Michael Pento: Recession Later This Year, Then...Raging Stagflation
With the market now expecting less than 2 rate cuts this year -- perhaps none at all until next year according to Bank of America -- what does that mean for the economy?
Can it handle "higher for even longer" interest rates without slowing markedly?
Or, even worse, something systemic breaking?
And what impact will these higher rates likely have on stock, bonds and other asset prices?
To find out, we're fortunate today to talk with money manager Michael Pento, president of Pento Portfolio Strategies.
Michael is not happy. He's very concerned that the crown jewel of our capitalist society, the middle class, is getting "wiped out". He sees nothing good coming from that.
And looking ahead, he sees a disinflationary recession happening in the second half of 2024, to be followed in early to mid-2025 by an era of stagflation more extreme than we've ever experienced.
All of this makes him very nervous about asset prices — especially stocks and housing, which he estimates are currently 40% above fair value.
Here are my top takeaways from this interview:
Michael warns of an impending debt crisis, citing surging government, consumer and corporate debt levels. US national debt has doubled in in the past decade to $34 trillion, consumer debt has surged to $20 trillion from $15.6 trillion in 2019, while corporate debt has doubled since 2007 to reach $13.7 trillion.
This is a crisis rooted in bad policy by our monetary and fiscal “leaders”, who continue to sacrifice the middle class in their ham-fisted attempts to keep the status quo continuing.
As for his economic outlook for 2024, Michael predicts
an upcoming recession later this year, initially disinflationary but evolving into an unprecedented stagflationary one due to his anticipated response from the Federal Reserve to re-stimulate the economy through rate cuts and quantitative easing.
America has unequivocally entered a phase of fiscal dominance. As a result, 40% of the Russell 2000 companies are currently unprofitable, signaling widespread financial distress across corporate America. Michael further emphasizes the imminent threat of mass bankruptcies looming not only within the corporate sphere but also among everyday consumers, painting a grim unfolding picture of economic insolvency.
Michael points out several indicators signaling an impending recession and facilitation of destruction of the middle class:
The index of leading economic indicators has been down 21 of the last 22 months.
The National Federation of Independent Small Business Optimism Index has been below the 50-year average for 27 consecutive months.
Household net interest income has dropped by $200 billion during the current Fed tightening cycle.
The 10-year note minus the 2-year note yield is in the longest inversion in history, which has historically been a near-perfect recession predictor since 1955.
There has been a positive real Fed funds rate for the past 12 months, which historically precedes recessions.
Personal and corporate bankruptcies are soaring, with corporate defaults reaching levels not seen since Q1 of 2000.
Bank lending and money supply growth are contracting.
Currently, Michael holds a lot of short-term Treasury bonds due to his expectation we will soon be entering a deflationary phase. However, as stagflation becomes more prominent, he plans to shift investments towards precious metals, agricultural and base commodities, and energy.
Michael is already shorting high yield debt via an inverse ETF. He thinks that trade should do very well once recession arrives.
Michael emphasizes the importance of humility and continuous learning throughout one's career. He stresses that stopping learning equates to stopping improvement. Additionally, he advocates for reaching back to help others rise, suggesting that investing in people can be more valuable than financial gains.
For the full interview, watch below:
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