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moneymetals

Michael Pento: Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’


Michael Mike Gleason: It is my privilege not to welcome back Michael Pento, president and founder of Pento Portfolio Strategies, and author of the book The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market.

Michael is a well-known money manager and a fantastic market commentator, and over the past few years has been a wonderful guest and one of our favorite interviews here on the Money Metals Podcast and we always enjoy getting his Austrian economist viewpoint.

Michael, welcome back and thanks for joining us again.

Michael Pento: What a great introduction. Thanks for having me back on, Mike.

Mike Gleason: Well, we often talk about bond yields with you, Michael, and I think that's a good place to start today. You recently published an article where you made the case that 4% would be the floor when it comes to the 10-year note – not the ceiling, the floor, and you made some observations that now seem striking. The yield on that note averaged 4.6% in 2007, just the year before the 2008 financial crisis.

Today practically nobody remembers yields ever being that high… 10 years is a long time we suppose. Heck, it seems like investors have already forgotten the early February selloff in the equities market, so I guess we can't be surprised that they can't remember the situation a decade ago.

In any event, markets are not prepared, or priced for 4% yields on the 10-year. Talk a bit about why 4% is likely to be a minimum and why yields should probably be much higher than that.

Michael Pento: Let's start with the fact that normally speaking throughout history, the 10-year note seems to run with nominal GDP growth, which is basically your real growth plus inflation. So, if we're running around 2% inflation and we have growth at 2.5% around that, you would assume that the 10-year note should be historically speaking around 4.5% right now. But I can make a very cogent argument, Mike, that rates should be much, much higher because if you look back ... as you mentioned the 2007 when that average interest rate was, again, 4.6% and nominal GDP was sort of around that same ballpark, the annual deficit was 1.1% of GDP.

But going into fiscal 2019... sounds far away, not maybe that far away, but it sounds further away than really what it is. It begins in October of this year. Our annual amount of red ink will be $1.2 trillion. That is the Treasury's annual deficit, but you have to add to that to the fact that the central bank of the United States will be selling... and I say selling, because what they don't buy the Treasury must issue to the public, $600 billion less of Treasury Bonds. So, that's $1.8 trillion deficit. That has never before happened in the history of mankind, a $1.8 trillion deficit, which happens to be 8.6% of our phony GDP if we don't go into a recession.

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