Michael Pento: Credit Breaks First, Then Stocks and Real Estate
Summary
Macro Outlook: The guest argues the market is historically overvalued and expects a recession and credit crisis, with downside potential of 50%+ to normalize valuation metrics.
Stagflation Base Case: He sees the economy in a stagflationary regime and positioning accordingly, emphasizing that higher rates and sticky inflation will challenge most risk assets.
Portfolio Positioning: He favors T-bills and short duration, alongside commodities exposure—agriculture, energy, uranium—and selective utilities to navigate stagflation.
Precious Metals: Bullish on gold and silver as core holdings (physical plus liquid exposure), noting they could surge as real rates fall amid future policy responses and currency debasement risks.
Energy: Expectation that energy (including fossil fuels and some alternative energy) will be a prime beneficiary of stagflation and potential dollar weakness after the next recession.
AI Infrastructure: Warns that heavy, credit-fueled spending on AI infrastructure, data centers, and hyperscalers resembles the late-1990s tech bubble, concentrating market gains and elevating risk.
Private Credit Risks: Highlights the $2T private credit market, gating/redemption pressures, and systemic links to primary dealers and private equity as likely catalysts for broader credit fractures.
Rates and Policy: Anticipates higher yields either from liquidity stress or inflation, and questions whether the Fed can prevent a disorderly reconciliation without worsening inflation.
Transcript
I mean, we have not repealed the business cycle. A recession is going to happen in our future. We are going to have a credit crisis. When I mentioned the total market cap of equities and the in the Schiller Pee ratio and negative risk premiums and price to sales, I can go on. You know, there's a there's many metrics that all point to the most overvalued stock market in history. I don't use that as a timing tool. I say that to just point out the evidence and then I say what how much can this market drop when we get the recession and credit crisis and the answer is 50%. At least >> Michael Pinto, founder and president of Pinto Portfolio Strategies. It is so great to see you again and welcome back to the show. Really appreciate you taking the time today, Michael. >> Always great to see you, Julia. Well, it's great to see you and this audience loves hearing from you and I think it's been six months since our last conversation. So, Michael, it's been way too long. So much has happened in that time frame. So, if you don't mind, let's start big picture macro view today, where we are, where you see things headed, what's been on your radar as of late, and as you know, Michael, you can take all the time you need to set the table. Well, um the bubbles in real estate, credit, and uh equities just grow bigger all the time, inexraably. And that doesn't mean that um I'm wrong. Doesn't mean that I'm a Cassandra. It doesn't mean they'll never burst. I hope people don't believe that. It just means that, you know, this is the this is the most extraordinary time in central bank history for United States. We've never ever have anything like this. Um, and and by that I mean the extent to which our central bank will print money and manipulate interest rates to keep the bubble going is unprecedented and by a lot. And I just want to give you a couple of data points on that. So, um, the Fed's balance sheet, I'm sure you all know, is was $800 billion prior to the global financial crisis in 2007. um the maniac money printer that is on his way out. Thank God. On I think Friday is his last day. >> 15th. Yeah. >> Yeah. Thank God. Let's all just say a prayer on that that he's leaving. Um he at at his at at the pinnacle of his horrific tenure, he printed $4.5 trillion. He expanded his balance sheet by $4.5 trillion. I believe his tenure started in 2016. $4 and a half trillion dollars and he had I'm sure people will say well it was during COVID he had an excuse blah blah blah wonderful um but co's over Julia as you know so what's happening today why in an era of where unemployment claims are almost at the the lowest in history where we have bubbles everywhere we look there's bubbles and um inflation's been above the Fed's target for 5 years and it's rising because of what's going on not only with money printing, but what's going on with energy prices and fertilizer and all the ancillary components of that? You would think that this Federal Reserve would be hiking rates and continuing on with quantitative tightening, reducing the Fed's balance sheet. But here's here's all you really have to know when you say, why is this why has this this market not crashed and and why do asset bubbles continue to grow? Um, Mr. Howell printed since QT ended in December, 170 billion with a B dollars since quantitative tightening ended. And QE again, we are in a $40 billion a month QE program for absolutely no reason, zero reason other than to destroy the middle class, the purchasing power of Americans and the and the currency. In fact, he printed $10 billion last week alone. His swan song. I'll get I'll get the data next week for what he what he did what he's doing right now. But as of last week, $10 billion. I think it's disgusting. And I would love to hold the door open for this gentleman. Just get out. Thank God we're having Mr. Worsh come in because I think he's a an Austrian economist at heart. He understands the danger of this financial footprint of the Federal Reserve which now has a new ma Julia it's a new mandate now it's no longer stable prices full employment is the stock market shall never have a down tick that's new man that's that's Mr. Powell's private equity. Powell's new mandate. That's what his that's what his um goal has been since he took office. He tried quantitative tightening. Didn't do much in that way. And as soon as things started to get a little bit hot on Wall Street, he ran like a chicken. So, goodbye. >> Okay. We have Kevin Walsh, a Kevin Walsh le Fed. What are your expectations there? What what change are you most looking forward to from him? >> Mr. Worsh. It's a great question that you asked. Mr. Worsh, who I respect and admire, has the tmerity to a vow that Wall Street has become too large of a footprint in the fin in in G in our GDP and the Fed has a much bigger influence on Wall Street to the expense of Main Street. So, Mr. Worsh instead of just slashing interest rates and printing money, Mr. Walsh is going to probably not cut interest rates maybe on the margin at the most, but but most importantly will reduce the size of the Fed's balance sheet and that's going to bring inflation down. It's going to boost Main Street while it punishes Wall Street. And Julia, that's what we need. We don't need We don't need idiots like me making millions of dollars a year while the the middle class is is doesn't have a $1,000 in the bank for an emergency expense. That's not that's not capitalism. It's not capitalism when you print trillions upon trillions of dollars and then to and and hand it to the primary dealers, take away their bad assets, be their treasuries or mortgage back securities or corporate bonds or whatever. We've probably even threatened to buy junk bonds, anything. We'll we'll take we'll take anything and give banks all of this credit, which is high-powered money, which is which is same as cash. It's part of the monetary it's called highowered money for a reason. It's part of the monetary base. That's that's the basis, the liquidity that banks need to make loans, but mostly it's used to just gamble on Wall Street. And they suppress interest rates. You know, Julie, when I talk about the the the bubble in in stocks, I'm not just, you know, here trying to entertain you and your audience. It's a fact. The total market cap of equities right now is a is is 230% of GDP. And the average of that metric is 90%. So, we're 2.3 times GDP. And that metric is extremely relevant because I don't want to hear someone once says well you know that measures the the numerator which in which includes all of the foreign corporations that are are here doiciled. Well guess what we make a lot of stuff our corporations make a lot of stuff overseas too. That's why GNP and GDP have been moving together with a very high correlation. So that metric is very very valid. The cape ratio, cyclically adjusted PE ratio is 42. The highest in history is 44. The average of that metric is 17. Price to sales is 3.5. The mean is is I think it's like 1.8 or something like it. It It's just we everywhere you look, even like um the metric of earnings yield. So risk premiums risk premiums are negative. you you can make more money safely just buying a T bill. That's a higher yield than the earnings yield, which is the inverse of the PE ratio. So, it's a massive unprecedented equity bubble. And that's what that's what Kevin Warst hates >> because it's not healthy for the long-term viability of this country. I think we I think we should all I'm a libertarian, but everybody's should be on the same page. Conservative Mami, socialists, communists, cons, you know, libertarian. We all understand one thing. Well, at least libertarians do in the foremost. Free market economies are best, but crony capitalism stinks to high heaven. And that's what we have here. Mhm. And as you point out, that's not capitalism, but it also makes me wonder, Michael, it gives capitalism a bad name or bad reputation. And then maybe that ties back to some of the rise of these candidates that espouse [laughter] very anti- capitalist ideologies. >> What What does a libertarian like me have in common with Mam Demi? Almost nothing except except one thing. There's there's too much money being thrown artificial fake money being thrown at Wall Street to the detriment of Main Street. That's a fact. That's not capitalism >> and it gives it a bad name. You're correct. I mean, money used to mean something. It's in the Constitution, Article 1, Section 10. It should be backed by gold and silver. It should not be created exneilo out of thin air at the whims of of a central bank, an unelected central bank and an an um a rogue chair of the FOMC that I mean I I'm kind of I'm just no fan of Mr. Powell. I I just can't wait till he leaves. And if you want to know why we have all these, if you want to know why pe hardworking people like yourself had to wait to buy a home because first-time home buyers were priced out of the real estate market, the home price to income ratio has never been higher. And if you add up all the costs like, you know, homeowners insurance and taxes and maintenance, it's just priced everybody out of reach. That didn't happen by osmosis. It's because the Fed has been repressing interest rates, printing money, buying bonds, pushing that price up, pushing down the yield, which pu pours money into assets. And who has that money? It's the richest of us. So, we have this eye-shaped economy where it's a small dot living large. The top 20% are doing great and the top 10% 1% are doing spectacularly. And then there's this long long eye which leads right into the dirt. >> Yeah. Um Michael, as you pointed out the top here, you've been talking about the triumvirate of bubbles, stocks, credit, and real estate for a while. And I I want to ask you this because we keep seeing stock market hit record highs, and I'm sure you've seen the headlines around consumer sentiment are hitting all-time lows. So, what do you make of it? And why do you think there's such a disconnect? Like, why is Wall Street missing this? Are they going to ever wake up to this? >> Well, um, that goes, you know, that dovtales nicely to what I've been talking about. So, um, there's just a very small part of the economy and a small part of Wall Street that's working. So, there's, um, no hiring going on outside of healthcare and and that's it. Um, but most of the spending we see today reminds me of what I saw in 1999. I'm old enough to remember the 1999 tech bubble. So today's massive spending on AI infrastructure, data centers, hyperscalers, blah blah blah. That's exactly what I saw in 1999. That doesn't mean that the internet was um a bad technology. It was a revolutionary and it was a major boost of productivity. I see the same thing hap same thing happening with artificial intelligence. It's just that Wall Street turns everything and bastardizes everything. And now we have not investment in in in AI from cash flow. It's from hundreds of billions of dollars in credit being thrown out being thrown at Wall Street. So um so there's a small sector of Wall Street that's profiting the most. That's AI related. That's where most of your earnings are coming from and it's a small section of consumers but the top 20% the top quintile of consumers control the economy because that's where all the money is unfortunately. So as far as Wall Street is concerned it's who cares about the bottom four quintiles. It's the top quintile. How are they doing? They're living large on asset bubbles. So they don't see a problem. But that spending is going to collapse because again it's debt driven. It's not it's not from cash flow. It's from money printing that fuels all this debt. When that dries up, please God, Kevin Walsh, we'll have some normaly where Main Street and Wall Street can converge once again. Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe [music] button, we are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. How how confident are you that Kevin Worsh could get us back to normaly? >> I'm not very confident. I'm hopeful. >> Hopeful. Okay. >> This is the first this the first I mean I'm just being honest. I'm hopeful because he knows what the right thing to do is but he's part of a committee. He's he heads the Federal Open Marketing Committee which is not a dictatorship. >> So he's have to vote on everything. But hope hopefully he'll be very, you know, influential. He can sway this vote to at least at the very le least stop printing. Why why are we on this 40 billion a month tacet QE program that's never been announced. It's exactly what it is. It's there's no difference. We got to stop. I think he'll be able to do that and that might bring the reality that makes that may be the catalyst to start the reality to Wall Street. Now the question is Julia, what is his response when when the reconciliation of asset prices begins? Does he have the bravery to to let it, you know, fully reconcile itself to that that cathartic cleansing of those prices? I I don't I don't think so, but I hope he does. you were talking about getting back getting out of this crony capitalism and back to free markets and you were just kind of referencing like where markets are today the valuations and what they are of GDP and um what where should markets be what would be that normal back to reality kind of >> yeah you would need a 50% you would need at least a 50% correction assuming the GDP you know denominator didn't fall, which is which would never happen. That would be disaster. That's what h well that's what happens when you over financialize an economy. I mean what would happen to banks if home prices corrected by 30% 25% to 30% which is what they need to correct to bring them in sort of an affordable starting starting to be an affordable level and at the same sign and concurrently home uh stock prices fell by 50%. What condition do you think banks would be in? Would the Federal Reserve allow banks to go under, you know, a re a replete insolveny condition of the banking system? No, they won't. They can't. So, we're forced to print money in adnauseium. That's that's that's what I think is going to happen, unfortunately. I'll say that again. Um, but that doesn't mean we're in the clear because the bond market's had it. I think the bond market is saying, "Wait, wait a second. We're we're at 35 year highs in in JGBs, Japanese government bonds. We're at 18-year high uh yields in US treasuries. So, uh I mean, the bond market is not going to take too kindly to an insolvent nation that's now going to expand its balance sheet into the double digits, you know, 15 trillion dollar, say Fed balance sheet from where it is today, just below 7 trillion. I mean how what would be the reaction to the dollar? What would be the reaction to the bond market? So I think the days of the days of since ' 87 this has happened. Well, we have a we have a problem in the liquidity in the in the bond market or we have a problem in the stock market or in the home or home prices or there's a virus. We'll just print we'll just print trillions of dollars and we'll we'll solve every issue. I don't know if that's going to I the odds are increasingly against that being effective. >> Yeah. Wouldn't that just set you up for more problems? >> Yeah, I mean worse problems. I mean, normally you see we have a recession induced by whatever, like I said, virus, tech wreck, home prices collapse, people, you know, scatter into the bond market, and prices rise, yields fall, and then the Fed comes in there and, you know, they they just print money like maniacs, trillions of dollars, and that re relicquidates the the financial system. Problem solved. But if you already have deficits that are your starting your starting point now is not a few hundred billion dollar deficit like we had in the global financial crisis. Your starting point is a $2 trillion deficit. You know 6% of GDP. That's your starting point. And deficits usually go they usually increase by about 300% two 300%. So now you're looking at, you know, perhaps a $6 trillion deficit, which the Fed is monetizing by printing trillions of dollars. What do you think happens to interest rates there? And my my view is probably they're going to go a lot higher as you have this like stagflationary scenario and then then the Fed's money printing is actually not a salve. It doesn't mify the problem. It exacerbates the problem. So your bond bond yields are going to sore either because there's not enough money or liquidity and like we had in 2018 19 repo crisis rates just you know 20% interest rates in the re in 10% 20% maybe in the repo market that just that's a non-starter for economic activity or you flood the market with money like we always do and that inflationary impulse sends yields soaring. So either scenario, higher rates then. >> Yes. >> And then unpack the implications of that. Like sound like we have many great options here. >> Now well you know I don't have to tell you what would happen to the real estate market if mortgage rates went to double digits. >> Oh man. Yeah. >> I mean we already have a frozen transaction market in the real estate market. What would happen if rates went to double digits? I mean, it' be it it'd be def defaults galore. Well, what happens to the the auto market where, you know, most people are underwater on their car. Uh, you know, people are going to extending like, you know, a 30-year loan on a car. You know, what happens if, you know, long-term rates, they they affect uh car price, auto order auto loans, too. Um, what would happen to the stock market if I could just buy a bond and get 10%. What would happen to the stock market if you if the hyperscalers could no longer raise debt >> because they have to pay double digits for it? I mean, it would be a it would be something like we've never seen before in this country. >> But and listen, you know, when you have a fake economy that's engendered by money printing, you know, borrowing, printing, inflation, asset bubbles, this is what happens. But having said all that, you know, I'm not I'm not sitting here panic with with massive shorts in my portfolio. I I run money for a living. >> So, I just I I'm just, you know, I I'm riding carefully with hedges this bubble higher in the appropriate uh scenario according to what I what I feel is the safest way to go >> because the last time Yeah. Last time I spoke to you, Michael, you said you you said you were nervously long. I believe those were the words you used at the time. Um, but explain like if you can, not to reveal everything because I do know you have clients and you run Money for a living, but like give us a taste of like how your position because like you're you're still riding this. >> Yeah. Yeah. I I you know, listening to me, you think, "Oh, this guy's probably a a bear, a perma bear." I get all I I I read the comments, you know, I have clients that are very happy. We're making money. >> I feel like our viewers are nice in the comments, though. >> Yeah. Yeah. No, not not not your kind not your viewers, but other I go on a lot of programs as you could imagine. >> Um Oh, yeah. This guy's been saying this for years. >> Yeah. Yeah. Um I've been saying it's an artificial economy for years. And it's not like we never had a It's like, you know, let's just go through a brief history. 2000 they lost 50%. 2008 the the S&P lost 50%. Uh 2018 2019 repo crisis I just talked about. 2020 COVID the market dropped 35% in a matter of days. Then we had the uh 2022 where stocks and bonds lost a lot of money. Okay, 20% down in stocks. Then 20 25 we had the liberation day debacle. So let's just you know there are times when I am quickly because I'm an active money manager I move into a net short position. But primarily I'm net long because I see this constant stream of money flowing into the stock market and in the end the the the conditions I look at or financial conditions and credit spreads remain quiescent. So I'm not I'm not net short but there's going to be a time guess what we have not [clears throat] excuse me we have not repealed the business cycle. A recession is going to happen in our future. We are going to have a credit crisis. We're going to have chaos in the bond market and what are you going to do about it? I I when I mention the total market cap of equities and the in the Schiller ratio and negative risk premiums and price to sales, I can go on, you know, there's a there's many metrics that all point to the most overvalued stock market in history. I don't use that as a timing tool. I say that to just point out the evidence that the bubble is extent and then I say what how much can this market drop when we get the recession and credit crisis? How how dangerous can it be? How quickly can it can it devolve and how and implode and how far down can it go? And the answer is 50%. At least >> wait a second. 50% that 50% probability we could see that implosion. >> No. >> Oh 50%. >> It would take it a fall um to reconcile the the total market cap of equity to GDP metric that ratio to go back around you know to 100% 1:1 ratio the stock price would have to fall more than 50%. >> Got it. >> In the context of GDP that did not drop. >> Got it. Okay. Um, Michael, as you point out, you have been talking about the triumph of bubbles for a number of years now, yet you're still long the market. You're riding this. I know you have like your your own model and um I want to say I feel like you had like five sections. I can't remember exactly. >> Five sectors of the inflation deflation and economic cycle model. >> Yes. Um, so has anything changed for you in I guess more recently where the the alarm bells are going off? Do you see like the like a more like an increased probability of this thing actually breaking? I don't know, but just kind of curious anything's changed for you or has somethingated it? >> No. No. So I the the model now has us in a in a mild period of stagflation which is sector five. So I own a lot of T bills because you don't want to own any duration in this scenario. So interest rates rising on the long end. Um not I have no nothing in the belly of the curve. I'm all T- bills you know for for a good portion of the portfolio. And then I have stack fleet. I have commodities, agriculture, precious metals, energy, I have um alternative energy. I have uranium in the portfolio. >> So that's my way of of of playing stagflation. You have to be very careful where how you invest in stagflation because not everything is going to work. I also have some utilities. Utilities t tend to do well in stagflation. >> Yeah, I understand like stagflation is one of the historically the one of the most challenging environments for pretty much all asset classes. Um but if you don't mind, I'd love to kind of go through a few with you. >> Precious metals. Um what's the latest for you on um the precious metals trade? >> Okay, so I own I own silver and I own gold. I own them in about a 6% position in the portfolio. Why am I not o more overweight? Because nominal rates are rising and the best scenario for precious metals is when nominal rates and real interest rates are falling. That's just not the case right now. Mhm. >> So, um I have a I have a nice position in there in them. I And that's on top of the 5%. I always say start with 5% that of gold that you physically own that you yourself control and it's not up to any third party. No gold IAS or vaults that hold your money. You control that. I mean, if you hold gold, if you own gold, it's because you don't trust the financial system. You don't trust the currency. You don't trust the government. Uh well, why would you let somebody else hold your gold? That's part of the financial system or government. You you would never do that. So, um that's that's your placeholder. That's your wealth placeholder that you keep yourself. And then you toggle your your which I call liquid paper goal between zero and 20%. We're at around six as I said. >> Okay. And then the energy uh commodities energy, you mentioned alternative energy, uranium. Um, was this be was this before the war in Iran that you were set up for this? We just would love to kind of hear the energy thesis. >> No, no, it was after the war >> after after and when energy spike spiked and engendered this stagflationary environment because we weren't in a stagflation area. Yeah. We were actually in a a stasis sector three which is the second derivative of inflation and growth was kind of neutral. Um, now we're into sector five. So that's agriculture, that's uranium, that's fertilizer stocks, um alternative energy, and regular old fossil fuels, too. >> Can you explain the sectors? And when you get into sector five, is that more worrisome? >> There's two there's there's there's three really great sectors to or good sectors to invest. So sector one would be rapid disinflation and deflation outright deflation. Two would be dis just disinflation. Three is stasis. Four is reflation which is the best sector for equities which is where we're in right now between four and five. And then five is stagflation. And when you get to you can get stagflation or intractable inflation in in that bucket sector five. Um that's when you would really really want to overweight only energy and precious metals. You would not you want to avoid all stocks and you'd want to also short not just be out of duration, you want to short duration in that bucket. So we're kind of straddling sector four and five right now. >> Yeah. And would you say like stagflation is that sort of the base case for you for going forward that that's the environment we're in? >> That's the environment we're in. I I expect it to intensify greatly as we go through time >> and a lot depends on when Mr. Worst does and what he's capable of getting done. >> Um but a after the next recession manifests, not not if it happens, when it happens, you're like I said, you're going to get um annual deficits approaching $6 trillion. I believe the monetary response from that is going to be incredible. We'll have a we'll have a Fed balance sheet that approaches $12 trillion and rising. And if that's the case, I think you'll get a much much much weaker dollar. You'll get precious metals rip, energy will explode, and everything mo most everything else will do nothing. It'll be like the 70s, >> but but but much worse. >> Wow. You know, people and people I I just want to say I I I find people people say, "Well, you know, we have the most liquid bond market and the dollar is the world's reserve currency and well, can that can never happen?" But wait a second, it happened already. I mean, this is not like a theory of mine. In 1980, which was, you know, years and years before you were born. >> Well, okay. 88. [laughter] There you go. >> [gasps] >> We had uh interest rates go to um 15%. In this country, inflation was 20%. So it's not I I think I and I was alive a few decades before the 1980. So when I when I hear people say that, wait, didn't we have the world's reserve currency in 1980? Didn't we didn't we have a um uh a very liquid bond market back then? So why couldn't it happen again? You know, back in the 19 1980, the US national debt to GDP was like 35%. It's 123% today. We have more debt today in terms of GDP. Look at total non-financial debt as a percentage of GDP. It ties what we had in the global leading up to the global financial crisis. Light years ahead of where we were in in 1980. So, if we had double digits, 15% interest rates, then why couldn't we have it again? >> It's silly to have make any other argument. >> It could it could even be a lot higher. And we talked about it already. Remember what I said? Play this again. >> What would those ramifications be on the acid bubbles that are extent today? It's not good. >> Not good. Yeah. I think sometimes we forget that. That's right. My I my parents I think they bought a house in that time period. Um or that's when rate Yeah. rates 15%. Oh my goodness. Yeah. We forget that it's possible you could go back there and then the backdrop is much worse right now too when you just look at our fiscal picture here in the country than it was back then. >> Exactly. >> Yeah. >> Back then we didn't have we didn't have all this debt. We don't have we have to roll over like$10 trillion dollars of debt a year. It's incredible. What do you think is the endg game here? >> Well, like I I think we're I I think we're going to run into intractable stagflation. That's what I see happening where the economy is just limping along and the the Fed is the Fed like the Japanese central bank, the BOJ is the only buyer. I mean, if you have if you have 20% inflation, we had that by the way. It's not it's like it's not like a you know a a a thought experiment. You know we had 20% inflation just postcoid if you calculated the way they did pre-bos so you know 17 to 20% inflation. If you have that kind of inflation rate who is going to give the government money at 4.5%. That's what the benchmark treasury is right now. I I wouldn't. No one would. Only the central bank would be dumb enough to do that. So you have incest rate repression on steroids where they're printing money like mad just to buy debt to keep it well below inflation. But as they do that, inflation goes higher and interest rates are low. That means real interest rates are plunging, which is rocket fuel for precious metals >> and energy. >> Yeah. >> Stationation. terrible for the terrible for the middle class. I don't see any I really don't see I hope I'm wrong. Could be wrong. Certainly not God. Um but that's where I see that's what I see happening in this country. A big big problem with stagflation. >> Yeah. Um do you see solutions or are we pass the point of no return? >> We are there's only two solutions that I see and they both end up the same place. We have to we you get there from two different areas. you say you you ascent to the idea that we have to reconcile these asset prices because inflation's killing the the middle class of this country and you can't have a you can't have a a country that works if you don't have a middle class. Um we do it voluntarily and we say yes it's let's do it. Let's let this happen. Let's let the market forces work. Let's let interest rates rise. We allow asset prices to reconcile to historic measurements. It'll be very painful. It'll be hopefully it'll be a a shortlive depression and then we can we you know we reset the debt, reset the currency, low price, low low inflation, stable dollar viable nation. That's that's the best way to do it. The sooner we do it, the better. The other way is we just keep printing money. I mean I who ever thought that the Fed's balance sheet would go to $9 trillion just a few, you know, a couple of decades ago? It happened. Mhm. >> Um that's where we're headed. And um if that happens then then the situation will be forced on us. Then you have you'll have hyperinflation which then when when the hyperinflation is worse than the depression then you just say okay let's just let's do it. We have to do it now. We have to reset the currency and you just wipe everybody out. Um for the three bubbles, do you see those bursting simultaneously or is it one after the other? Do you see any that are more likely to >> go first and like maybe what the epicenter might be of those? >> Yeah. So the epicenter of the So the bubble is most likely this is my analysis from doing this for like 35 years of studying this. It'll it'll the catalyst will be the credit markets that'll burst first. That gives me my clue. These are my which my model >> monitors assiduously myopically focused on the credit markets. >> Credit markets start to to fracture and that causes the stock market to fracture and that causes the real estate market to tumble. That's that's the way it's going to play out. Mike, >> watch credit first. Then speaking of credit, I mean, Michael, private credit, is that one of the first telltale signs we're seeing. >> We're seeing it. We're seeing that we're seeing the fissures right now. Absolutely. >> It hasn't reached to the point where it's systemic, but I think it gets there. That's the epicenter of the credit bubble. >> Yeah. You know, the two we have two we the private credit market, which really didn't exist in the global financial crisis. We we had um it was like a few hundred billion couple hundred billion. Now it's$2 trillion dollars in private credit. The entire subprime mortgage market was 1.3 trillion. So we're way ahead of it. I mean that alone is enough to to to start to crater banks and crater the re the um the money markets to freeze the repo market to to fracture. That's where it's going to happen. But I mean I you know it it's just not happening today, Julia. But stay tuned. I think if we had this interview in six months from now, I think we'd have a totally different conversation. >> Yeah. >> We don't have to wait that long. >> And we still have to see like, you know, what the June redemptions are going to look like with some of these credit funds. Um I had Jeffrey Gunlock on the the podcast back in March and he's been saying, "Watch for June." Uh because if you thought the redemptions back in March were big, wait till because people are getting gated and now you're going to ask for even more money out because you're worried about getting gated or you only get so much out. >> Exactly. It's it's it's a it's a cycle that's feeds on itself. It's like a death spiral. The more gates walls you put up, the more you want your money out. >> Uh yeah. Um it makes me wonder and the harder it is to raise new money. >> It makes me wonder because you're right. We saw this whole industry emerge post financial crisis. Um 1.7 trillion near 2 trillion whatever the number is. Um are we creating a a scenario where we could be too big to fail or some of these places could be considered too big to fail. Is that a risk? >> Well the primary dealers after DoddFrank they they they pushed all the loan the lending into the shadow banking system. So it's in the private credit arena. But who's the biggest funer of private credit is private equity. And where do they get their money from? Primary dealers. It's all It's all from the same pie. Yes, it's systemic. >> Wow. Systemic. Okay. Well, we'll definitely have that conversation six months from now. Um, what's the risk for you today that's not getting nearly enough attention? Um I you know people don't talk much about I don't hear many people talk about the pressure that's on the middle class of this country and they just they just look um superficially at um the initial claims data um the GDP data and the stock market and say well where's the where's the problem? But then you look at some of these sentiment surveys and they show clearly like the worst the worst consumer confidence on record doesn't I mean Maybe that's a slight exaggeration from you, Mish. I I don't know. But I do know this is that, you know, when it when it costs you like $90 to fill up your tank with gas gasoline and you don't have and and 60% of the country doesn't have $1,000 in savings, you're just you're just destroying their standard of living day after day. And it gets worse and worse. And it's not just the gas at the pump. It's it what's happening in the straight of our muzz is is pervading throughout everything. You know, you know, natural gas, fertilizer, which goes into food >> and and semiconductor chips are they're the stuff that they sulfur that they need to make those chips. >> Um it's it's everywhere. And so there's a there's a there's a bow wave of inflation that's going to hit that's already an already decimated middle class. another wave is going to hit them because the the from what I'm from the research I've done that we're depleting all of our reserves of of energy storage and then it's going to just hit >> and they're already so stretched like if you look at buy now pay later and things like that like they're already at the they're stretched >> are already extremely st and there the default rate on buy now pay later loans is surging >> so so just don't look at you can look at the aggregate of consumers and say, "Well, they're they're generally okay." But again, it's only the 20% which is doing spectacular in the bottom 80% that's really really hurting. >> Yeah. >> And you get down to the lower quintiles, it's just it's just disa it's a depression for them. They're going to food pantries just to make ends meet. >> It's very sad. Should never should never be happening in this in this country. I understand the I understand the motivation >> to fix everything. Um, but you you have to let markets fun. It's a business cycle. We have to let it's almost like trying to pro like I I liken it liken it to this. It's almost like saying we're going to put gigantic stakes in the tectonic plates to make sure there's never an earthquake cuz like who who wants an earthquake to happen? But these plates are always moving. And when you prevent them from moving because you don't want to have a tremor, you get a a you know an epic RTOR scale shock. And that's where we're heading. >> Mhm. >> Because of our desire to make sure we never had a cathartic tremor. >> Yeah. >> Either in the unemployment rate or in the stock market. It's >> setting up for something worse because of the intervention. Yeah. If you just let the cycle be and let free markets work, you'll have some pain here and there, but it won't be setting you up for this >> extreme pain. Yeah. >> Yeah. And and then and the evidence is like why, you know, look, I could show you a chart after I if anybody wants to contact me, I could send you a PowerPoint presentation. >> Oh, they'd love that. Do you want to let them know or they could uh >> Yeah, I mean, you could you could email um my my office. It's um it's right on the website. you can is the contact information and we'll send you a PowerPoint display just show it shows you the massive unprecedented liquidity impulse that was has been created over the past few years which just flooded the banking system reserves and how the Fed manipulated interest rates and in to negative terms you know real terms and the money supply chart and charts of of of the stock bubble that it it's not my opinion I mean I'm not I hope people understand I'm not just making stuff up this is Not my opinion. This is fact. We have these massive bubbles in place which are being constantly trying to keep inflated with this money printing $170 billion since has anybody Julie has anybody on your show come in and said we had $170 billion of QE since since December. How many people know about that? >> I don't remember. I don't know. >> Well, it's true. And I'll show and I'll show it. >> Yeah. No, I believe you. Michael, um it's always a treat having you on the show. We love listening to you and learning from you and just appreciate you being so generous with your time. Maybe let's end on this note. Um I want you to let folks know where they can find and support your work. Um and also what is something that's making you hopeful for the future? Because we did have a sobering conversation here, but yeah, let's leave it at that. Um well the the quality of the American person, you know, the person who resides in this country is is is one's a God-fearing individual for the most part. And through prayer and through the help of the Lord, we'll we'll get through this. So that's my inspiring message for the day. Michael Pinto, founder and president of Pinto Portfolio Strategies. I want to thank you for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better, for being a friend of this show. Really, really appreciate you. And until next time, Michael, be well. Thank you so much, Julia.
Michael Pento: Credit Breaks First, Then Stocks and Real Estate
Summary
Transcript
I mean, we have not repealed the business cycle. A recession is going to happen in our future. We are going to have a credit crisis. When I mentioned the total market cap of equities and the in the Schiller Pee ratio and negative risk premiums and price to sales, I can go on. You know, there's a there's many metrics that all point to the most overvalued stock market in history. I don't use that as a timing tool. I say that to just point out the evidence and then I say what how much can this market drop when we get the recession and credit crisis and the answer is 50%. At least >> Michael Pinto, founder and president of Pinto Portfolio Strategies. It is so great to see you again and welcome back to the show. Really appreciate you taking the time today, Michael. >> Always great to see you, Julia. Well, it's great to see you and this audience loves hearing from you and I think it's been six months since our last conversation. So, Michael, it's been way too long. So much has happened in that time frame. So, if you don't mind, let's start big picture macro view today, where we are, where you see things headed, what's been on your radar as of late, and as you know, Michael, you can take all the time you need to set the table. Well, um the bubbles in real estate, credit, and uh equities just grow bigger all the time, inexraably. And that doesn't mean that um I'm wrong. Doesn't mean that I'm a Cassandra. It doesn't mean they'll never burst. I hope people don't believe that. It just means that, you know, this is the this is the most extraordinary time in central bank history for United States. We've never ever have anything like this. Um, and and by that I mean the extent to which our central bank will print money and manipulate interest rates to keep the bubble going is unprecedented and by a lot. And I just want to give you a couple of data points on that. So, um, the Fed's balance sheet, I'm sure you all know, is was $800 billion prior to the global financial crisis in 2007. um the maniac money printer that is on his way out. Thank God. On I think Friday is his last day. >> 15th. Yeah. >> Yeah. Thank God. Let's all just say a prayer on that that he's leaving. Um he at at his at at the pinnacle of his horrific tenure, he printed $4.5 trillion. He expanded his balance sheet by $4.5 trillion. I believe his tenure started in 2016. $4 and a half trillion dollars and he had I'm sure people will say well it was during COVID he had an excuse blah blah blah wonderful um but co's over Julia as you know so what's happening today why in an era of where unemployment claims are almost at the the lowest in history where we have bubbles everywhere we look there's bubbles and um inflation's been above the Fed's target for 5 years and it's rising because of what's going on not only with money printing, but what's going on with energy prices and fertilizer and all the ancillary components of that? You would think that this Federal Reserve would be hiking rates and continuing on with quantitative tightening, reducing the Fed's balance sheet. But here's here's all you really have to know when you say, why is this why has this this market not crashed and and why do asset bubbles continue to grow? Um, Mr. Howell printed since QT ended in December, 170 billion with a B dollars since quantitative tightening ended. And QE again, we are in a $40 billion a month QE program for absolutely no reason, zero reason other than to destroy the middle class, the purchasing power of Americans and the and the currency. In fact, he printed $10 billion last week alone. His swan song. I'll get I'll get the data next week for what he what he did what he's doing right now. But as of last week, $10 billion. I think it's disgusting. And I would love to hold the door open for this gentleman. Just get out. Thank God we're having Mr. Worsh come in because I think he's a an Austrian economist at heart. He understands the danger of this financial footprint of the Federal Reserve which now has a new ma Julia it's a new mandate now it's no longer stable prices full employment is the stock market shall never have a down tick that's new man that's that's Mr. Powell's private equity. Powell's new mandate. That's what his that's what his um goal has been since he took office. He tried quantitative tightening. Didn't do much in that way. And as soon as things started to get a little bit hot on Wall Street, he ran like a chicken. So, goodbye. >> Okay. We have Kevin Walsh, a Kevin Walsh le Fed. What are your expectations there? What what change are you most looking forward to from him? >> Mr. Worsh. It's a great question that you asked. Mr. Worsh, who I respect and admire, has the tmerity to a vow that Wall Street has become too large of a footprint in the fin in in G in our GDP and the Fed has a much bigger influence on Wall Street to the expense of Main Street. So, Mr. Worsh instead of just slashing interest rates and printing money, Mr. Walsh is going to probably not cut interest rates maybe on the margin at the most, but but most importantly will reduce the size of the Fed's balance sheet and that's going to bring inflation down. It's going to boost Main Street while it punishes Wall Street. And Julia, that's what we need. We don't need We don't need idiots like me making millions of dollars a year while the the middle class is is doesn't have a $1,000 in the bank for an emergency expense. That's not that's not capitalism. It's not capitalism when you print trillions upon trillions of dollars and then to and and hand it to the primary dealers, take away their bad assets, be their treasuries or mortgage back securities or corporate bonds or whatever. We've probably even threatened to buy junk bonds, anything. We'll we'll take we'll take anything and give banks all of this credit, which is high-powered money, which is which is same as cash. It's part of the monetary it's called highowered money for a reason. It's part of the monetary base. That's that's the basis, the liquidity that banks need to make loans, but mostly it's used to just gamble on Wall Street. And they suppress interest rates. You know, Julie, when I talk about the the the bubble in in stocks, I'm not just, you know, here trying to entertain you and your audience. It's a fact. The total market cap of equities right now is a is is 230% of GDP. And the average of that metric is 90%. So, we're 2.3 times GDP. And that metric is extremely relevant because I don't want to hear someone once says well you know that measures the the numerator which in which includes all of the foreign corporations that are are here doiciled. Well guess what we make a lot of stuff our corporations make a lot of stuff overseas too. That's why GNP and GDP have been moving together with a very high correlation. So that metric is very very valid. The cape ratio, cyclically adjusted PE ratio is 42. The highest in history is 44. The average of that metric is 17. Price to sales is 3.5. The mean is is I think it's like 1.8 or something like it. It It's just we everywhere you look, even like um the metric of earnings yield. So risk premiums risk premiums are negative. you you can make more money safely just buying a T bill. That's a higher yield than the earnings yield, which is the inverse of the PE ratio. So, it's a massive unprecedented equity bubble. And that's what that's what Kevin Warst hates >> because it's not healthy for the long-term viability of this country. I think we I think we should all I'm a libertarian, but everybody's should be on the same page. Conservative Mami, socialists, communists, cons, you know, libertarian. We all understand one thing. Well, at least libertarians do in the foremost. Free market economies are best, but crony capitalism stinks to high heaven. And that's what we have here. Mhm. And as you point out, that's not capitalism, but it also makes me wonder, Michael, it gives capitalism a bad name or bad reputation. And then maybe that ties back to some of the rise of these candidates that espouse [laughter] very anti- capitalist ideologies. >> What What does a libertarian like me have in common with Mam Demi? Almost nothing except except one thing. There's there's too much money being thrown artificial fake money being thrown at Wall Street to the detriment of Main Street. That's a fact. That's not capitalism >> and it gives it a bad name. You're correct. I mean, money used to mean something. It's in the Constitution, Article 1, Section 10. It should be backed by gold and silver. It should not be created exneilo out of thin air at the whims of of a central bank, an unelected central bank and an an um a rogue chair of the FOMC that I mean I I'm kind of I'm just no fan of Mr. Powell. I I just can't wait till he leaves. And if you want to know why we have all these, if you want to know why pe hardworking people like yourself had to wait to buy a home because first-time home buyers were priced out of the real estate market, the home price to income ratio has never been higher. And if you add up all the costs like, you know, homeowners insurance and taxes and maintenance, it's just priced everybody out of reach. That didn't happen by osmosis. It's because the Fed has been repressing interest rates, printing money, buying bonds, pushing that price up, pushing down the yield, which pu pours money into assets. And who has that money? It's the richest of us. So, we have this eye-shaped economy where it's a small dot living large. The top 20% are doing great and the top 10% 1% are doing spectacularly. And then there's this long long eye which leads right into the dirt. >> Yeah. Um Michael, as you pointed out the top here, you've been talking about the triumvirate of bubbles, stocks, credit, and real estate for a while. And I I want to ask you this because we keep seeing stock market hit record highs, and I'm sure you've seen the headlines around consumer sentiment are hitting all-time lows. So, what do you make of it? And why do you think there's such a disconnect? Like, why is Wall Street missing this? Are they going to ever wake up to this? >> Well, um, that goes, you know, that dovtales nicely to what I've been talking about. So, um, there's just a very small part of the economy and a small part of Wall Street that's working. So, there's, um, no hiring going on outside of healthcare and and that's it. Um, but most of the spending we see today reminds me of what I saw in 1999. I'm old enough to remember the 1999 tech bubble. So today's massive spending on AI infrastructure, data centers, hyperscalers, blah blah blah. That's exactly what I saw in 1999. That doesn't mean that the internet was um a bad technology. It was a revolutionary and it was a major boost of productivity. I see the same thing hap same thing happening with artificial intelligence. It's just that Wall Street turns everything and bastardizes everything. And now we have not investment in in in AI from cash flow. It's from hundreds of billions of dollars in credit being thrown out being thrown at Wall Street. So um so there's a small sector of Wall Street that's profiting the most. That's AI related. That's where most of your earnings are coming from and it's a small section of consumers but the top 20% the top quintile of consumers control the economy because that's where all the money is unfortunately. So as far as Wall Street is concerned it's who cares about the bottom four quintiles. It's the top quintile. How are they doing? They're living large on asset bubbles. So they don't see a problem. But that spending is going to collapse because again it's debt driven. It's not it's not from cash flow. It's from money printing that fuels all this debt. When that dries up, please God, Kevin Walsh, we'll have some normaly where Main Street and Wall Street can converge once again. Hey everyone, I hope you are enjoying this interview. If you can take a quick moment and hit that subscribe [music] button, we are on a mission to hit our next goal of 100,000 subscribers and your support could really help us get there. Thank you so much and enjoy the rest of the interview. How how confident are you that Kevin Worsh could get us back to normaly? >> I'm not very confident. I'm hopeful. >> Hopeful. Okay. >> This is the first this the first I mean I'm just being honest. I'm hopeful because he knows what the right thing to do is but he's part of a committee. He's he heads the Federal Open Marketing Committee which is not a dictatorship. >> So he's have to vote on everything. But hope hopefully he'll be very, you know, influential. He can sway this vote to at least at the very le least stop printing. Why why are we on this 40 billion a month tacet QE program that's never been announced. It's exactly what it is. It's there's no difference. We got to stop. I think he'll be able to do that and that might bring the reality that makes that may be the catalyst to start the reality to Wall Street. Now the question is Julia, what is his response when when the reconciliation of asset prices begins? Does he have the bravery to to let it, you know, fully reconcile itself to that that cathartic cleansing of those prices? I I don't I don't think so, but I hope he does. you were talking about getting back getting out of this crony capitalism and back to free markets and you were just kind of referencing like where markets are today the valuations and what they are of GDP and um what where should markets be what would be that normal back to reality kind of >> yeah you would need a 50% you would need at least a 50% correction assuming the GDP you know denominator didn't fall, which is which would never happen. That would be disaster. That's what h well that's what happens when you over financialize an economy. I mean what would happen to banks if home prices corrected by 30% 25% to 30% which is what they need to correct to bring them in sort of an affordable starting starting to be an affordable level and at the same sign and concurrently home uh stock prices fell by 50%. What condition do you think banks would be in? Would the Federal Reserve allow banks to go under, you know, a re a replete insolveny condition of the banking system? No, they won't. They can't. So, we're forced to print money in adnauseium. That's that's that's what I think is going to happen, unfortunately. I'll say that again. Um, but that doesn't mean we're in the clear because the bond market's had it. I think the bond market is saying, "Wait, wait a second. We're we're at 35 year highs in in JGBs, Japanese government bonds. We're at 18-year high uh yields in US treasuries. So, uh I mean, the bond market is not going to take too kindly to an insolvent nation that's now going to expand its balance sheet into the double digits, you know, 15 trillion dollar, say Fed balance sheet from where it is today, just below 7 trillion. I mean how what would be the reaction to the dollar? What would be the reaction to the bond market? So I think the days of the days of since ' 87 this has happened. Well, we have a we have a problem in the liquidity in the in the bond market or we have a problem in the stock market or in the home or home prices or there's a virus. We'll just print we'll just print trillions of dollars and we'll we'll solve every issue. I don't know if that's going to I the odds are increasingly against that being effective. >> Yeah. Wouldn't that just set you up for more problems? >> Yeah, I mean worse problems. I mean, normally you see we have a recession induced by whatever, like I said, virus, tech wreck, home prices collapse, people, you know, scatter into the bond market, and prices rise, yields fall, and then the Fed comes in there and, you know, they they just print money like maniacs, trillions of dollars, and that re relicquidates the the financial system. Problem solved. But if you already have deficits that are your starting your starting point now is not a few hundred billion dollar deficit like we had in the global financial crisis. Your starting point is a $2 trillion deficit. You know 6% of GDP. That's your starting point. And deficits usually go they usually increase by about 300% two 300%. So now you're looking at, you know, perhaps a $6 trillion deficit, which the Fed is monetizing by printing trillions of dollars. What do you think happens to interest rates there? And my my view is probably they're going to go a lot higher as you have this like stagflationary scenario and then then the Fed's money printing is actually not a salve. It doesn't mify the problem. It exacerbates the problem. So your bond bond yields are going to sore either because there's not enough money or liquidity and like we had in 2018 19 repo crisis rates just you know 20% interest rates in the re in 10% 20% maybe in the repo market that just that's a non-starter for economic activity or you flood the market with money like we always do and that inflationary impulse sends yields soaring. So either scenario, higher rates then. >> Yes. >> And then unpack the implications of that. Like sound like we have many great options here. >> Now well you know I don't have to tell you what would happen to the real estate market if mortgage rates went to double digits. >> Oh man. Yeah. >> I mean we already have a frozen transaction market in the real estate market. What would happen if rates went to double digits? I mean, it' be it it'd be def defaults galore. Well, what happens to the the auto market where, you know, most people are underwater on their car. Uh, you know, people are going to extending like, you know, a 30-year loan on a car. You know, what happens if, you know, long-term rates, they they affect uh car price, auto order auto loans, too. Um, what would happen to the stock market if I could just buy a bond and get 10%. What would happen to the stock market if you if the hyperscalers could no longer raise debt >> because they have to pay double digits for it? I mean, it would be a it would be something like we've never seen before in this country. >> But and listen, you know, when you have a fake economy that's engendered by money printing, you know, borrowing, printing, inflation, asset bubbles, this is what happens. But having said all that, you know, I'm not I'm not sitting here panic with with massive shorts in my portfolio. I I run money for a living. >> So, I just I I'm just, you know, I I'm riding carefully with hedges this bubble higher in the appropriate uh scenario according to what I what I feel is the safest way to go >> because the last time Yeah. Last time I spoke to you, Michael, you said you you said you were nervously long. I believe those were the words you used at the time. Um, but explain like if you can, not to reveal everything because I do know you have clients and you run Money for a living, but like give us a taste of like how your position because like you're you're still riding this. >> Yeah. Yeah. I I you know, listening to me, you think, "Oh, this guy's probably a a bear, a perma bear." I get all I I I read the comments, you know, I have clients that are very happy. We're making money. >> I feel like our viewers are nice in the comments, though. >> Yeah. Yeah. No, not not not your kind not your viewers, but other I go on a lot of programs as you could imagine. >> Um Oh, yeah. This guy's been saying this for years. >> Yeah. Yeah. Um I've been saying it's an artificial economy for years. And it's not like we never had a It's like, you know, let's just go through a brief history. 2000 they lost 50%. 2008 the the S&P lost 50%. Uh 2018 2019 repo crisis I just talked about. 2020 COVID the market dropped 35% in a matter of days. Then we had the uh 2022 where stocks and bonds lost a lot of money. Okay, 20% down in stocks. Then 20 25 we had the liberation day debacle. So let's just you know there are times when I am quickly because I'm an active money manager I move into a net short position. But primarily I'm net long because I see this constant stream of money flowing into the stock market and in the end the the the conditions I look at or financial conditions and credit spreads remain quiescent. So I'm not I'm not net short but there's going to be a time guess what we have not [clears throat] excuse me we have not repealed the business cycle. A recession is going to happen in our future. We are going to have a credit crisis. We're going to have chaos in the bond market and what are you going to do about it? I I when I mention the total market cap of equities and the in the Schiller ratio and negative risk premiums and price to sales, I can go on, you know, there's a there's many metrics that all point to the most overvalued stock market in history. I don't use that as a timing tool. I say that to just point out the evidence that the bubble is extent and then I say what how much can this market drop when we get the recession and credit crisis? How how dangerous can it be? How quickly can it can it devolve and how and implode and how far down can it go? And the answer is 50%. At least >> wait a second. 50% that 50% probability we could see that implosion. >> No. >> Oh 50%. >> It would take it a fall um to reconcile the the total market cap of equity to GDP metric that ratio to go back around you know to 100% 1:1 ratio the stock price would have to fall more than 50%. >> Got it. >> In the context of GDP that did not drop. >> Got it. Okay. Um, Michael, as you point out, you have been talking about the triumph of bubbles for a number of years now, yet you're still long the market. You're riding this. I know you have like your your own model and um I want to say I feel like you had like five sections. I can't remember exactly. >> Five sectors of the inflation deflation and economic cycle model. >> Yes. Um, so has anything changed for you in I guess more recently where the the alarm bells are going off? Do you see like the like a more like an increased probability of this thing actually breaking? I don't know, but just kind of curious anything's changed for you or has somethingated it? >> No. No. So I the the model now has us in a in a mild period of stagflation which is sector five. So I own a lot of T bills because you don't want to own any duration in this scenario. So interest rates rising on the long end. Um not I have no nothing in the belly of the curve. I'm all T- bills you know for for a good portion of the portfolio. And then I have stack fleet. I have commodities, agriculture, precious metals, energy, I have um alternative energy. I have uranium in the portfolio. >> So that's my way of of of playing stagflation. You have to be very careful where how you invest in stagflation because not everything is going to work. I also have some utilities. Utilities t tend to do well in stagflation. >> Yeah, I understand like stagflation is one of the historically the one of the most challenging environments for pretty much all asset classes. Um but if you don't mind, I'd love to kind of go through a few with you. >> Precious metals. Um what's the latest for you on um the precious metals trade? >> Okay, so I own I own silver and I own gold. I own them in about a 6% position in the portfolio. Why am I not o more overweight? Because nominal rates are rising and the best scenario for precious metals is when nominal rates and real interest rates are falling. That's just not the case right now. Mhm. >> So, um I have a I have a nice position in there in them. I And that's on top of the 5%. I always say start with 5% that of gold that you physically own that you yourself control and it's not up to any third party. No gold IAS or vaults that hold your money. You control that. I mean, if you hold gold, if you own gold, it's because you don't trust the financial system. You don't trust the currency. You don't trust the government. Uh well, why would you let somebody else hold your gold? That's part of the financial system or government. You you would never do that. So, um that's that's your placeholder. That's your wealth placeholder that you keep yourself. And then you toggle your your which I call liquid paper goal between zero and 20%. We're at around six as I said. >> Okay. And then the energy uh commodities energy, you mentioned alternative energy, uranium. Um, was this be was this before the war in Iran that you were set up for this? We just would love to kind of hear the energy thesis. >> No, no, it was after the war >> after after and when energy spike spiked and engendered this stagflationary environment because we weren't in a stagflation area. Yeah. We were actually in a a stasis sector three which is the second derivative of inflation and growth was kind of neutral. Um, now we're into sector five. So that's agriculture, that's uranium, that's fertilizer stocks, um alternative energy, and regular old fossil fuels, too. >> Can you explain the sectors? And when you get into sector five, is that more worrisome? >> There's two there's there's there's three really great sectors to or good sectors to invest. So sector one would be rapid disinflation and deflation outright deflation. Two would be dis just disinflation. Three is stasis. Four is reflation which is the best sector for equities which is where we're in right now between four and five. And then five is stagflation. And when you get to you can get stagflation or intractable inflation in in that bucket sector five. Um that's when you would really really want to overweight only energy and precious metals. You would not you want to avoid all stocks and you'd want to also short not just be out of duration, you want to short duration in that bucket. So we're kind of straddling sector four and five right now. >> Yeah. And would you say like stagflation is that sort of the base case for you for going forward that that's the environment we're in? >> That's the environment we're in. I I expect it to intensify greatly as we go through time >> and a lot depends on when Mr. Worst does and what he's capable of getting done. >> Um but a after the next recession manifests, not not if it happens, when it happens, you're like I said, you're going to get um annual deficits approaching $6 trillion. I believe the monetary response from that is going to be incredible. We'll have a we'll have a Fed balance sheet that approaches $12 trillion and rising. And if that's the case, I think you'll get a much much much weaker dollar. You'll get precious metals rip, energy will explode, and everything mo most everything else will do nothing. It'll be like the 70s, >> but but but much worse. >> Wow. You know, people and people I I just want to say I I I find people people say, "Well, you know, we have the most liquid bond market and the dollar is the world's reserve currency and well, can that can never happen?" But wait a second, it happened already. I mean, this is not like a theory of mine. In 1980, which was, you know, years and years before you were born. >> Well, okay. 88. [laughter] There you go. >> [gasps] >> We had uh interest rates go to um 15%. In this country, inflation was 20%. So it's not I I think I and I was alive a few decades before the 1980. So when I when I hear people say that, wait, didn't we have the world's reserve currency in 1980? Didn't we didn't we have a um uh a very liquid bond market back then? So why couldn't it happen again? You know, back in the 19 1980, the US national debt to GDP was like 35%. It's 123% today. We have more debt today in terms of GDP. Look at total non-financial debt as a percentage of GDP. It ties what we had in the global leading up to the global financial crisis. Light years ahead of where we were in in 1980. So, if we had double digits, 15% interest rates, then why couldn't we have it again? >> It's silly to have make any other argument. >> It could it could even be a lot higher. And we talked about it already. Remember what I said? Play this again. >> What would those ramifications be on the acid bubbles that are extent today? It's not good. >> Not good. Yeah. I think sometimes we forget that. That's right. My I my parents I think they bought a house in that time period. Um or that's when rate Yeah. rates 15%. Oh my goodness. Yeah. We forget that it's possible you could go back there and then the backdrop is much worse right now too when you just look at our fiscal picture here in the country than it was back then. >> Exactly. >> Yeah. >> Back then we didn't have we didn't have all this debt. We don't have we have to roll over like$10 trillion dollars of debt a year. It's incredible. What do you think is the endg game here? >> Well, like I I think we're I I think we're going to run into intractable stagflation. That's what I see happening where the economy is just limping along and the the Fed is the Fed like the Japanese central bank, the BOJ is the only buyer. I mean, if you have if you have 20% inflation, we had that by the way. It's not it's like it's not like a you know a a a thought experiment. You know we had 20% inflation just postcoid if you calculated the way they did pre-bos so you know 17 to 20% inflation. If you have that kind of inflation rate who is going to give the government money at 4.5%. That's what the benchmark treasury is right now. I I wouldn't. No one would. Only the central bank would be dumb enough to do that. So you have incest rate repression on steroids where they're printing money like mad just to buy debt to keep it well below inflation. But as they do that, inflation goes higher and interest rates are low. That means real interest rates are plunging, which is rocket fuel for precious metals >> and energy. >> Yeah. >> Stationation. terrible for the terrible for the middle class. I don't see any I really don't see I hope I'm wrong. Could be wrong. Certainly not God. Um but that's where I see that's what I see happening in this country. A big big problem with stagflation. >> Yeah. Um do you see solutions or are we pass the point of no return? >> We are there's only two solutions that I see and they both end up the same place. We have to we you get there from two different areas. you say you you ascent to the idea that we have to reconcile these asset prices because inflation's killing the the middle class of this country and you can't have a you can't have a a country that works if you don't have a middle class. Um we do it voluntarily and we say yes it's let's do it. Let's let this happen. Let's let the market forces work. Let's let interest rates rise. We allow asset prices to reconcile to historic measurements. It'll be very painful. It'll be hopefully it'll be a a shortlive depression and then we can we you know we reset the debt, reset the currency, low price, low low inflation, stable dollar viable nation. That's that's the best way to do it. The sooner we do it, the better. The other way is we just keep printing money. I mean I who ever thought that the Fed's balance sheet would go to $9 trillion just a few, you know, a couple of decades ago? It happened. Mhm. >> Um that's where we're headed. And um if that happens then then the situation will be forced on us. Then you have you'll have hyperinflation which then when when the hyperinflation is worse than the depression then you just say okay let's just let's do it. We have to do it now. We have to reset the currency and you just wipe everybody out. Um for the three bubbles, do you see those bursting simultaneously or is it one after the other? Do you see any that are more likely to >> go first and like maybe what the epicenter might be of those? >> Yeah. So the epicenter of the So the bubble is most likely this is my analysis from doing this for like 35 years of studying this. It'll it'll the catalyst will be the credit markets that'll burst first. That gives me my clue. These are my which my model >> monitors assiduously myopically focused on the credit markets. >> Credit markets start to to fracture and that causes the stock market to fracture and that causes the real estate market to tumble. That's that's the way it's going to play out. Mike, >> watch credit first. Then speaking of credit, I mean, Michael, private credit, is that one of the first telltale signs we're seeing. >> We're seeing it. We're seeing that we're seeing the fissures right now. Absolutely. >> It hasn't reached to the point where it's systemic, but I think it gets there. That's the epicenter of the credit bubble. >> Yeah. You know, the two we have two we the private credit market, which really didn't exist in the global financial crisis. We we had um it was like a few hundred billion couple hundred billion. Now it's$2 trillion dollars in private credit. The entire subprime mortgage market was 1.3 trillion. So we're way ahead of it. I mean that alone is enough to to to start to crater banks and crater the re the um the money markets to freeze the repo market to to fracture. That's where it's going to happen. But I mean I you know it it's just not happening today, Julia. But stay tuned. I think if we had this interview in six months from now, I think we'd have a totally different conversation. >> Yeah. >> We don't have to wait that long. >> And we still have to see like, you know, what the June redemptions are going to look like with some of these credit funds. Um I had Jeffrey Gunlock on the the podcast back in March and he's been saying, "Watch for June." Uh because if you thought the redemptions back in March were big, wait till because people are getting gated and now you're going to ask for even more money out because you're worried about getting gated or you only get so much out. >> Exactly. It's it's it's a it's a cycle that's feeds on itself. It's like a death spiral. The more gates walls you put up, the more you want your money out. >> Uh yeah. Um it makes me wonder and the harder it is to raise new money. >> It makes me wonder because you're right. We saw this whole industry emerge post financial crisis. Um 1.7 trillion near 2 trillion whatever the number is. Um are we creating a a scenario where we could be too big to fail or some of these places could be considered too big to fail. Is that a risk? >> Well the primary dealers after DoddFrank they they they pushed all the loan the lending into the shadow banking system. So it's in the private credit arena. But who's the biggest funer of private credit is private equity. And where do they get their money from? Primary dealers. It's all It's all from the same pie. Yes, it's systemic. >> Wow. Systemic. Okay. Well, we'll definitely have that conversation six months from now. Um, what's the risk for you today that's not getting nearly enough attention? Um I you know people don't talk much about I don't hear many people talk about the pressure that's on the middle class of this country and they just they just look um superficially at um the initial claims data um the GDP data and the stock market and say well where's the where's the problem? But then you look at some of these sentiment surveys and they show clearly like the worst the worst consumer confidence on record doesn't I mean Maybe that's a slight exaggeration from you, Mish. I I don't know. But I do know this is that, you know, when it when it costs you like $90 to fill up your tank with gas gasoline and you don't have and and 60% of the country doesn't have $1,000 in savings, you're just you're just destroying their standard of living day after day. And it gets worse and worse. And it's not just the gas at the pump. It's it what's happening in the straight of our muzz is is pervading throughout everything. You know, you know, natural gas, fertilizer, which goes into food >> and and semiconductor chips are they're the stuff that they sulfur that they need to make those chips. >> Um it's it's everywhere. And so there's a there's a there's a bow wave of inflation that's going to hit that's already an already decimated middle class. another wave is going to hit them because the the from what I'm from the research I've done that we're depleting all of our reserves of of energy storage and then it's going to just hit >> and they're already so stretched like if you look at buy now pay later and things like that like they're already at the they're stretched >> are already extremely st and there the default rate on buy now pay later loans is surging >> so so just don't look at you can look at the aggregate of consumers and say, "Well, they're they're generally okay." But again, it's only the 20% which is doing spectacular in the bottom 80% that's really really hurting. >> Yeah. >> And you get down to the lower quintiles, it's just it's just disa it's a depression for them. They're going to food pantries just to make ends meet. >> It's very sad. Should never should never be happening in this in this country. I understand the I understand the motivation >> to fix everything. Um, but you you have to let markets fun. It's a business cycle. We have to let it's almost like trying to pro like I I liken it liken it to this. It's almost like saying we're going to put gigantic stakes in the tectonic plates to make sure there's never an earthquake cuz like who who wants an earthquake to happen? But these plates are always moving. And when you prevent them from moving because you don't want to have a tremor, you get a a you know an epic RTOR scale shock. And that's where we're heading. >> Mhm. >> Because of our desire to make sure we never had a cathartic tremor. >> Yeah. >> Either in the unemployment rate or in the stock market. It's >> setting up for something worse because of the intervention. Yeah. If you just let the cycle be and let free markets work, you'll have some pain here and there, but it won't be setting you up for this >> extreme pain. Yeah. >> Yeah. And and then and the evidence is like why, you know, look, I could show you a chart after I if anybody wants to contact me, I could send you a PowerPoint presentation. >> Oh, they'd love that. Do you want to let them know or they could uh >> Yeah, I mean, you could you could email um my my office. It's um it's right on the website. you can is the contact information and we'll send you a PowerPoint display just show it shows you the massive unprecedented liquidity impulse that was has been created over the past few years which just flooded the banking system reserves and how the Fed manipulated interest rates and in to negative terms you know real terms and the money supply chart and charts of of of the stock bubble that it it's not my opinion I mean I'm not I hope people understand I'm not just making stuff up this is Not my opinion. This is fact. We have these massive bubbles in place which are being constantly trying to keep inflated with this money printing $170 billion since has anybody Julie has anybody on your show come in and said we had $170 billion of QE since since December. How many people know about that? >> I don't remember. I don't know. >> Well, it's true. And I'll show and I'll show it. >> Yeah. No, I believe you. Michael, um it's always a treat having you on the show. We love listening to you and learning from you and just appreciate you being so generous with your time. Maybe let's end on this note. Um I want you to let folks know where they can find and support your work. Um and also what is something that's making you hopeful for the future? Because we did have a sobering conversation here, but yeah, let's leave it at that. Um well the the quality of the American person, you know, the person who resides in this country is is is one's a God-fearing individual for the most part. And through prayer and through the help of the Lord, we'll we'll get through this. So that's my inspiring message for the day. Michael Pinto, founder and president of Pinto Portfolio Strategies. I want to thank you for being so generous with your time, all of your knowledge, your wisdom, helping us all learn and get better, for being a friend of this show. Really, really appreciate you. And until next time, Michael, be well. Thank you so much, Julia.