on the other side of that the response from the treasury and fed although reluctant especially from the fed at first is going to have to be massive and
Speaker 1unprecedented well michael fantastic conversation well michael fantastic conversation what do you tell us about pento portfolio
Speaker 2strategies so um i run a actively managed portfolio an sma separate managed account um it's called the inflation deflation and economic cycle portfolio and if you have a hundred thousand dollars to invest and you are a u.s citizen you qualify for a long short portfolio i will directly manage your money in that in that structure and that strategy if you don't have a hundred thousand and you're to invest and you don't have a hundred thousand and you're to invest and you're to invest and you're to invest and you and you're to invest and you're to invest and you're to invest and you're to invest and you can subscribe to the um midweek can subscribe to the um midweek can subscribe to the um midweek podcast called the midweek reality check podcast called the midweek reality check podcast called the midweek reality check and and on that podcast i will let you and and on that podcast i will let you and and on that podcast i will let you know exactly know exactly know exactly what i think about the most salient what i think about the most salient what i think about the most salient economic data and from a high level the economic data and from a high level the economic data and from a high level the port the changes in the portfolio and port the changes in the portfolio and port the changes in the portfolio and that's fifty dollars a year great well
Speaker 1that's fifty dollars a year great well that's fifty dollars a year great well i'm gonna put a link to pinto portfolio i'm gonna put a link to pinto portfolio i'm gonna put a link to pinto portfolio strategies in the description below strategies in the description below strategies in the description below michael as always thank you so much for michael as always thank you so much for michael as always thank you so much for coming on and sharing your insights with coming on and sharing your insights with coming on and sharing your insights with the audience
Speaker 2the audience the audience always great to be with you jesse thank
Speaker 1always great to be with you jesse thank always great to be with you jesse thank you for joining us today on commodity you for joining us today on commodity you for joining us today on commodity culture earn up to a four percent annual Link is in the show notes below.
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