Fiscal & Monetary Madness To Blow Up Bonds, Stocks & Housing In 2026? | Michael Pento
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If we don't have a recession, if we don't have a credit crisis, we are going to have a blow up in the bond market just because we have so much fiscal and monetary madness going to happen in 2026. And I think if those bond yields go north of 6%, I think the whole I think that completely submarines the housing market and completely blows up the credit the uh credit bubble obviously and also the equity bubble. Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagger. When today's guest was on this channel earlier this year, he warned that a triumvirate of three massive asset price bubbles in credit, real estate, and stocks threatened to take down our fragile economy and dash the retirement hopes for millions. But since then, the bubbles have only expanded. So, will they expand further or pop in 2026? To find out, we've got the great good fortune to welcome money manager Michael Pinto back to the program. Michael, thanks so much for joining us today. >> Hey, I'm looking forward to a great conversation, Adam. >> It is always a great conversation with you, Michael. I'm looking forward to this, too. Lots to talk about. >> Not a lot of time, so we're gonna have to just bang through a bunch of stuff as quickly as we can. Um, so let's let's start here. So the day we're recording, Michael, um, it's Friday, uh, yesterday, Thursday, market close, record high for the S&P and for the Dow, uh, kind of riding a recent sugar rush with the, uh, recent uh, Federal Reserve guidance and chairman Powell talking about how the Fed is going to be buying $40 billion worth of Toss going forward. markets interpreting that as QE light or maybe just regular QE. Um so anyways, you've warned about these these bubbles. They they seem to continue being blown here. Let's start there. Um as you as we look into 2026, is it just going to be more of the same or do you think there'll be a reckoning at some point next year? >> So if you don't mind me um answering the question this way. Um so let's just go back on a timeline. So I um my IDC model on November 6th said it was time to get a little more defensive after being so we started the year bearish as you remember cautious. >> Uh April 2nd was liberation day. April 9th was a rec we recanted all of our liberation day tariffs or most at least the levels and then we went bullish and I've been on your program several times saying that we're you know not max bullish but we were about 40 we were 40% long the market until November 6. That's when the IDC model began to tell me, hey, start getting more defensive. And I did. And the reason why, I'm glad you're having me on. I want to walk the audience through what I saw and what I see now. And then we can talk about 2026. So, I noticed that on November 6, financial conditions stopped easing and credit spreads began to widen out. So, that had me thinking, well, why would that happen? Is it just a fluke or or is it or is the move substantiated? So then I I looked at the reverse repo facility which effectively is zero. These are the liquidity metrics that I look at. >> The level of the real Fed funds rate had been in positive territory for two and a half years, which in previous cycles indicated it was time to get bearish because that's when you'd have a a selloff in the market. bank reserves had been falling for the past few months and the slope of that line was increasing to the downside and um and the yen carry trade again this is there'll be slides on this stuff uh later in the show the yen carry trade started to erode significantly which is basically just real quick people mostly institutions borrow in yen they sell the yen and buy various currencies across the globe their bonds and their stocks and they get a much higher yield and they also get a currency appreciation that too. When they repatriate back into the yen, the yen has usually declined. It's a huge source of liquidity and that has dried up or it was drying up. Then I look at some um AI credit to false swap spreads in particular Oracle and and they were blowing out. And the last thing I looked at in the in my model, these are all things in my model, was the move index, which is a measure of bond market volatility that was spiking. So for those reasons, I got I I I sold down the equity expo exposure from 40% to just 15% net long. Then on November 13th, the Fed funds, this is before November 13th. So the model is very very robust and picked up on this trouble before November 13th is when the Fed funds futures market said that there would not be a rate cut in December. It went below 50%. >> Yep. >> And in that one week between November 13th and um November say November 20 was it November 24 first that I tech I emailed you? I think it was November 21st. The S&P dropped 5%, the Q's dropped 6% and Bitcoin went down by uh 20%. In so everything went to an R squared correlation of one in that week. Everything pl even silver and gold was all s was being sold off. >> Yeah. And I just checked it was November 21st when you emailed me about that. And and on November and on no serendipity for me when I when I told you I had been selling on November 21st, New York Fed President John Williams came out of the blue, maybe not so much, Adam, but maybe out of the blue said, "Oh, by the way, we are going to cut rates in December." And the Fed funds futures market went to 90% that we were going to have a cut. And then of course on December 10th, Jerome Powell proved himself one one of the great um alchemists uh one of the greatest counterfeits in history. Not only did he cut rates again by by 25 basis points, but yes, he he entered into a $40 billion per month QE program. Now, some people are saying that's not QE. I would I would argue that till I'm blew in the face or, you know, uh dead because when you expand the Fed's balance sheet, when you print money X neilo out of nothing and you're buying short-term bonds, I don't care why you're buying them. I don't care if you're buying them to bring down the rate or keep money markets rate stable to hit your target. You are expanding the Fed's balance sheet by creating money out of nothing. Credit, highowered money. Fed credit is the same as cash. It's electronic cash. It can be converted to stock to to cash. That's why it's part of the high-powered money uh aggregate. Um they're blowing that up by $40 billion a month. So yes, we are in QE. And that has um put a a lid on the deterioration of financial conditions and sent credit spreads into a more um into a period of mllification. They were being mllified. as of this recording. And then we have today we we see some I think and I think my theory is it has more to do with the AI bubble bursting and we'll get we can get into that later uh in the program but there's two salient risks for 2026 and one of those risks is the AI credit bubble is going to burst and so that's that's what I think is happening today. Um but that's that's where I was that's that's a recap of two 2025 in a nutshell. >> Okay. And and for folks that they're going to watch this a couple days after we record this, Michael, but who weren't paying attention this Friday that we're talking, what about today's action is making you think that the AI bubble may be starting to break down? >> Well, we had we had earnings out on I believe it was um what was the what is the big AI company that came out on uh Avago, right? >> Yeah. and they said they, you know, they beat on top line, they beat on the bottom line, and then it turns out it looks like financial alchemy on their balance sheets. That's what people are seeing right now. Um, in other words, this circular financing and and this all all kinds of and this is I'm haven't I'm not a forensic accountant, but they have been accused of accounting gimmickry and that's why the stock is crashing and it's bringing down the whole the whole market with it because listen, Adam, if you take out AI from earnings, look at the NIPA tables, earnings are falling. If you if you take out the AI stocks from the earnings complex, EPS is dropping on the S&P 500. And if you take out the companies that deal with AI, you don't you don't have much of a gain in the stock market and you don't have much of a gain in GDP either. It's all about this financing of the AI bubble which used to be, you know, was the foundation was built on cash flow and now it's borrowing hundreds of billions of dollars to buy these chips. So, it's just an another uh example of this magnificent credit bubble which is part of the triumvirate of bubbles that include equity prices and real estate. >> Okay. And and I want to note too this week that um Oracle uh suffered a big drop and largely I think because uh its capital expenditures on AI were even bigger than what Wall Street was expecting. And I know Oracle, they've had a lot of questions about, man, is this company going to actually be able to to to finance what it's told us it wants to build out here. Um, so anyways, there's just there's there does seem to be sort of a a um a questioning of confidence in the space that we're seeing this week. I think Broadcom also had a similar size selloff, you know, that 13% something like that. >> Yeah, that's what I was trying to get out of the Oh, Broadcom. Okay. Broadcom the symbol is AVGO for Broadcom. >> Okay. Yeah. Okay. So, um, so yeah, so we're seeing some very big players and and folks may remember Oracle added a ridiculous amount of market value, um, uh, at the last earnings call because it was, uh, uh, you know, announced it was going to do all this this this spending for AI. Um, and you know, this big big blue check chip tech company, you know, added like 40% of market value within a matter of hours. I think we're starting to see the bloom coming off that rose. So, you know, is this the end of the AI bubble? I don't know. Probably too early to tell, but definitely these are some of the initial signs you might expect to see. So, more to come. Okay. So, you just you just recap 2025 for us. Um, you gave a quick mention of some of the slides that you prepared, Michael. Um, because we are a little tight on time. I want to make sure that we get to them and we don't short change them. Should I should I pull them up now? >> Sure, go ahead. >> Okay. put a little color on more of more more of what my model looks at and what I was seeing and why I was able to shed some some of the um high beta exposure before we had that big swoon, you know, the S&P and the the Q's everything was dropping all interesting as my theory holds again and it's proven out that everything goes to a correlation of one >> when you see this you know rapid disinflation or deflation or some kind of chaos in the bond market which I will talk about 2026 So, so first the first slide is the um just a a chart of the real Fed funds rate and in particular you can see that um the level of the real Fed funds rate has been positive for two and a half years. That's the very right side of the of the uh chart and and that's most relevant because it was mostly negative. We had a negative real FUD fund Fed fund rate from 2001 all the way to 2022. And and you could see what happened right before 2008. See the real Fed funds rate spiked up about two and a half years and then we had a collapse in the uh in the credit markets, the housing market and in u and in the stock market. So uh my model here looks at also bond market volatility. This is the move index. This is from Meil Lynch. And you can see just on the right side of the scene bond mark uh the screen bond market volatility started to spike in very very early November. And that was another reason that why I went uh a little bit shorter on my exposure with equities. Um it's since come down a little bit, but it's spiking back up again. Uh reserve balances. Uh bank reserves have dropped $1.2 trillion since 2021. Now, what makes reserves disappear? Two things. Quantitative tightening is one, and the other one is bank runs. When you go to a bank and you take money and you withdraw it, their reserves are drained. And look at this pre precipitous slope over the last few years here since 2021. And that's what if you ever we could talk about it in adnauseium. I know we're short on time, but if you want to ask yourself why after almost five years of missing your inflation target to the north that you would dare to cut interest rates for the third time in this, you know, three meetings in a row. it it's to protect banks and to keep interest payments low for the treasury. Those are your two It's not about the middle class. >> It's not about employment. It's that those that those are straw men that they are reasons to obfuscate the truth. They are in business to protect banks and to make the treasury solvent. That's the only reason why. That is the main reason why, believe me. >> And Michael, there there's a term out there um called fiscal dominance. >> And and in a nutshell, it it it basically means you get to a point where the central planners have to kind of abandon any and all other mandates that they have, price stability, unemployment, low, whatever. Uh they have to sacrifice it all just to keep the debt serviceable. In your opinion, are we are we in fiscal are we mired in fiscal dominance now? >> Yes. When you have when you have a trillion dollars in interest payments, that was the the watershed moment where I think the and that's the only that's the only cogent reasonable assertion you can make because looking at uh all-time highs, you just mentioned all-time highs in the stock market other than today. Uh financial conditions are still pretty easy. You have an unemployment rate that's way below uh his historical average. um home prices are unaffordable for most Americans and you have you've missed your inflation target for almost five years. You would for I just mentioned all those things which are all facts. They're not my opinion. They're all facts. You would say, "Well, the Fed is raising interest rates. They're not cutting. They're they're not they're not cutting three times in a row and going back into QE and being told by the administration that they should have went by 50 basis points, if not more. It's all about keeping debt service costs low and and keeping banks solvent. >> Okay. >> It's not about the middle class, unfortunately. >> So on for slide four, you see um these are the reserve balances. I I was I just talked to No, that's slide three. Slide Slide four is the reverse repo facility. >> Yeah. Sorry, I skipped that on you. No, >> it's effectively zero. Look at the right right side of the screen there. um down from $2.5 trillion in 2022. So this these slides are showing why we have a liquidity problem in the markets. Positive real Fed funds rate causing bond market volatility spike. Reserve balances got very low. Um repo reverse repo facility which is theow that wasow excess reserves being parked at the Fed that went into the bond market. Well, they're gone now and and that's why we're we're doing 40 billion in QE. Um, slide five. >> Sorry, before before we move real quick, let let me just make sure folks really understand this. So, think of the reverse repo facility as a as a big sponge. And um when a when you put a sponge, say when you submerse it in water and you pull it out, the sponge is is saturated with water, right? And that's pretty much where we were when when this reverse repo facility was at its highs here. The sponge had a ton of water in it. So as you squeeze the sponge, it's pushing water or liquidity out of the sponge into the world, right? And so it's this nice tailwind for the markets. It's this excess liquidity. It keeps everything running, lubricated, creates extra liquidity that can go into asset prices and push them higher and everybody's happy, right? So now we've got to the point where the sponge has been squeezed dry, right? And so we're not getting that that that extra liquidity anymore. And so that was probably what your model was picking up on, Michael. So you could have a problem with a dry sponge. But to refill, like if we wanted to to refill the repo facility, >> well, that's a sponge that's sucking water out of the system and that would create even bigger problems. Um, so the Fed is is sitting in a challenge here where it's like, well, I got this dry sponge. It's not providing the tailwind anymore, but I'm afraid to start refilling it because it'll shift those tailwinds the mark the system used to have into headwinds. Um, so I just wanted to sort of help folks understand where we are specifically with the repo facility. Now he can help out by providing liquidity other ways, which is part of what he just announced. >> Yeah, I mean I would they could they could flood the banking system with reserves enough to fill a reverse repo facility, but it would have to be more than $40 billion a month. It' have to be like a hundred billion a month, some some some number like that. Yeah. >> Banks would have reserves. They could hold on to reserves and they would park reserves at the reverse refu facility and it wouldn't make a difference to them. >> But that's not we don't we don't have that yet. As a matter of fact, that that reminds me of something else I want to make sure I mention before we run out of time. is the the the first Fed meeting of the new replacement, what I like to call affectionately as an obsequious sickopant of the administration, who I who I mostly support and voted for, just a caveat. Um Kevin Hasset is the is the odds on winner there. He doesn't get a vote until June 17th. So, not only you you have to ask yourself problems that could exert themselves as as far as exacerbating the liquidity crisis that was happening starting on November 6th, you could say, well, is it is one rate cut between now and one more, that's what we're, you know, that's what the markets are projecting. One, maybe two at the most between now and June 17th enough. Is is it going to be enough to provide the liquidity for the bond market? Is $40 billion in QE going to be enough? I I mean probably is. I don't know for sure. My model will watch it deciduously. But the question is, you know, do you want to just ignore that fact? And I wouldn't I would pay close very close attention to it. Um so now slide five, Adam, is the is the Japanese benchmark yield, benchm benchmark treasury. So the benchmark yield is at an 18-year high. And don't forget um the the yield range between zero or below between 2016 and 2021. That was under Shinszo Abbe in his interest rate repression regime where he capped 10-year note at zero. But one you know when you have uh when you have a quadrillion I think it's like one point. Yeah. Here I wrote it down here. So the new the new uh minister and I won't I won't pretend I can pronounce her name correctly. S Tekachi she is she went to add $21.3 trillion yen in a stimulus program and that added to the $1.3 trillion yen in debt which is 240% of GDP. So this rise in yields which is dragging >> you you said you said trillion trill trillion. >> Is it trillion or is it quadrillion? It >> it's 1 point one 1,300 trillion yen. So, it's 1.3 quadrillion yen. Thank you if you corrected me. I don't know if I I I don't know if I misspoke, but it's 1,300 trillion yen. So, you know, um that's a lot of yen, right? Um [laughter] so, so they they they have abandoned their interest rate repression where the where the BOJ was just buying every uh JGB auction. >> Yeah. >> Central Bank. They abandoned that and look where yields are going. They're going up up up and away. Um, and the the last slide that we have, >> so sorry, but before we get there, so a this this endangers the carry trade, which you you talked about earlier, but just to underscore that's been just sort of a hu huge component of how markets have worked over the past couple decades. Yep. >> So, if that if that goes away and TBD, whether it will or it won't, but if it does, I mean, the system is it's like losing a limb. like you're going to have to the system is going to have to learn how to operate differently and it's going to be curious to see how how it does that. Also, Michael, I I had heard it said, you know, years ago that Japan was so overinded and, you know, having a quadrillion in debt, you know, it catches the attention. Uh but it was so overinded especially on a debt to GDP basis I think in most of any country that I'd heard it said once that um I think back when yeah yields were I don't know back back in 2022 there were there what like half a percent or something like that in the tenure. I had heard that if if the 10-year Treasury in Japan rose to like one or god forbid 2% that it would just blow up the economy there. It just blow up the the country. >> Is is that a real danger here? Yes. The short answer is yes. Absolutely. Um yeah, when you have 1,300 trillion yen in debt, 240% debt to GDP, your your economy stops functioning as rates rise. And it's not only it's not only that the actual level, which is almost 2% now. It's the rate of change. This was this was zero or below in 2021. So it's it's the rate of change that I'm really watching here. like throwing a person into Arctic waters. You you you just it's a shock to the system. >> Yes. Yes. Um so uh and it's dragging yields higher across the globe. So um we'll see what happens there. But that's >> So is it safe to say if if let me just ask you this. If if yields don't come down materially from here, what do you expect? I mean, do you expect Japan to just grind to a halt and enter into a deflation? I I expect I expect the BOJ to go back into interest rate repression where they just put a cap on the on the yield on the 10-year. >> I Okay, that that's what I expect will happen. I don't know if it's 2% or 3%. I don't know the level, but I expect that to happen. >> Okay. Sorry to interject, but those are important questions. >> Yeah. Yeah. Yeah. Always. Um so, uh the end carry trade is eroding. um that the estimates for the size of this carry trade which is you know it's important enough for me to put it in my model you it doesn't just get there by osmosis so I back tested everything and the reason why it's there is because the yen carry trade as you said very eloquently eloquently is that it's a major source of global liquidity and when that dries up there's a hu huge problem in funding markets so the size is between between four and 20 trillion dollars the entire size of the end trade And the blue line on this chart represents the US 10-year and the and the and the JGB 10year. Now, the spread between the two was 400 basis points in 2023. And now it's about 200 basis points. So, you're getting to the point now where when you factor in currency uh protection, currency hedging that you can no longer make a profit by borrowing in yen and buying US assets. Mhm. >> So it's so it's those so it's those six reasons that I mentioned that caused me to get more cautious. Now I to in all honesty yesterday I went a bit longer um on some healthc care stocks just to bring the portfolio up to 20% net long but given where we are at at a total market cap of equities to GDP at 200 almost 230%. which is, you know, into the into the thermosphere of valuations. You have to be very careful and you if you're out there 100% long AI stocks in an S&P 500, you know, equity only portfolio, you could be in a world of hurt in 2026. I want to make sure we get to the three the three reasons why I think there could be trouble in in 2026, but I just want to wrap up this this uh PowerPoint so people understand how my model works. what got me, you know, more bearish on November 6, what saved me saved us from losing money then? And what we're looking at going forward to make sure we we make the right decision. Well, if credit spreads start to come in again and stay criescent and financial conditions continue or start to ease again while we go while we'll be going long because a lot of these slides will start to be uh you know to to mllify. >> Mh. or the opposite when we will go finally go net short and jo and and join the and start riding the four horsemen of the economic apocalypse which is a tremendous opportunity to not only protect your money but to profit from the demise of this massive bubble that we've built in equities and when I say we I mean mo mostly I'm pointing fingers at the Federal Reserve >> the ridiculous malfe malfeasants that's going on there >> um true although you know um Congress is is uh similarly complicit with their want and spending ways that the Federal Reserve has been helping enable as well. Um okay so so lots of blame to go around but but I agree you know Fed central character to point the finger at um okay so let let's talk about the specific concerns and risks and how you plan to sort of you know surf 2026. Um but real quick you had all these concerns last week. um post the FOMC announcement of the 40 billion per month. Uh do you feel like that is pushing off the reckoning a little bit now? Is that is that buying the Fed extra time here? Is it is it pushing some of your concerns a little bit further off in the timeline or not? >> According to my model, it has it bought it bought some time for sure because like I said, the financial conditions uh stopped they were they were easing. They stopped easing. they started to tighten and then they're getting easy again. And you look at credit spreads, they started to to narrow again. So that just tells me based on what I all the all the components of my model that it's time to get a little less cautious and which is exactly what I did which is why yesterday I went and bought some more healthcare and added 5% more net long to the portfolio. >> Right. You went you went from 15% net long to 20% long. >> 20%. Correct. >> Okay. Yeah. And sorry I should have asked this earlier. What sector does your model is it in? We're in sector three right now, bouncing around. We went to four, then we went quickly to two, and now we're into three. So things are >> And I'm sorry, I know we do this every time, but can you just very quickly name what every sector is so folks know? >> So sector one would be rapid disinflation or deflation and a recession. Sector two is just a mild disinflation. Sector three is stasis. Se sector four is reflation. And sector five is stagflation or intractable inflation. And each se and each sector back tested rigorously, you'll see what stocks, what bonds, what currencies, what commodities you should own. >> And it and it varies greatly. But, you know, here's the here's the here I want to h this what happened in the past few weeks should hammer home how overfinancialized and how fragile our entire economy is. I mean, just just having the idea that we wouldn't get a rate cut in December because reserves were getting a little scarce and I and I and I pull up a chart of look at that chart on reserves. Reserves were non-existent. I mean, they were they're very very minimal for many many many decades and then they spiked up to like three trillion in reserves and now now they're you know now they're now they're down but they're not down relative to where they were a decade ago. They're just down of their where they were in 2020. >> But just the the rate of change caused the whole system to freeze up. And in those six days, we saw the S&P 500 drop 5%, QQQ's down 6%. Bitcoin down 19 a.5%. In just six straing days and and and the only thing that ameliated that process was the fact that the Federal Reserve had to step in and launch QE and and cut rates. That's how that's how fragile the system is. And it's very sad that it's become so dependent on neverending >> continuous interest rate repression and debt monetization and money printing from our Federal Reserve. >> Okay. So, Michael, some people would say, um, yeah, I get all that. So, maybe it's bad, right? May maybe you think it's bad that that we the system's dependent on this uh all this stuff. But if prices keep going up and I own assets, why should I care? [snorts] >> Well, you should care because there'll be a time, here's a here's a succinct answer. I'll try to be succinct as possible. There will be a time when that very process just leads to exacerbating the inflationary process which leads to a spike, intractable spike in long-term interest rates. And if that's the case, there's nothing they can do. I mean, you can't stop a problem where the bond market's blowing up because of inflation by creating more inflation. >> That doesn't solve the problem. And you can't fix an insolvent nation by launching more rounds of helicopter money. So, when the long end of the bond market finally blows up, and it will, then you see these asset prices will crash concurrently, credit, real estate, and equities. That's why you should care. And and people people say, "Well, did didn't didn't we have a problem in 2008? We had a crisis in 2008. We had a credit crisis. We had a housing crisis. We had a stock market crash. Why can't they just do the same thing again?" Well, think about first of all, you have to think about what's different. First of all, the total market cap of equities as a percentage of GDP wasund I think it was 107%. Now it's close to 230. But that didn't stop the stock. when it was 107% of GDP, the market still crashed by 50%. >> Mhm. >> So imagine how much it's going to crash. And they started manipulating interest rates lower in the summer of 2007. The market didn't stop going down till March of 2009. So just because they're the Calvary is riding to the rescue doesn't mean they've they've requefied the system. That didn't happen till rates went from five and a quarter to zero and Bernanki was buying 80 90 h 100red billion dollars of bonds every month, >> right? >> Mortgage back securities to be spec to be specific. So there's a there's a there's a salient elevated risk that the next time they come to the to the rescue because of the insolveny that we now have as a nation, insolveny meaning we have $2 trillion deficits, a trillion dollar in interest payments, total debt to GP GDP is now 125%. It was like something like 80% back in 2007. Much le much lower. And we now also have we also have an intractable problem with it. Not intractable, but I don't use hyperbole. We have a problem with inflation getting back to target. Whereas in 2008, we you know the problem was we we were rigging our hands. We just can't get inflation to 2%. >> Yeah. Quote unquote too little inflation. >> Yeah. >> Yeah. >> So for those three reasons, things could be very different next time. >> Okay, great. Um, and I just condense that even more to say um the more uh distorted the system gets by the policies that that that are used to to stimulate um you you you increase the risk of a dramatic downward repricing when things go off the rails which you just described. The other thing I would say along with that too is because those policies in general are inflationary, you are you are damaging on an ongoing basis the purchasing power of the economy. So you kind of end up with the worst of both worlds where you're down the road your dollars buy less and then you have a lot less dollars because you've had a big repricing in in the asset markets, right? So you kind of get the worst of both worlds. And then I guess the third thing is is you know none of that does anything good constructively for the nation, right? you end up with a damaged nation, a damaged economy, a damaged uh populace. There's just no good about it in the long run. >> Adam, perfectly said, but we, you know, I'd add to that. We already have the bottom 80% of the economy, the consumers have been, you know, severely injured. It's only the top quintile that's really working. >> Let me let me ask you this. Sorry to interrupt, but this so I talk about this all the time and people have heard me talk about not just the K-shaped economy, but but I think it's in danger of metastasizing into a lowercase Ishaped economy, right? >> Um, just put on your bullish hat for a second, Michael. What could get us out of this? What could get the bottom 80%, you know, let's look with the 5 10 years down the road. What could happen between now and then where we could be talking about how, hey, it's no longer a K-shaped economy and everybody who's, you know, that bottom 80%'s feeling a lot better now. >> I guess you >> I ask just because I have trouble coming up with that answer. >> I guess it would have to be a an an artificial intelligence productivity miracle where you that the massive increase in supply without damaging labor too much. But how do [laughter] you >> Well, you asked me you asked me to put on a bullish hat, which I don't really I you know, I don't own many of them, you know. [laughter] >> So, >> well, and you know, I understand why, but let me just clarify. I don't think you're a bear. You're not a perma bear, right? You're just a practical guy. You're realistic. >> Yeah. As I, as anybody can pull up the tapes from our interviews, I I I turned very bullish in late April after being bearish at the start of the year and rode that, you know, rode a very nice return for me and my clients this year. So, um, but now I'm a little more cautious and and the reasons why I I can go through the quickly if you want me to go through the the three salient risks for 2026. If we still have time, >> please do it. Unless I interrupted you and you actually had some magical solution. I shouldn't say magical, some some convincing solution why uh we should feel optimistic about the bottom 80%. >> Well, you I believe in mean reversion natures nature hates vacuums. I I can't come out come up with one example in history where you saw the numerator of of say the total market cap of equities or or home prices stay where it is and had GDP and incomes catch up. The bubbles don't burst that way. They burst violently where the numerator and denominator both go down together and then until they until they have some kind of mean reversion and normalization. So that I you know I'd ra I'm open to the idea. I hope and pray that it happens. I just had never seen it before and no one else has either. >> Yeah. >> But if I I I guess my answer to this question that I think about it is is I can see the wealth gap narrowing over the next five years, but it's not because the bottom is getting pulled up. It's because the top is getting pulled [laughter] down, >> right? That's egalitarian socialism. So everybody's equal. We no longer have an I a lower case eye economy, but everybody's v, you know, >> right? Well, and that could be because of political means where there's, you know, confis confiscatory policies or whatever, but but also I'm just thinking more about your part, which is, hey, we've got the I mean, we haven't even talked about the cape ratio and the buffet indicator and all that stuff, but we're at all-time high, you know, valuations. Um but to your point, the system could just you know start to really break and then we get that big uh correction that big reckoning in asset prices and that would bring the top 10% you know down. >> Yeah. >> So when I say total market cap of equities to GDP that's the Buffett indicator and if the Buffet indicator says that the average the average return for the next 10 years will be minus 1%. And I don't think it's going to be minus one. It's going to look more like minus 50 minus 60 and then up 100. something like that close to that. So you want to be that's why I I I have an I make a very strong argument for active management. Active management with a robust smart >> model that works that you can get out of harm's way when this stuff really starts to I call it the great reconciliation of asset prices which is guaranteed to occur. It's just getting the timing right. That's that's what we try to do here. So I I find I'm I'm really starting a lot in the past couple weeks been making the exact same case. So um and of course that's exactly what you do. So we're getting right into your wheelhouse here. Um before we talk a little bit more about that though, I think I interrupted you and you were going to talk about your three big outlooks for 2026. I want to make sure we don't miss that. >> Okay. So the the three dangers um of 2026 are number number one is and this is I guess this is the in ascending probabilities. Um so number one is and this is the lowest probability that we only have one more rate cut between now and June 17th and the $40 billion in QE isn't enough. And even if that is the case and we have a liquidity crisis and a credit market crisis and a bond market freeze up, money markets freeze up, I think Powell will react, if he's still there, will react almost immediately and just flood the system with money. Um, of course, the dollar will get destroyed and we can get into the allocation where where I think at the end of this conversation where you should be allocated with your assets if that's the case. Um, a little slightly higher probability is that the AI credit bubble bursts. Hundreds of billions of dollars are being borrowed now. Not just not that not cash flow uh any longer. It's borrowed funds being thrown at this. And this to me is even I'm not disparaging AI. This just smacks of the overinvestment that occurred in 2000. were buying switches and routers and fiber optic cables just not because the inter internet was a a false flag of a technology and wasn't it wasn't that it wasn't going to be massively in in accreative to productivity it's because we just went Wall Street just went crazy like they always do >> right and with every technical innov transformation like this we overbuild too quickly and then it takes a while for the economy to fill out the full potential >> we buy too many we too we buy too many of these these chips and and and build too many of these data centers and the economy economy needs to reset. Um but the hi the highest probability um is the fiscal and monetary madness. So we're having uh we're starting at $2 trillion. That's the baseline deficit for 20 fiscal 26. Then you add to it um $1,000 for every child born that's being floated out there. M >> uh $2,000 checks to everybody who makes under $100,000 a year that's being floated out there. We we naturally because the one big beautiful bill, we're going to have big tax refunds going out in in April. Um that's the fiscal impulse. And then you of course you have the monetary impulse. You have Kevin Hassid who who said hey listen there's plenty of room to cut cut interest rates. And even Austin Goulsby who actually dissented and said, "You know what? I don't think we should cut rates." Even he came out and said, "You know what? I think we can cut rates a whole heck of a lot next year. It's just not the right time." So I I mean you you can imagine if we have 3% 3 and a half% uh GDP growth and real GDP growth and then you have 3% plus inflation, that's 6.5% on a nominal 10-year yield. That's why I shorted the I shorted the 10-year note yield when it was 4%. And so far, I've been only marginally correct. I think I'm going to be wildly correct. If we don't have a recession, if we don't have a credit crisis, we are going to have a blow up in the bond market just because we have so much fiscal and monetary madness going to happen in 2026. And I think if those bond yields go north of 6% I think the whole I think that completely submarines the housing market and completely blows up the credit the uh credit bubble obviously and also the equity bubble. You know I would I just want to add one one anecdote. You know I have I have a couple of houses here in Florida. One house that I have in Naples, Florida is already down 20% from where I bought it in 2022. >> Wow. I'm no I'm I'm no Nick Jerie, you know. I'm just I'm just telling you from from what I could see. And guess what people say? Well, it's only Florida and it's only the Sunb Belt. Well, that's where all the people move to and that's where all the bank loans sit in. All those bank loans that were made from 2020 to 2023, they were all made to people moving out of the Northeast and the Midwest and coming down to the Sunb Belt and buying asset prices, homes that were way overvalued and unsustainably so. So, there's going to be a lot of bank bank distress as well. >> A lot of bank stress. Okay. And I should note too that that despite uh you know the announcement of the 40 billion a month for getting back to ample reserves and all that stuff. Uh the 10-year bond uh is still at 4.2. >> Uh so it hasn't come down at all. >> Is it 4.2? I thought it was more like 4.12. 4.2. >> I'm looking at it right now and it's at 4.194. Um >> 4.19. So almost 4.2. 2. Yeah. >> Yeah. It's almost 4.2. >> Not 4.02. Okay. Gotcha. You're correct. Sorry. So that's so that's the wrong direction from where I mean that's the right direction for me because I shorted. But 4.2 is nowhere near where it should be in nominal GDP. I mean Atlanta Fed has us at three and a half%. And that's before we have all this fiscal and monetary madness kick in. So there's a there's a very coaching argument to make that that the bond vigilantes wake up. That's the highest probability of why I think this thing can crash because you'd have a credit market train wreck and chaos in 26. >> Yeah. And and all I'm saying giving validation to your point here is that despite [clears throat] the three rate cuts that we've already had and then now the you know the sessation of QT and now the announcement of QE or >> requefification whatever you want to call it. >> Yeah. >> The 10 years not coming down at all. >> No. No. Why would it why why would it come down when not only my nominal GDP argument if you don't like that when we're pursu when we're pursuing more inflation when we haven't gotten back anywhere near to 2% we're closer to three why would the long end of the bond market do anything else doesn't make any sense >> right well um well it's making sense to you and you've made your you made your your bet on it and yeah if if if to your point uh we get even more what are you saying monetary mayhem uh in 2026 that the vigilantes don't like and they take it high enough to to break the housing market and break uh you know the other parts in the banking systems under stress from like the loans you were talking about you know things could get could could go catwon pretty quickly um all right well look uh in we only got a couple minutes left Michael so two really key questions I'm gonna ask one I usually ask at the end but we'll put it up here at the front before I ask the second question um for people that have a enjoyed this conversation, b enjoyed all my past conversations with you, feel that you've got a really good read on things and you've got a good model that's helped guiding you here. Where should they go to learn more about you and your work and potentially even if they want to become a client of yours? >> Well, thank you, Adam. Pentoport.com is the website. Um, I have a midweek reality check podcast for $50 a year. Gives you the interpretation, my interpretation of the sailing economic data. Um, and if you are a US citizen and you qualify for a long, short, actively managed strategy and you have $100,000 a US citizen, I will directly manage your money in the inflation, deflation, and economic cycle portfolio. >> All right, great. And Michael, when I edit this, as usual, I'll put up the link to Pentoport there on the screen so folks know where to go. Folks, the link will be in the description below this video, too. All right. So, in wrapping up here, you you talked about, hey, if if things start getting, you know, rockier this year. Um, your model obviously will shift into different sectors and tell people how to invest. So, if the year goes the way that you think it could, >> talk about how your allocation would change from sector 3 stasis moving through sector 2 into sector one. >> Well, it depends on what what's the catalyst for the chaos. Okay. Why what's happening? So if it's a um a blow up in the liquidity because you know one one more rate cut didn't quite do it and the 40 bill bill billion dollars a month didn't quite do it we'd be moving towards sector one which is rapid disinflation deflation and recession. So that that's where the four horsemen of the apocalypse come in. So you have cash, you got short-term treasuries, um you've got the US dollar which you want to own and you would be shorting the stock market. Um, on the other hand, if it blows up because of runaway inflation, you'd want I would increase my short in the bond market and I would buy base metals. I I actually would increase my energy holdings as well. So, right now I'm I'm I I'm in and out of silver. I've owned gold and platinum for a long time. Um, and I and I own energy and I would be in increasing all those positions as I short the bond market. the long end of the bond market. That's where the that's where you'd see the most the word because the stock market can go down along with bonds just like it did in 2022. So asset prices go to a correlation of one and everything gets flushed down the toilet. >> All right. Um Michael, I hate to wrap it up here um more quickly than normal. Um I love to go long with you normally. We'll just have to rectify that early in Q1. We'll have you back on in January to give us a sense of uh kind of a real time audible about where things are. And just in wrapping up real quickly, two bits of housekeeping. One, um if you uh you know, if you'd like to talk to Michael, obviously talk to Michael. Go to pentoport.com. Uh if you've got questions about how to manage your portfolio for next year position for a lot of the things that Michael and I have talked about, um if you don't have a good professional financial adviser who's advising you through that, um feel free to talk to one of the ones that thoughtful money endorses. To do that, just fill out the very short form at thoughtfulmoney.com. These are the um financial advisors you see with me on this channel week in and week out. These consultations are totally free. Uh and there's no obligations involved. It's just a free service they offer to be as helpful as possible. Also want to remind folks too, if you haven't seen it yet, uh Thoughtful Money's precious metals endorsed uh provider. Uh that's Andy Sheckchman's company. Miles Franklin is offering exclusive for Thoughtful Money followers uh while supplies last. They're offering junk silver for a dollar under spot price. And as you've seen this week, silver has just been on an absolute breakout tear. So, if you hadn't known about that offer and it interests you, uh you can go uh reach out to Andy Spirm about it by filling out the very short form at thoughtfulmoney.com/bygold. It is always such a great pleasure to talk to you, my friend. Thanks so much for coming on. >> Always a pleasure, Adam. >> And everybody else, thanks so much for watching.
Fiscal & Monetary Madness To Blow Up Bonds, Stocks & Housing In 2026? | Michael Pento
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If we don't have a recession, if we don't have a credit crisis, we are going to have a blow up in the bond market just because we have so much fiscal and monetary madness going to happen in 2026. And I think if those bond yields go north of 6%, I think the whole I think that completely submarines the housing market and completely blows up the credit the uh credit bubble obviously and also the equity bubble. Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagger. When today's guest was on this channel earlier this year, he warned that a triumvirate of three massive asset price bubbles in credit, real estate, and stocks threatened to take down our fragile economy and dash the retirement hopes for millions. But since then, the bubbles have only expanded. So, will they expand further or pop in 2026? To find out, we've got the great good fortune to welcome money manager Michael Pinto back to the program. Michael, thanks so much for joining us today. >> Hey, I'm looking forward to a great conversation, Adam. >> It is always a great conversation with you, Michael. I'm looking forward to this, too. Lots to talk about. >> Not a lot of time, so we're gonna have to just bang through a bunch of stuff as quickly as we can. Um, so let's let's start here. So the day we're recording, Michael, um, it's Friday, uh, yesterday, Thursday, market close, record high for the S&P and for the Dow, uh, kind of riding a recent sugar rush with the, uh, recent uh, Federal Reserve guidance and chairman Powell talking about how the Fed is going to be buying $40 billion worth of Toss going forward. markets interpreting that as QE light or maybe just regular QE. Um so anyways, you've warned about these these bubbles. They they seem to continue being blown here. Let's start there. Um as you as we look into 2026, is it just going to be more of the same or do you think there'll be a reckoning at some point next year? >> So if you don't mind me um answering the question this way. Um so let's just go back on a timeline. So I um my IDC model on November 6th said it was time to get a little more defensive after being so we started the year bearish as you remember cautious. >> Uh April 2nd was liberation day. April 9th was a rec we recanted all of our liberation day tariffs or most at least the levels and then we went bullish and I've been on your program several times saying that we're you know not max bullish but we were about 40 we were 40% long the market until November 6. That's when the IDC model began to tell me, hey, start getting more defensive. And I did. And the reason why, I'm glad you're having me on. I want to walk the audience through what I saw and what I see now. And then we can talk about 2026. So, I noticed that on November 6, financial conditions stopped easing and credit spreads began to widen out. So, that had me thinking, well, why would that happen? Is it just a fluke or or is it or is the move substantiated? So then I I looked at the reverse repo facility which effectively is zero. These are the liquidity metrics that I look at. >> The level of the real Fed funds rate had been in positive territory for two and a half years, which in previous cycles indicated it was time to get bearish because that's when you'd have a a selloff in the market. bank reserves had been falling for the past few months and the slope of that line was increasing to the downside and um and the yen carry trade again this is there'll be slides on this stuff uh later in the show the yen carry trade started to erode significantly which is basically just real quick people mostly institutions borrow in yen they sell the yen and buy various currencies across the globe their bonds and their stocks and they get a much higher yield and they also get a currency appreciation that too. When they repatriate back into the yen, the yen has usually declined. It's a huge source of liquidity and that has dried up or it was drying up. Then I look at some um AI credit to false swap spreads in particular Oracle and and they were blowing out. And the last thing I looked at in the in my model, these are all things in my model, was the move index, which is a measure of bond market volatility that was spiking. So for those reasons, I got I I I sold down the equity expo exposure from 40% to just 15% net long. Then on November 13th, the Fed funds, this is before November 13th. So the model is very very robust and picked up on this trouble before November 13th is when the Fed funds futures market said that there would not be a rate cut in December. It went below 50%. >> Yep. >> And in that one week between November 13th and um November say November 20 was it November 24 first that I tech I emailed you? I think it was November 21st. The S&P dropped 5%, the Q's dropped 6% and Bitcoin went down by uh 20%. In so everything went to an R squared correlation of one in that week. Everything pl even silver and gold was all s was being sold off. >> Yeah. And I just checked it was November 21st when you emailed me about that. And and on November and on no serendipity for me when I when I told you I had been selling on November 21st, New York Fed President John Williams came out of the blue, maybe not so much, Adam, but maybe out of the blue said, "Oh, by the way, we are going to cut rates in December." And the Fed funds futures market went to 90% that we were going to have a cut. And then of course on December 10th, Jerome Powell proved himself one one of the great um alchemists uh one of the greatest counterfeits in history. Not only did he cut rates again by by 25 basis points, but yes, he he entered into a $40 billion per month QE program. Now, some people are saying that's not QE. I would I would argue that till I'm blew in the face or, you know, uh dead because when you expand the Fed's balance sheet, when you print money X neilo out of nothing and you're buying short-term bonds, I don't care why you're buying them. I don't care if you're buying them to bring down the rate or keep money markets rate stable to hit your target. You are expanding the Fed's balance sheet by creating money out of nothing. Credit, highowered money. Fed credit is the same as cash. It's electronic cash. It can be converted to stock to to cash. That's why it's part of the high-powered money uh aggregate. Um they're blowing that up by $40 billion a month. So yes, we are in QE. And that has um put a a lid on the deterioration of financial conditions and sent credit spreads into a more um into a period of mllification. They were being mllified. as of this recording. And then we have today we we see some I think and I think my theory is it has more to do with the AI bubble bursting and we'll get we can get into that later uh in the program but there's two salient risks for 2026 and one of those risks is the AI credit bubble is going to burst and so that's that's what I think is happening today. Um but that's that's where I was that's that's a recap of two 2025 in a nutshell. >> Okay. And and for folks that they're going to watch this a couple days after we record this, Michael, but who weren't paying attention this Friday that we're talking, what about today's action is making you think that the AI bubble may be starting to break down? >> Well, we had we had earnings out on I believe it was um what was the what is the big AI company that came out on uh Avago, right? >> Yeah. and they said they, you know, they beat on top line, they beat on the bottom line, and then it turns out it looks like financial alchemy on their balance sheets. That's what people are seeing right now. Um, in other words, this circular financing and and this all all kinds of and this is I'm haven't I'm not a forensic accountant, but they have been accused of accounting gimmickry and that's why the stock is crashing and it's bringing down the whole the whole market with it because listen, Adam, if you take out AI from earnings, look at the NIPA tables, earnings are falling. If you if you take out the AI stocks from the earnings complex, EPS is dropping on the S&P 500. And if you take out the companies that deal with AI, you don't you don't have much of a gain in the stock market and you don't have much of a gain in GDP either. It's all about this financing of the AI bubble which used to be, you know, was the foundation was built on cash flow and now it's borrowing hundreds of billions of dollars to buy these chips. So, it's just an another uh example of this magnificent credit bubble which is part of the triumvirate of bubbles that include equity prices and real estate. >> Okay. And and I want to note too this week that um Oracle uh suffered a big drop and largely I think because uh its capital expenditures on AI were even bigger than what Wall Street was expecting. And I know Oracle, they've had a lot of questions about, man, is this company going to actually be able to to to finance what it's told us it wants to build out here. Um, so anyways, there's just there's there does seem to be sort of a a um a questioning of confidence in the space that we're seeing this week. I think Broadcom also had a similar size selloff, you know, that 13% something like that. >> Yeah, that's what I was trying to get out of the Oh, Broadcom. Okay. Broadcom the symbol is AVGO for Broadcom. >> Okay. Yeah. Okay. So, um, so yeah, so we're seeing some very big players and and folks may remember Oracle added a ridiculous amount of market value, um, uh, at the last earnings call because it was, uh, uh, you know, announced it was going to do all this this this spending for AI. Um, and you know, this big big blue check chip tech company, you know, added like 40% of market value within a matter of hours. I think we're starting to see the bloom coming off that rose. So, you know, is this the end of the AI bubble? I don't know. Probably too early to tell, but definitely these are some of the initial signs you might expect to see. So, more to come. Okay. So, you just you just recap 2025 for us. Um, you gave a quick mention of some of the slides that you prepared, Michael. Um, because we are a little tight on time. I want to make sure that we get to them and we don't short change them. Should I should I pull them up now? >> Sure, go ahead. >> Okay. put a little color on more of more more of what my model looks at and what I was seeing and why I was able to shed some some of the um high beta exposure before we had that big swoon, you know, the S&P and the the Q's everything was dropping all interesting as my theory holds again and it's proven out that everything goes to a correlation of one >> when you see this you know rapid disinflation or deflation or some kind of chaos in the bond market which I will talk about 2026 So, so first the first slide is the um just a a chart of the real Fed funds rate and in particular you can see that um the level of the real Fed funds rate has been positive for two and a half years. That's the very right side of the of the uh chart and and that's most relevant because it was mostly negative. We had a negative real FUD fund Fed fund rate from 2001 all the way to 2022. And and you could see what happened right before 2008. See the real Fed funds rate spiked up about two and a half years and then we had a collapse in the uh in the credit markets, the housing market and in u and in the stock market. So uh my model here looks at also bond market volatility. This is the move index. This is from Meil Lynch. And you can see just on the right side of the scene bond mark uh the screen bond market volatility started to spike in very very early November. And that was another reason that why I went uh a little bit shorter on my exposure with equities. Um it's since come down a little bit, but it's spiking back up again. Uh reserve balances. Uh bank reserves have dropped $1.2 trillion since 2021. Now, what makes reserves disappear? Two things. Quantitative tightening is one, and the other one is bank runs. When you go to a bank and you take money and you withdraw it, their reserves are drained. And look at this pre precipitous slope over the last few years here since 2021. And that's what if you ever we could talk about it in adnauseium. I know we're short on time, but if you want to ask yourself why after almost five years of missing your inflation target to the north that you would dare to cut interest rates for the third time in this, you know, three meetings in a row. it it's to protect banks and to keep interest payments low for the treasury. Those are your two It's not about the middle class. >> It's not about employment. It's that those that those are straw men that they are reasons to obfuscate the truth. They are in business to protect banks and to make the treasury solvent. That's the only reason why. That is the main reason why, believe me. >> And Michael, there there's a term out there um called fiscal dominance. >> And and in a nutshell, it it it basically means you get to a point where the central planners have to kind of abandon any and all other mandates that they have, price stability, unemployment, low, whatever. Uh they have to sacrifice it all just to keep the debt serviceable. In your opinion, are we are we in fiscal are we mired in fiscal dominance now? >> Yes. When you have when you have a trillion dollars in interest payments, that was the the watershed moment where I think the and that's the only that's the only cogent reasonable assertion you can make because looking at uh all-time highs, you just mentioned all-time highs in the stock market other than today. Uh financial conditions are still pretty easy. You have an unemployment rate that's way below uh his historical average. um home prices are unaffordable for most Americans and you have you've missed your inflation target for almost five years. You would for I just mentioned all those things which are all facts. They're not my opinion. They're all facts. You would say, "Well, the Fed is raising interest rates. They're not cutting. They're they're not they're not cutting three times in a row and going back into QE and being told by the administration that they should have went by 50 basis points, if not more. It's all about keeping debt service costs low and and keeping banks solvent. >> Okay. >> It's not about the middle class, unfortunately. >> So on for slide four, you see um these are the reserve balances. I I was I just talked to No, that's slide three. Slide Slide four is the reverse repo facility. >> Yeah. Sorry, I skipped that on you. No, >> it's effectively zero. Look at the right right side of the screen there. um down from $2.5 trillion in 2022. So this these slides are showing why we have a liquidity problem in the markets. Positive real Fed funds rate causing bond market volatility spike. Reserve balances got very low. Um repo reverse repo facility which is theow that wasow excess reserves being parked at the Fed that went into the bond market. Well, they're gone now and and that's why we're we're doing 40 billion in QE. Um, slide five. >> Sorry, before before we move real quick, let let me just make sure folks really understand this. So, think of the reverse repo facility as a as a big sponge. And um when a when you put a sponge, say when you submerse it in water and you pull it out, the sponge is is saturated with water, right? And that's pretty much where we were when when this reverse repo facility was at its highs here. The sponge had a ton of water in it. So as you squeeze the sponge, it's pushing water or liquidity out of the sponge into the world, right? And so it's this nice tailwind for the markets. It's this excess liquidity. It keeps everything running, lubricated, creates extra liquidity that can go into asset prices and push them higher and everybody's happy, right? So now we've got to the point where the sponge has been squeezed dry, right? And so we're not getting that that that extra liquidity anymore. And so that was probably what your model was picking up on, Michael. So you could have a problem with a dry sponge. But to refill, like if we wanted to to refill the repo facility, >> well, that's a sponge that's sucking water out of the system and that would create even bigger problems. Um, so the Fed is is sitting in a challenge here where it's like, well, I got this dry sponge. It's not providing the tailwind anymore, but I'm afraid to start refilling it because it'll shift those tailwinds the mark the system used to have into headwinds. Um, so I just wanted to sort of help folks understand where we are specifically with the repo facility. Now he can help out by providing liquidity other ways, which is part of what he just announced. >> Yeah, I mean I would they could they could flood the banking system with reserves enough to fill a reverse repo facility, but it would have to be more than $40 billion a month. It' have to be like a hundred billion a month, some some some number like that. Yeah. >> Banks would have reserves. They could hold on to reserves and they would park reserves at the reverse refu facility and it wouldn't make a difference to them. >> But that's not we don't we don't have that yet. As a matter of fact, that that reminds me of something else I want to make sure I mention before we run out of time. is the the the first Fed meeting of the new replacement, what I like to call affectionately as an obsequious sickopant of the administration, who I who I mostly support and voted for, just a caveat. Um Kevin Hasset is the is the odds on winner there. He doesn't get a vote until June 17th. So, not only you you have to ask yourself problems that could exert themselves as as far as exacerbating the liquidity crisis that was happening starting on November 6th, you could say, well, is it is one rate cut between now and one more, that's what we're, you know, that's what the markets are projecting. One, maybe two at the most between now and June 17th enough. Is is it going to be enough to provide the liquidity for the bond market? Is $40 billion in QE going to be enough? I I mean probably is. I don't know for sure. My model will watch it deciduously. But the question is, you know, do you want to just ignore that fact? And I wouldn't I would pay close very close attention to it. Um so now slide five, Adam, is the is the Japanese benchmark yield, benchm benchmark treasury. So the benchmark yield is at an 18-year high. And don't forget um the the yield range between zero or below between 2016 and 2021. That was under Shinszo Abbe in his interest rate repression regime where he capped 10-year note at zero. But one you know when you have uh when you have a quadrillion I think it's like one point. Yeah. Here I wrote it down here. So the new the new uh minister and I won't I won't pretend I can pronounce her name correctly. S Tekachi she is she went to add $21.3 trillion yen in a stimulus program and that added to the $1.3 trillion yen in debt which is 240% of GDP. So this rise in yields which is dragging >> you you said you said trillion trill trillion. >> Is it trillion or is it quadrillion? It >> it's 1 point one 1,300 trillion yen. So, it's 1.3 quadrillion yen. Thank you if you corrected me. I don't know if I I I don't know if I misspoke, but it's 1,300 trillion yen. So, you know, um that's a lot of yen, right? Um [laughter] so, so they they they have abandoned their interest rate repression where the where the BOJ was just buying every uh JGB auction. >> Yeah. >> Central Bank. They abandoned that and look where yields are going. They're going up up up and away. Um, and the the last slide that we have, >> so sorry, but before we get there, so a this this endangers the carry trade, which you you talked about earlier, but just to underscore that's been just sort of a hu huge component of how markets have worked over the past couple decades. Yep. >> So, if that if that goes away and TBD, whether it will or it won't, but if it does, I mean, the system is it's like losing a limb. like you're going to have to the system is going to have to learn how to operate differently and it's going to be curious to see how how it does that. Also, Michael, I I had heard it said, you know, years ago that Japan was so overinded and, you know, having a quadrillion in debt, you know, it catches the attention. Uh but it was so overinded especially on a debt to GDP basis I think in most of any country that I'd heard it said once that um I think back when yeah yields were I don't know back back in 2022 there were there what like half a percent or something like that in the tenure. I had heard that if if the 10-year Treasury in Japan rose to like one or god forbid 2% that it would just blow up the economy there. It just blow up the the country. >> Is is that a real danger here? Yes. The short answer is yes. Absolutely. Um yeah, when you have 1,300 trillion yen in debt, 240% debt to GDP, your your economy stops functioning as rates rise. And it's not only it's not only that the actual level, which is almost 2% now. It's the rate of change. This was this was zero or below in 2021. So it's it's the rate of change that I'm really watching here. like throwing a person into Arctic waters. You you you just it's a shock to the system. >> Yes. Yes. Um so uh and it's dragging yields higher across the globe. So um we'll see what happens there. But that's >> So is it safe to say if if let me just ask you this. If if yields don't come down materially from here, what do you expect? I mean, do you expect Japan to just grind to a halt and enter into a deflation? I I expect I expect the BOJ to go back into interest rate repression where they just put a cap on the on the yield on the 10-year. >> I Okay, that that's what I expect will happen. I don't know if it's 2% or 3%. I don't know the level, but I expect that to happen. >> Okay. Sorry to interject, but those are important questions. >> Yeah. Yeah. Yeah. Always. Um so, uh the end carry trade is eroding. um that the estimates for the size of this carry trade which is you know it's important enough for me to put it in my model you it doesn't just get there by osmosis so I back tested everything and the reason why it's there is because the yen carry trade as you said very eloquently eloquently is that it's a major source of global liquidity and when that dries up there's a hu huge problem in funding markets so the size is between between four and 20 trillion dollars the entire size of the end trade And the blue line on this chart represents the US 10-year and the and the and the JGB 10year. Now, the spread between the two was 400 basis points in 2023. And now it's about 200 basis points. So, you're getting to the point now where when you factor in currency uh protection, currency hedging that you can no longer make a profit by borrowing in yen and buying US assets. Mhm. >> So it's so it's those so it's those six reasons that I mentioned that caused me to get more cautious. Now I to in all honesty yesterday I went a bit longer um on some healthc care stocks just to bring the portfolio up to 20% net long but given where we are at at a total market cap of equities to GDP at 200 almost 230%. which is, you know, into the into the thermosphere of valuations. You have to be very careful and you if you're out there 100% long AI stocks in an S&P 500, you know, equity only portfolio, you could be in a world of hurt in 2026. I want to make sure we get to the three the three reasons why I think there could be trouble in in 2026, but I just want to wrap up this this uh PowerPoint so people understand how my model works. what got me, you know, more bearish on November 6, what saved me saved us from losing money then? And what we're looking at going forward to make sure we we make the right decision. Well, if credit spreads start to come in again and stay criescent and financial conditions continue or start to ease again while we go while we'll be going long because a lot of these slides will start to be uh you know to to mllify. >> Mh. or the opposite when we will go finally go net short and jo and and join the and start riding the four horsemen of the economic apocalypse which is a tremendous opportunity to not only protect your money but to profit from the demise of this massive bubble that we've built in equities and when I say we I mean mo mostly I'm pointing fingers at the Federal Reserve >> the ridiculous malfe malfeasants that's going on there >> um true although you know um Congress is is uh similarly complicit with their want and spending ways that the Federal Reserve has been helping enable as well. Um okay so so lots of blame to go around but but I agree you know Fed central character to point the finger at um okay so let let's talk about the specific concerns and risks and how you plan to sort of you know surf 2026. Um but real quick you had all these concerns last week. um post the FOMC announcement of the 40 billion per month. Uh do you feel like that is pushing off the reckoning a little bit now? Is that is that buying the Fed extra time here? Is it is it pushing some of your concerns a little bit further off in the timeline or not? >> According to my model, it has it bought it bought some time for sure because like I said, the financial conditions uh stopped they were they were easing. They stopped easing. they started to tighten and then they're getting easy again. And you look at credit spreads, they started to to narrow again. So that just tells me based on what I all the all the components of my model that it's time to get a little less cautious and which is exactly what I did which is why yesterday I went and bought some more healthcare and added 5% more net long to the portfolio. >> Right. You went you went from 15% net long to 20% long. >> 20%. Correct. >> Okay. Yeah. And sorry I should have asked this earlier. What sector does your model is it in? We're in sector three right now, bouncing around. We went to four, then we went quickly to two, and now we're into three. So things are >> And I'm sorry, I know we do this every time, but can you just very quickly name what every sector is so folks know? >> So sector one would be rapid disinflation or deflation and a recession. Sector two is just a mild disinflation. Sector three is stasis. Se sector four is reflation. And sector five is stagflation or intractable inflation. And each se and each sector back tested rigorously, you'll see what stocks, what bonds, what currencies, what commodities you should own. >> And it and it varies greatly. But, you know, here's the here's the here I want to h this what happened in the past few weeks should hammer home how overfinancialized and how fragile our entire economy is. I mean, just just having the idea that we wouldn't get a rate cut in December because reserves were getting a little scarce and I and I and I pull up a chart of look at that chart on reserves. Reserves were non-existent. I mean, they were they're very very minimal for many many many decades and then they spiked up to like three trillion in reserves and now now they're you know now they're now they're down but they're not down relative to where they were a decade ago. They're just down of their where they were in 2020. >> But just the the rate of change caused the whole system to freeze up. And in those six days, we saw the S&P 500 drop 5%, QQQ's down 6%. Bitcoin down 19 a.5%. In just six straing days and and and the only thing that ameliated that process was the fact that the Federal Reserve had to step in and launch QE and and cut rates. That's how that's how fragile the system is. And it's very sad that it's become so dependent on neverending >> continuous interest rate repression and debt monetization and money printing from our Federal Reserve. >> Okay. So, Michael, some people would say, um, yeah, I get all that. So, maybe it's bad, right? May maybe you think it's bad that that we the system's dependent on this uh all this stuff. But if prices keep going up and I own assets, why should I care? [snorts] >> Well, you should care because there'll be a time, here's a here's a succinct answer. I'll try to be succinct as possible. There will be a time when that very process just leads to exacerbating the inflationary process which leads to a spike, intractable spike in long-term interest rates. And if that's the case, there's nothing they can do. I mean, you can't stop a problem where the bond market's blowing up because of inflation by creating more inflation. >> That doesn't solve the problem. And you can't fix an insolvent nation by launching more rounds of helicopter money. So, when the long end of the bond market finally blows up, and it will, then you see these asset prices will crash concurrently, credit, real estate, and equities. That's why you should care. And and people people say, "Well, did didn't didn't we have a problem in 2008? We had a crisis in 2008. We had a credit crisis. We had a housing crisis. We had a stock market crash. Why can't they just do the same thing again?" Well, think about first of all, you have to think about what's different. First of all, the total market cap of equities as a percentage of GDP wasund I think it was 107%. Now it's close to 230. But that didn't stop the stock. when it was 107% of GDP, the market still crashed by 50%. >> Mhm. >> So imagine how much it's going to crash. And they started manipulating interest rates lower in the summer of 2007. The market didn't stop going down till March of 2009. So just because they're the Calvary is riding to the rescue doesn't mean they've they've requefied the system. That didn't happen till rates went from five and a quarter to zero and Bernanki was buying 80 90 h 100red billion dollars of bonds every month, >> right? >> Mortgage back securities to be spec to be specific. So there's a there's a there's a salient elevated risk that the next time they come to the to the rescue because of the insolveny that we now have as a nation, insolveny meaning we have $2 trillion deficits, a trillion dollar in interest payments, total debt to GP GDP is now 125%. It was like something like 80% back in 2007. Much le much lower. And we now also have we also have an intractable problem with it. Not intractable, but I don't use hyperbole. We have a problem with inflation getting back to target. Whereas in 2008, we you know the problem was we we were rigging our hands. We just can't get inflation to 2%. >> Yeah. Quote unquote too little inflation. >> Yeah. >> Yeah. >> So for those three reasons, things could be very different next time. >> Okay, great. Um, and I just condense that even more to say um the more uh distorted the system gets by the policies that that that are used to to stimulate um you you you increase the risk of a dramatic downward repricing when things go off the rails which you just described. The other thing I would say along with that too is because those policies in general are inflationary, you are you are damaging on an ongoing basis the purchasing power of the economy. So you kind of end up with the worst of both worlds where you're down the road your dollars buy less and then you have a lot less dollars because you've had a big repricing in in the asset markets, right? So you kind of get the worst of both worlds. And then I guess the third thing is is you know none of that does anything good constructively for the nation, right? you end up with a damaged nation, a damaged economy, a damaged uh populace. There's just no good about it in the long run. >> Adam, perfectly said, but we, you know, I'd add to that. We already have the bottom 80% of the economy, the consumers have been, you know, severely injured. It's only the top quintile that's really working. >> Let me let me ask you this. Sorry to interrupt, but this so I talk about this all the time and people have heard me talk about not just the K-shaped economy, but but I think it's in danger of metastasizing into a lowercase Ishaped economy, right? >> Um, just put on your bullish hat for a second, Michael. What could get us out of this? What could get the bottom 80%, you know, let's look with the 5 10 years down the road. What could happen between now and then where we could be talking about how, hey, it's no longer a K-shaped economy and everybody who's, you know, that bottom 80%'s feeling a lot better now. >> I guess you >> I ask just because I have trouble coming up with that answer. >> I guess it would have to be a an an artificial intelligence productivity miracle where you that the massive increase in supply without damaging labor too much. But how do [laughter] you >> Well, you asked me you asked me to put on a bullish hat, which I don't really I you know, I don't own many of them, you know. [laughter] >> So, >> well, and you know, I understand why, but let me just clarify. I don't think you're a bear. You're not a perma bear, right? You're just a practical guy. You're realistic. >> Yeah. As I, as anybody can pull up the tapes from our interviews, I I I turned very bullish in late April after being bearish at the start of the year and rode that, you know, rode a very nice return for me and my clients this year. So, um, but now I'm a little more cautious and and the reasons why I I can go through the quickly if you want me to go through the the three salient risks for 2026. If we still have time, >> please do it. Unless I interrupted you and you actually had some magical solution. I shouldn't say magical, some some convincing solution why uh we should feel optimistic about the bottom 80%. >> Well, you I believe in mean reversion natures nature hates vacuums. I I can't come out come up with one example in history where you saw the numerator of of say the total market cap of equities or or home prices stay where it is and had GDP and incomes catch up. The bubbles don't burst that way. They burst violently where the numerator and denominator both go down together and then until they until they have some kind of mean reversion and normalization. So that I you know I'd ra I'm open to the idea. I hope and pray that it happens. I just had never seen it before and no one else has either. >> Yeah. >> But if I I I guess my answer to this question that I think about it is is I can see the wealth gap narrowing over the next five years, but it's not because the bottom is getting pulled up. It's because the top is getting pulled [laughter] down, >> right? That's egalitarian socialism. So everybody's equal. We no longer have an I a lower case eye economy, but everybody's v, you know, >> right? Well, and that could be because of political means where there's, you know, confis confiscatory policies or whatever, but but also I'm just thinking more about your part, which is, hey, we've got the I mean, we haven't even talked about the cape ratio and the buffet indicator and all that stuff, but we're at all-time high, you know, valuations. Um but to your point, the system could just you know start to really break and then we get that big uh correction that big reckoning in asset prices and that would bring the top 10% you know down. >> Yeah. >> So when I say total market cap of equities to GDP that's the Buffett indicator and if the Buffet indicator says that the average the average return for the next 10 years will be minus 1%. And I don't think it's going to be minus one. It's going to look more like minus 50 minus 60 and then up 100. something like that close to that. So you want to be that's why I I I have an I make a very strong argument for active management. Active management with a robust smart >> model that works that you can get out of harm's way when this stuff really starts to I call it the great reconciliation of asset prices which is guaranteed to occur. It's just getting the timing right. That's that's what we try to do here. So I I find I'm I'm really starting a lot in the past couple weeks been making the exact same case. So um and of course that's exactly what you do. So we're getting right into your wheelhouse here. Um before we talk a little bit more about that though, I think I interrupted you and you were going to talk about your three big outlooks for 2026. I want to make sure we don't miss that. >> Okay. So the the three dangers um of 2026 are number number one is and this is I guess this is the in ascending probabilities. Um so number one is and this is the lowest probability that we only have one more rate cut between now and June 17th and the $40 billion in QE isn't enough. And even if that is the case and we have a liquidity crisis and a credit market crisis and a bond market freeze up, money markets freeze up, I think Powell will react, if he's still there, will react almost immediately and just flood the system with money. Um, of course, the dollar will get destroyed and we can get into the allocation where where I think at the end of this conversation where you should be allocated with your assets if that's the case. Um, a little slightly higher probability is that the AI credit bubble bursts. Hundreds of billions of dollars are being borrowed now. Not just not that not cash flow uh any longer. It's borrowed funds being thrown at this. And this to me is even I'm not disparaging AI. This just smacks of the overinvestment that occurred in 2000. were buying switches and routers and fiber optic cables just not because the inter internet was a a false flag of a technology and wasn't it wasn't that it wasn't going to be massively in in accreative to productivity it's because we just went Wall Street just went crazy like they always do >> right and with every technical innov transformation like this we overbuild too quickly and then it takes a while for the economy to fill out the full potential >> we buy too many we too we buy too many of these these chips and and and build too many of these data centers and the economy economy needs to reset. Um but the hi the highest probability um is the fiscal and monetary madness. So we're having uh we're starting at $2 trillion. That's the baseline deficit for 20 fiscal 26. Then you add to it um $1,000 for every child born that's being floated out there. M >> uh $2,000 checks to everybody who makes under $100,000 a year that's being floated out there. We we naturally because the one big beautiful bill, we're going to have big tax refunds going out in in April. Um that's the fiscal impulse. And then you of course you have the monetary impulse. You have Kevin Hassid who who said hey listen there's plenty of room to cut cut interest rates. And even Austin Goulsby who actually dissented and said, "You know what? I don't think we should cut rates." Even he came out and said, "You know what? I think we can cut rates a whole heck of a lot next year. It's just not the right time." So I I mean you you can imagine if we have 3% 3 and a half% uh GDP growth and real GDP growth and then you have 3% plus inflation, that's 6.5% on a nominal 10-year yield. That's why I shorted the I shorted the 10-year note yield when it was 4%. And so far, I've been only marginally correct. I think I'm going to be wildly correct. If we don't have a recession, if we don't have a credit crisis, we are going to have a blow up in the bond market just because we have so much fiscal and monetary madness going to happen in 2026. And I think if those bond yields go north of 6% I think the whole I think that completely submarines the housing market and completely blows up the credit the uh credit bubble obviously and also the equity bubble. You know I would I just want to add one one anecdote. You know I have I have a couple of houses here in Florida. One house that I have in Naples, Florida is already down 20% from where I bought it in 2022. >> Wow. I'm no I'm I'm no Nick Jerie, you know. I'm just I'm just telling you from from what I could see. And guess what people say? Well, it's only Florida and it's only the Sunb Belt. Well, that's where all the people move to and that's where all the bank loans sit in. All those bank loans that were made from 2020 to 2023, they were all made to people moving out of the Northeast and the Midwest and coming down to the Sunb Belt and buying asset prices, homes that were way overvalued and unsustainably so. So, there's going to be a lot of bank bank distress as well. >> A lot of bank stress. Okay. And I should note too that that despite uh you know the announcement of the 40 billion a month for getting back to ample reserves and all that stuff. Uh the 10-year bond uh is still at 4.2. >> Uh so it hasn't come down at all. >> Is it 4.2? I thought it was more like 4.12. 4.2. >> I'm looking at it right now and it's at 4.194. Um >> 4.19. So almost 4.2. 2. Yeah. >> Yeah. It's almost 4.2. >> Not 4.02. Okay. Gotcha. You're correct. Sorry. So that's so that's the wrong direction from where I mean that's the right direction for me because I shorted. But 4.2 is nowhere near where it should be in nominal GDP. I mean Atlanta Fed has us at three and a half%. And that's before we have all this fiscal and monetary madness kick in. So there's a there's a very coaching argument to make that that the bond vigilantes wake up. That's the highest probability of why I think this thing can crash because you'd have a credit market train wreck and chaos in 26. >> Yeah. And and all I'm saying giving validation to your point here is that despite [clears throat] the three rate cuts that we've already had and then now the you know the sessation of QT and now the announcement of QE or >> requefification whatever you want to call it. >> Yeah. >> The 10 years not coming down at all. >> No. No. Why would it why why would it come down when not only my nominal GDP argument if you don't like that when we're pursu when we're pursuing more inflation when we haven't gotten back anywhere near to 2% we're closer to three why would the long end of the bond market do anything else doesn't make any sense >> right well um well it's making sense to you and you've made your you made your your bet on it and yeah if if if to your point uh we get even more what are you saying monetary mayhem uh in 2026 that the vigilantes don't like and they take it high enough to to break the housing market and break uh you know the other parts in the banking systems under stress from like the loans you were talking about you know things could get could could go catwon pretty quickly um all right well look uh in we only got a couple minutes left Michael so two really key questions I'm gonna ask one I usually ask at the end but we'll put it up here at the front before I ask the second question um for people that have a enjoyed this conversation, b enjoyed all my past conversations with you, feel that you've got a really good read on things and you've got a good model that's helped guiding you here. Where should they go to learn more about you and your work and potentially even if they want to become a client of yours? >> Well, thank you, Adam. Pentoport.com is the website. Um, I have a midweek reality check podcast for $50 a year. Gives you the interpretation, my interpretation of the sailing economic data. Um, and if you are a US citizen and you qualify for a long, short, actively managed strategy and you have $100,000 a US citizen, I will directly manage your money in the inflation, deflation, and economic cycle portfolio. >> All right, great. And Michael, when I edit this, as usual, I'll put up the link to Pentoport there on the screen so folks know where to go. Folks, the link will be in the description below this video, too. All right. So, in wrapping up here, you you talked about, hey, if if things start getting, you know, rockier this year. Um, your model obviously will shift into different sectors and tell people how to invest. So, if the year goes the way that you think it could, >> talk about how your allocation would change from sector 3 stasis moving through sector 2 into sector one. >> Well, it depends on what what's the catalyst for the chaos. Okay. Why what's happening? So if it's a um a blow up in the liquidity because you know one one more rate cut didn't quite do it and the 40 bill bill billion dollars a month didn't quite do it we'd be moving towards sector one which is rapid disinflation deflation and recession. So that that's where the four horsemen of the apocalypse come in. So you have cash, you got short-term treasuries, um you've got the US dollar which you want to own and you would be shorting the stock market. Um, on the other hand, if it blows up because of runaway inflation, you'd want I would increase my short in the bond market and I would buy base metals. I I actually would increase my energy holdings as well. So, right now I'm I'm I I'm in and out of silver. I've owned gold and platinum for a long time. Um, and I and I own energy and I would be in increasing all those positions as I short the bond market. the long end of the bond market. That's where the that's where you'd see the most the word because the stock market can go down along with bonds just like it did in 2022. So asset prices go to a correlation of one and everything gets flushed down the toilet. >> All right. Um Michael, I hate to wrap it up here um more quickly than normal. Um I love to go long with you normally. We'll just have to rectify that early in Q1. We'll have you back on in January to give us a sense of uh kind of a real time audible about where things are. And just in wrapping up real quickly, two bits of housekeeping. One, um if you uh you know, if you'd like to talk to Michael, obviously talk to Michael. Go to pentoport.com. Uh if you've got questions about how to manage your portfolio for next year position for a lot of the things that Michael and I have talked about, um if you don't have a good professional financial adviser who's advising you through that, um feel free to talk to one of the ones that thoughtful money endorses. To do that, just fill out the very short form at thoughtfulmoney.com. These are the um financial advisors you see with me on this channel week in and week out. These consultations are totally free. Uh and there's no obligations involved. It's just a free service they offer to be as helpful as possible. Also want to remind folks too, if you haven't seen it yet, uh Thoughtful Money's precious metals endorsed uh provider. Uh that's Andy Sheckchman's company. Miles Franklin is offering exclusive for Thoughtful Money followers uh while supplies last. They're offering junk silver for a dollar under spot price. And as you've seen this week, silver has just been on an absolute breakout tear. So, if you hadn't known about that offer and it interests you, uh you can go uh reach out to Andy Spirm about it by filling out the very short form at thoughtfulmoney.com/bygold. It is always such a great pleasure to talk to you, my friend. Thanks so much for coming on. >> Always a pleasure, Adam. >> And everybody else, thanks so much for watching.