China Shuts Down Paper Gold Trading July 24 — Pento: “This Could Break the Western Gold Market”

Hi everyone, welcome back to the Daniela Comboni show. Happy Friday. Happy to announce that today we have a true market maverick joining us, Michael Pento. He's the president of Pento Portfolio Strategies, former right hand to Peter Schiff and the creator of the powerful IDEC model that's kept him ahead of the biggest regime shifts for decades. He rode the equity bull run hard because his model told him to, not because he's a perma bull. But now the same model is flipping him towards gold. Not as a gold bug, but as a cold eyed realist who sees the fiscal math exploding. $40 trillion in debt, a Fed trapped with no good options and the next recession that could finally break the bond market. So buckle up. I know this is going to be one of the best interviews of the year and most important, Michael Pento. It's been a long time coming. Welcome to the show. What a pleasure to be with you, Daniela. And I hope I live up to that billing. I'm sure you will. I know we have a lot to dig into, but I need to get in this one question about China since it's happening today. China's biggest banks, including the ICBC, are shutting down retail access to leveraged paper gold trading on the Shanghai Gold Exchange after today, after July 24th. Officially, it's about protecting investors from volatility, they say, after gold sharp dropped from 5600. Do you see this? Do you have any thoughts on whether you think China is deliberately forcing price discovery toward physical metal and away from Western paper markets? Or basically, the question is, is the gold paper market coming to an end, Michael? So my initial reaction is that when you think about these liquid paper gold ETFs, they're supposed to be buying physical gold to back the paper gold purchases. So if they ban that from happening, especially in the leverage situation, in my opinion, that means there'll be less demand for gold. But what if China is requiring these ownerships of ETFs to actually buy the gold, not just say they're buying the gold to verify? So it's no longer paper gold, it's verified gold. So I really don't know how to take it, to be honest with you. But it could be very beneficial for gold and it could be very detrimental. It just depends on what the authorities and the People's Bank of China is requiring these liquid gold ETFs to do. Exactly. And we'll be following that story. We'll see after today what's going to happen. But it sounds to me that it could be a major game changer for the gold market here, Michael. Look, you've been in this business since 1992. You've worked on your stock exchange floor. You've built your own model that's kept you out of trouble in major turns. Right now, that model has you turning to gold. I mean, I think you've been in gold a long time, but is it flashing greener for you now? Well, about three weeks ago, for the first time in many years, it flashed me to be buying gold miners. And that's because my model looks at the second derivative of inflation and growth. So let me just abuse a lot of listeners about what the purpose of owning gold really is. It is not an inflation hedge. It's not really a hedge against geopolitical risk. It is a hedge against falling real and nominal interest rates. And when does that happen? That happens most of the time during recessions. Think about a recession, Daniela. What happens in a recession? Well, usually the stock market tanks, right? Because earnings are going down and that's less competition for gold and interest rates. The Fed is cutting interest rates. That's less competition for gold. And then what usually happens at the end of a recession is that the Federal Reserve has to monetize trillions of dollars of new treasury debt, right? We can get into that if we have time. That means inflation is rising while nominal rates are falling. And that's rocket fuel for gold. So when I saw the memorandum of understanding and the perhaps end of the war in Iran, where energy prices went from $67 a barrel on West Texas up to 120, then back down to 67, I saw that as a great entry point to both more gold physically and also the miners. It was just what I did. However, now we're back. Brent crude is back towards $95 a barrel as of this recording on Wednesday morning. And there's even a credible threat of the Houthis in Yemen to block the Red Sea. That could send oil skyrocketing. So I find it very peculiar that gold is rising and the miners are surging two days in a row in the context of inexorably rising interest rates. Totally counterintuitive. So maybe it has something to do with what's happening with the China paper gold market. Maybe they're going to force these ETFs to own physical gold, not just say that they're owned by gold. I don't know for sure. I do know that miners and physical gold do best in falling nominal and real interest rates. And when you think about how much debt and deficits we have in this country, we have now, we are not paying $24 billion each and every week, just on interest payments on our $40 trillion national debt. No, I was gonna say that number is mind boggling. So basically, okay, we might be servicing the debt, but it's 24 billion a week. 24 billion a week. And that makes interest payments are well over $1.2 trillion a year. That's over 21% of our entire federal revenue. Danielle, this is in times of relative peace and prosperity, supposedly. In recessions, we have a $2 trillion deficit right now. In recessions, the past two recessions saw deficits increased by 300%. So there's a very credible case of having $6 trillion annual deficits in this country, which will be necessitated to be monetized by the federal reserve, even if Kevin Walsh is at the helm. And I say, Kevin Walsh, who is an Austrian economist, who's an Onrandian follower, just like Alan Greenspan was before he turned Koch. I find it interesting that Mr. Walsh, who was getting a task force together on determining what do we do about the Fed's balance sheet? He knows inflation comes from printing money, printing Fed credit, high-powered base money supply. This gentleman printed $39 billion since May 22nd when he took office. What is he doing, Danielle? Does he understand that the federal reserve has to do whatever it can do to make sure we never have a recession and never have a bear market? Otherwise, that recession will quickly metastasize into a depression. And he'll print money proactively, just like his predecessor did. As a matter of fact, Jerome Powell printed $220 billion in the five months before he left office. And I don't think people understand that, because I speak to so many experts, Michael, who are steadfast, who believe that Walsh is going to hike rates and that we could even see the first one before the midterms. And I agree with you. It doesn't make sense to me, but maybe I'm missing something. Well, you're not missing anything, Danielle, at all, because he didn't hike rates when inflation was 4.2% when he took office in his first FOMC meeting and press conference. So now, as we get closer to November, he's going to now start hiking rates when inflation is 3.5%. It's coming down on a second derivative basis, but it's still prices heading higher on the middle class, which has been eviscerated since 2020. Prices are up over a third for this cohort, middle class and down, since 2020, and their incomes haven't gone up. People say, well, you know, you have to inflation adjust earnings. Do you inflation adjust the earnings of people who aren't employed, partially employed, or who are retired? Has their income gone up 35% since 2020? No. Their standard of living is being wiped out. And that's why you see this yawning trenchant gap between the very rich, you know, top 10% and then the rest of us. The rest of them, I should say. That's exactly what it is. So, I mean, are you talking a full-blown Bernanke-style QE program coming? I think we have. Well, so due to the automatic stabilizers, you know, unemployment rate, unemployment insurance, WIC, SNAP, the degradation of tax receipts into the treasury, you're going to see deficits, as I said, most likely approach $6 trillion. And that's before you get any kind of helicopter money or TARP program, like we had in 2008 and 2020. So you can see deficits rise, you know, way above 6 trillion. I think I'm being rather conservative. I'm just doing the math behind the last two recessions, 2000 recession and the one began in December of 2007. So if that's the scenario and you have hyperscalers raising, you know, over a trillion dollars next year, 2027, and then you have six or plus trillion dollars in debt that needs to be financed, you've got two choices, Daniela, two. You could do nothing and watch interest rates surge because there's just no savings there to supply all that debt without having interest rates going much higher, or you monetize it all. And the danger in monetizing debt this time around, see, this is unique. We have a unique condition. U.S. debt to GDP is now 123%, Daniela. It was 60%. It was 57, 58 in 2000, and it was 60% in 2007. That was the U.S. national debt to GDP. Now you're 123%. It's 720% of our entire revenue. So you have to ask yourself, where does the money come from if it's not printed? And if they print the money, if they print trillions and trillions of dollars, what happens to our dollar? And what does it say about our credibility in our treasury complex? Because if you're monetizing trillions of dollars on an insolvent nation's debt, we're already technically an insolvent nation, in my opinion, or very close to one. What does that say about interest rates? Where are they going to go? I think there's a very credible case. Since we have eviscerated, we have destroyed the balance sheet of the United States already going into this next recession. There's a very good chance that long-term interest rates rise. That has been the only ameliorating process behind every other recession. What do you do when you have a recession? The government takes on a massive amount of debt, which is monetized by the Federal Reserve, and that mollifies the situation. And eventually asset prices start to rise and you reliquify the banking system. But a function of that has always been declining rates, both on the short term, that's what the Fed controls, short-term interest rates, and on the long end of the yield curve. What happens if this time around long-term yields spike and there's a very credible chance that happens? I think they will, Michael. Bill Powell cut rates seven times before he left office, three times in the past year before he left office. And interesting point, long-term interest rates increased. They did not fall like they did in every other occasion. That is indicative of our insolvent problem and our intractable inflation problem. Inflation has been above the Fed's asinine, which I say with great alacrity, asinine 2% target for over five years. You know, the Fed used to have a mandate, it was called stable prices. Then they redefined that as 2% inflation. Then that became, well, it could be two, it could be four. It could be above 2% for many, many, many years, you know, a half a decade. And we're cutting interest rates and printing hundreds of billions of dollars into that inflationary environment. You tell me what's wrong with that scenario. Everything is wrong with it. But from his last statement, did Walsh not make it clear that that was his number one priority was to bring like all eyes on bringing that inflation down? Correct. All is myopic focus on inflation. Inflation is a direct result of a choice from the Federal Reserve, which is exactly correct. But Mr. Walsh knows what to do. He needs to stop the increase in the size of the Federal Reserve's balance sheet. Why then does he need a task force or a symposium or a sit down to decide what to do? Why is he printing $39 billion over the past few weeks? It doesn't make any sense to me unless he's so scared to death. He didn't raise interest rates and he's continuing sort of on a quasi reduced scale with Jerome Powell and the horrific Jerome Powell who printed at its peak, took the balance sheet from $4.5 trillion to $9 trillion. So he printed $4.5 trillion of high powered money, which is the building blocks of all other monetary aggregates because it's credit for banks. You have banks to gamble with and banks to lend. They need that liquidity to lend. So he did that. And the one problem that we had with him, the one problem that our government had with Mr. Powell, that he wasn't cutting rates and he wasn't a deployer of a loose enough monetary policy. I mean, this is the United States of America. What are we doing? It just makes me scratch my head. I'm wondering why in the world would Walsh have taken on this mandate? Michael, he knew what he was getting into. He's worth billions, doesn't need the money. I mean, is it really about the ego or do you really think he thinks he can solve this? I think he does nothing before the midterms because you imagine the ire is going to come from Capitol Hill, from the White House. If he was to cut rates, well, there's July and September. So he didn't raise rates this past meeting. He has a meeting coming up in a few days now, end of July. He's not going to really, I don't think he's going to raise rates into declining second derivative basis of inflation. I don't think he's going to do that. So then you're talking about September and October meetings, which is just prior to the midterms. So he doesn't do anything. But I think what he does is he has this task force. They meet and they say, oh, here's my backup. I can now start after the midterms to start to reduce the Fed's balance sheet. I hope and pray because I am a man of faith. I hope and pray for the sake of the middle class of this country and for the long term viability of this nation that he does that because it isn't really right, Daniela, that people can't afford to buy a house. Thank you. Keep their house. They can't afford to buy their house. Taxes, maintenance, insurance, the price of the home. If you look at the home price to income ratio, it's higher today than it was at the peak of 2006. And that doesn't include all the things I just mentioned, taxes, insurance, the maintenance of owning a home. So why is it that first time homebuyers have been completely priced out of the market? It didn't happen by osmosis because it was because Jerome Powell was buying mortgage backed securities in the spring of 2022 after home prices had gone up 20 percent year after year. Why? Why did he do that? Well, you can say he's inane, but I believe it's because he's looking at his models are all broken. He's looking at Phillips curve models, but he's in he's in business like every other Fed Federal Reserve chairman other than maybe Paul Volcker. He's in he's in business of keeping banks healthy. Let's just look at how overpriced stocks are. And this will make sense. Just give me a second here. So the total market cap of equities to GDP, that ratio is the most is the is the strongest, most robust measurement metric to see if the stock market is overvalued. It's now two hundred and thirty five percent of GDP. Then the average of that ratio is one hundred. That means the stock market has to drop by over 50 percent just to get back to a mean ratio. If GDP didn't fall, home prices have to drop using that same logic. Home price to income ratios have to drop about 30 percent just to go back to historical normal levels. Daniel, what would happen to the economy and to the banking system if we suffered another 50 percent reduction in the stock market and a 30 percent blow to real estate values? I would hasten to tell you there would hardly be a bank that would be solvent. So they understand this. That is why we have this preemptive malarkey about two percent inflation. We've got to make sure it never goes lower because we can't have falling asset prices because banks will go bankrupt. But here's the thing, as I mentioned, the next recession is going to quickly, in my opinion, manifest or metastasize into a depression given how elevated asset prices are relative to normal levels. So I've coined the phrase a triumvirate of bubbles. We've got a massive credit bubble. We've got a massive real estate bubble and we have a massive equity bubble bubble all existing concurrently for the first time in history. So when we have a recession, number one, it's going to be very trenchant, very deep, very acute, could be a depression. That's number one. Number two, the ability of our government to quickly and I'll put that in quotes because it took five years to turn around the decline in the Great Recession. The ability of the government to do anything about it because of our intractable inflation and very injured balance sheet on the sovereign level will be much more difficult to achieve. So you're looking at a lost decade or more where prices on average go down. In fact, the NYU Stern School of Business did a study. In the Great Depression, it was 20 years, the average return was 0.6%. In a stagflation era between 69 and 84, it was 0.5% annual return. And from 2000 to 2012, it was minus 0.8% with very steep declines in all of those eras. So people that are just invested in these triple leveraged ETFs and the zero dated options and the massive amount, we've got 1.6 trillion in private credit, 1.4 trillion in CLOs, a one and a half trillion dollar junk bond market. This is the most overinflated, overfinancialized economy we've ever seen. And for those who are just in their target date portfolios hoping and praying that we never have a bear market and we never have a downtick in the stock market, they're in for a rude awakening. Well, I think you've made it clear. You've made really important explosive statements here. We're obviously spending like drunken sailors. If this fiscal trajectory doesn't change, what I'm hearing for you is we are on the path of recession, possibly depression. The question is, how far away? That's the question people want. How far are we from this? And two, Michael, you know that President Trump doesn't want recession under his watch. Correct. Well, why would he? I mean, I don't blame him for that. Won't the admin do everything possible to avoid this and just keep inflating those bubbles you're talking about? So you asked me, what am I doing about it? I have a 12-point model. I refined it from 20 points to 12. Every good model should evolve. And that's what mine has done, just more concentrated and more robust. My model says right now it's not at this, as of this recording, and it could change very quickly given what was going on with these investments in the hyperscalers and given what's going on with the energy complex. I mean, let's just say the Houthis in Yemen blocked the Red Sea and then oil prices go to $120 a barrel. So this statement is just for now. My model looks at financial conditions and credit spreads, and they're just, it's a green light right now. So, and you said in the beginning of this interview, I'm trying to ride these asset bubbles higher, sometimes successfully, sometimes not so much, but for the most part, very successfully. And the most important objective on my part is to be out and short this market and aboard the four horsemen of the economic apocalypse when this, what I call great reconciliation of asset prices, which must occur, begins. There's only two ways it could happen. Either asset prices stay where they are and GDP and income surge, which has never happened before in the history of mankind when you have bubbles, or you get a combination of crashing asset prices and GDP tumbles and then begins to make its rebound. I'm betting on the latter scenario. And I want to make sure my investors who were mostly multimillionaires and either in retirement or about to retire, don't ride that roller coaster if they don't have to. And you don't have to. You can know, see, here's the thing. Most money managers are salespeople. By edict, they can't raise a lot of cash, and they can't short the market. So what they're bound to do is just tell you, don't worry, just ride it out. The Fed is going to come to the rescue. Yes. The currency is going to come to the rescue. And I think I spent a decent amount of time on this brief interview telling you it's going to be much more difficult to do so because of the inflation and because of the amount of debt that we have. But they're trying to do it. They're trying to continue to flood air and liquidity into this bubble to keep it going as long as possible. What will break the bubble is one of two things. So I don't have a date for you. Fortunately, I wish I did. Like you can't say six months, a year. I could say that if there's two things will pop the bubble. We know what we know what they are. The Fed will pop the bubble as they as what happened in 2000. The Fed raised rates to six and a quarter. It popped the Nasdaq bubble and the Nasdaq dropped 80 percent. Even the S&P fell 50 percent. And then Bernanke raised rates to five and a quarter, had to take them down to zero percent. But that took five years. But that didn't stop the housing market for dropping 30 percent and didn't stop the S&P from falling 50 percent. So I think Walsh and his symposium or task force starts to shrink that balance sheet next year. And that could engender the recession. And once that starts going, it just falls apart. It could be the hyperscalers cut back on their spending, their capex. That's the big driver in earnings and the big driver in GDP. That'll cause a recession. The other thing cause of recession is inflation. If inflation continues way above target the way it is and continues to rise, it could eventually injure the bond market where the long end of the bond market says, hey, I've had enough. Rates are going to rise inexorably. And that would pop by definition that will be popping the credit bubble. Yeah, absolutely. Pop the stock market bubble and the real estate. That's what I think Walsh is most worried about, Michael. And that's why he made that statement. He knows better. But I mean, he was he was at the Fed when we had the problem in the global financial crisis. He was there. So how how how much can he really attack the inflation problem? Because what can they do? There's only two things they can do. They could drain the balance sheet and raise interest rates. Well, we tried that before and we saw what happened. And the situation, as I said very clearly, is much worse today than it was in 2000 and 2008. So how I my guess is, Daniela, is he tries to shrink the balance sheet. He might incrementally on the margin, raise interest rates. He engenders the next recession. And then we we follow we go over the waterfall. Let's talk about the role of gold. I know, you know, offline we're talking about how you see gold as a great vehicle to building generational wealth. Obviously, I'm completely in line with you. Talk to me a little bit about your thoughts on gold. And how I assume you feel it's one of the best places to be right now. Well, since the year 2000, it's been the best to be placed the best place to be. I think and I don't know how you or your audience view cryptocurrencies. I abhor them. I think they've shown to be completely inept as an investment and as a substitute for money. So it's gold for me. It's outperformed the S&P 500 over the last 25 years. So it's a part of my portfolio. I always recommend that everyone put five percent of their net worth in physical gold means you store the gold yourself. You have access to your gold. It's not in a bank. It's not in a gold IRA. It's not in a vault somewhere. And it's not in, you know, what I call liquid paper gold ETF. It's your gold. And then I toggle the balance between zero and 20 percent in liquid paper gold, depending on the second derivative of inflation and growth. And as I said, recession is coming. That's when you really want to pile up on gold. And here's the one brief caveat. There could be a time in my sector one, which is deflation. That means prices are actually falling, not disinflation. Prices are falling, coming down, deflation, where you re-enter into a liquidity crisis. And that's bad for gold. Everything goes for a correlation. The R squared goes to one and everything gets sold. That's going to be very brief though, because on the other end of that, you'll see massive liquidation into the treasury complex, the federally printing trillions of dollars, trying to cap long term interest rates from rising. That means real interest rates will be falling and that's rocket fuel for gold. So think about what happened right heading into that great recession. Gold did great. Then there was a brief window of a few months where it crashed in that liquidity crisis. And then in March 2009, all the way to 2011, it was just off to the races. Look for something like that to happen again. Yeah. And I'm actually, you know, full disclosure, adding to my gold position at these levels. I invite everyone watching, if you haven't taken the first step, you must reach out to my colleagues at ITM Trading because we offer free strategy sessions built around exactly what Michael is saying, owning physical gold. Do you like silver, Michael? I like it less than gold because it has the industrial component to it. So I like it, but I like it less than gold. Gold is 100% monetary metal, in my view. Silver has a much higher volatility profile than gold. So silver does really well when you have global inflation accelerating and global growth is accelerating in the context of interest rates that are not going crazy. I don't really see that in our future. I think, especially in the United States, we've spent all of our tax refunds in the beginning of this year. Well, the World Cup has now ended and I don't like talking about the World Cup because Italy didn't qualify for three World Cups in a row. Michael, you're speaking to my heart now. I didn't know we had that common connection already. Yeah, well, I got D'Ambrone, is a beautiful name, so I figured you might be Italian. But I think now we're just looking at that pressure on the middle class and down, that spending cohorts, those spending cores are really under pressure. And the only thing you have left is the 20%, the top quintile, which is really spending money, keeping the economy going. But if home prices continue to level off and turn lower and the stock market starts to fall, you'll see that you'll lose that cohort as well and you'll definitely end up into a recession. So I'm not a Cassandra, I'm not saying head for the hills. I'm just saying there's this potential energy out there, massive and unprecedented potential energy for the decline in the stock market that's going to be unprecedented in intensity and duration. Just be prepared and have a plan in place. Just a quick note, we got greedy with what we saw in January, right? We headed over $5,000 gold, everyone's celebrating exuberance. And then people want to keep living in this realm, right? They want 5,000, we want 6,000, we want 7,000, we want 10,000. So what do you say to those gold investors who are perhaps frustrated right now, they want that momentum back, don't we all? Well, it proves my point that I said before about gold, loving nominal and real interest rates falling. What happened on February 28th, gold was doing fantastic. Even the miners were having a great start to the year. And that's when oil prices started rising at the commencement of the U.S.-Iran war. Normally you would think, well, inflation is going higher, isn't that good for gold? No, that's when we went from two or three rate cuts predicted in the Fed Fund's futures market to we're going to get two or three rate hikes in the Fed Fund's futures market. And that's what gold is suffering from right now. So what you want to look for is looking for any sign of a recession, falling second derivative basis of inflation and rising unemployment rate or falling GDP growth. And that will stop the decline in gold and boost the prices much higher. I just want to get one more point on this housing emergency that the country is facing, because I truly believe it's a national emergency. Won't they bring down mortgage rates, Michael? Or just in general, like why can't we make it? What is stopping us from making it affordable, accessible for people to buy their first home at 50 years old? Well, I mean, of course, of course, rates are part of the complex and insurance and maintenance are also taxes are part of that complex, too. But home prices, Daniela, home prices are just too darn high. Home prices have to fall and you're not going to get a fall in home prices unless you're going to unless you're going to get a recession. And I mean, no one likes recessions. That's why we when we went off the gold standard, we have this now powerful tool. We can we can paper over recessions and we can make sure we never have an uptick in the unemployment rate. And we can also make sure we never have a bear market. That was the mindset. And so we went from 1913 for emergency lender of last resort to an idiosyncratic bank that got into trouble to two percent inflation to to never having a bear market and now never even having a bad week in the stock market. That's right. The new mandate of the Federal Reserve exactly has morphed into let's never have an uptick in the unemployment rate. Let's never have even a down spell like a pothole in the stock market. You just nailed it. You just nailed it. Yeah, because they they know they are they are aware, like I just said, that when the recession comes and the bear market hits, it's going to be so so intense, so disruptive that the recession could quickly metastasize into a depression. And they don't want any part of it. We can't be living in this la la land. And that's why I tell people you must be prepared for what's coming. So, again, reach out for a free strategy session with my colleagues at ITM Trading. Michael, you are absolutely wonderful. I can't believe it's taken this long for us to connect. Where can people find more of your work? So thank you. The website is PentoPort.com. And on that Web page, you'll see a link to a midweek reality check podcast I put out every Wednesday evening. It's $50 a year, but it gives you a high level view of the salient economic data, salient news and my take on it and a very high level view of the portfolio. And if you're a U.S. investor and want to avail yourself of the inflation, deflation and economic cycle strategy, I will personally manage your money in that strategy. It's a minimum investment of one hundred thousand dollars. You have to be a U.S. citizen and you have to qualify for a long, short portfolio. But if you do, I will manage your money personally and feel free to reach out to me. I promise you that we don't bite over here. All right. Next time, Michael, we're going to talk about something even more corrupt, FIFA. How about that for a segment? I look forward to that, Daniela. You're the best. Thank you. And I want to give a shout out to Goldbug Jeff for connecting us. So thank you, Jeff. You know who you are watching. And Michael, you're going to come back now that we now that we connected. You're going to be a fixture on the show, OK? I would be disappointed if I didn't see you again. All right. Awesome. And thank you all for watching this edition of the Daniela Comboni show. We'll have more great content coming your way. Stay tuned.