SmallCapPower (SCP) recently spoke with Michael Pento, President and founder of Pento Portfolio Strategies, a Registered Investment Advisory Firm (RIA) based in New Jersey. Mr. Pento is a well-established specialist in the Austrian School of economics and a regular guest on CNBC, Bloomberg, FOX Business News and other national media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, a contributing writer to TheStreet.com and is a blogger at the Huffington Post.
Smallcappower (SCP): In a December 20, 2013, interview with Bloomberg you said “gold will probably reach a bottom by April as the Fed “does whatever it takes” to reach its inflation target.” Has your opinion changed on gold given the precious metal’s strong start to 2014?
Michael Pento: I actually went on record saying gold would bottom in January. The mining shares would bottom first and then the metal would bottom after. I believe that’s absolutely what has occurred and I think the future for gold is very positive in 2014 because either the exit of QE is going to be an absolute success and money supply growth is going to continue to grow strongly. For instance M2 is growing at over 8% at this current rate and if I’m wrong and the Fed taper doesn’t reduce money supply growth and everything is fine then gold is going to have a very good 2014 just like it had in 2003, 2004, 2005, 2006, and 2007. Gold does not need QE to appreciate in value. However, if I’m right and the end of QE is a disaster and the money supply shrinks and we end up in a deflationary recession/depression like I think is going to occur later this year, then I think the Fed would engineer a protracted and expansive new round of QE and that’s very bullish for gold because basically the Federal Reserve would have to admit that there is no escape from Quantitative Easing and that money printing to keep interest rates low would have to go on for many, many years.
SCP: So, are you in the camp that thinks the gold price is being manipulated?
Michael Pento: Yes I am but what good does that do. Every market is being manipulated. Gold can be manipulated up as well as down. I don’t waste my time worrying about it, to me that’s just an excuse.
SCP: What’s your outlook for U.S. equities and the U.S. economy in general in 2014?
Michael Pento: Look at the Quantitative Easing in Japan – 70 trillion Yen has been printed and their GDP growth rate was 0.7% in Q1. So, we’re seeing the same thing in the United States. We printed $3.3 trillion (expanded the monetary base) since 2008 and what has it got us? Well, the stock market is up 170% but real GDP is below 2%. We’re not getting a really good increase in non-farm payrolls. In fact, we had what I would consider three back to back to back underwhelming non-farm payroll reports. We’re having a decades-low labour force participation rate. The E-POP (employment to population) ratio is in the cellar. The truth is that you cannot engender growth from inflation (money printing) and debt – and that’s exactly what we’ve tried to do here. It’s going to be a miserable failure here just as it is in Japan.
SCP: You recently wrote a book entitled ‘The coming bond market collapse’. Given this scenario, what should investors be doing with their money?
Michael Pento: You have to be able to model the growth rate in the money supply. If you think the growth rate in the money supply is going to be robust then you should be investing for inflation. If you think it’s going to be contracting you should be investing for deflation. But you have to be able to model the growth rate in the money supply because we’re in an environment where we’re on either side of that scenario, which is going to take place. Either the Federal Reserve is going to capitulate and allow defaults in the municipal bond market or allow defaults in corporations, and allow banks to go under. Just like they were doing in 2008. The gravitational forces of deflation are so very, very strong – we’re going to have mass chaos and bankruptcies across the board in the United States and indeed all across the world. So what’s happening is central banks are acting in unison and are trying to inflate the economy again. And it takes a tremendous amount of Quantitative Easing to try to mask over those deflationary forces. I think we’re going to have very violent swings between both scenarios (deflation and inflation) depending on which direction central banks happen to be in, which mode they’re in at any given time. So, you have to be able to invest for BOTH scenarios, not just one. For example, look what happened to price of oil (as a proxy for the direction of inflation) throughout the 2000s – it went from $30 a barrel to $150 a barrel, then back to $30 then back to $117 a barrel. It’s those type of fits and starts that you have to be able to invest for.
SCP: Is there any other commodities that you think will outperform in the coming year and why?
Michael Pento: No, I know copper is going down – it’s in a vicious bear market. Iron ore is down, aluminum is down, agricultural commodities are going to have their day too lower. I think the only commodity I’m really looking strongly at in 2014 is gold. And, I’m not even talking about silver so much either because of its industrial usage. I think gold will be the metal that shines brightest in 2014.
SCP: Thank you for your time Michael.
Michael Pento: No problem, thank you.
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This interview was conducted for SmallCapPower on behalf of Sean Mason.
