The Next Recession Could Trigger Double-Digit Inflation – A Dangerous New Crisis! Are You Prepared?

[00:00:00] Speaker 1: hello everyone and welcome to another edition of triangle investor interviews i'm your host lucian valkovich and before i announce my guests just a quick reminder of a disclaimer this interview and all my interviews are not a recommendation to buy or sell any shares products or services always do the diligence and consult with your financial advisor today we are joined by michael pento an american economist financial commentator and investment manager mike thank you so much for joining me today it's a pleasure lucian thank you so much uh let's start with the u.s economy you have been warning about the major economic crisis for years but recently you have become more specific about the timing so why do you believe 2027 could be a disastrous year for u.s economy [00:01:00] Michael Pento: well i have a model called the inflation deflation and economic cycle model it looks at the second derivative of inflation in the context of growth and i see inflation by the middle of next year falling closer to two percent closer to the fed's target but there's a good chance a high probability it could we could even have deflation and i'll tell you why um so inflation where is inflation coming right now what's the problem that we've had with inflation well it's it's always oh first and foremost always an increase in the money supply and we have a fiat currency debt-based monetary system so the primary dealer dealers are loaning in new funds for the specific purpose of ai infrastructure development hundreds of billions of dollars yeah so the money supply growth is growing very very robustly it's not out of hand but it's robustly so that's that's one part of it and then when you add on to that the tariffs and you add on to that the energy shock from the war and you get a problem with inflation you get inflation around four percent which is at 3.7 percent is where we are uh year over year headline figure cpi so how do you kill that how do you address that well um you could wait for the um the middle of next year where you're lapping all the tariffs and you're lapping uh so mechanically they fall off the the the um the rate of change will drop you could do that or you could be more uh of a timely uh manner like um kevin chair wars says he wants he wants inflation back to two percent in a timely manner and that means he's going to have to raise the fed funds rate enough so he can kill off the ai um debt fueled monster so if he does that and he's he did it once he'll almost definitely raise again in december um so we have higher borrowing costs for ai investment you have the return on investment which is not there so you're going to kill the uh monetary push for inflation and then you're going to lap all of the other things i just mentioned the tariffs and the and the war so you have inflation coming down sharply and and since and since ai investment has been responsible for 50 of gdp growth 80 percent of earnings growth and what i like to call nearly 100 percent of the wealth effect for the top 20 percent of of us consumers you're going to kill that part of the economy too and the other 80 percent the other the bottom four quintiles have been in a recession since 2022. so if we pop that ai bubble and i highly suspect that we will we could have not only disinflation in other words that second derivative falling from 3.7 closer to two but we can go into actual deflation which would involve the collapse of asset prices which could be could be i didn't say 2025 was going to be devastating because i said it could be okay i am now net neutral stocks but if my model says the the continued deterioration in credit spreads and financial conditions if that continues i will be neutral i will be negative net short in my portfolio 2027 that's where i expect to be got it you also describe the current environment [00:04:25] Speaker 1: as three simultaneous bubbles stocks real estate and credit have have you ever seen this combination before and what happens if all three start unwinding at the same time well that's the that's the most salient [00:04:39] Michael Pento: question anybody's ever asked me so so so a lot of people don't understand this they or they overlook it will willfully probably or because they have to because they don't not most people in my business lucien they're they're sales people so most people that manage money don't have the ability to raise cash they don't have the the ability or the wherewithal to short the market so they're selling people they're gathering assets and they're telling their investors buy and hold okay for the most of the time that works great but sometimes it doesn't this is one of those times lucien because this is the first time in history so if we look at the united states we had a um a very big nasdaq investment bubble in the year 2000 burst in march of 2000 but it was an isolation there was no credit bubble there was no real estate bubble uh subsequent subsequent to that we took interest rates down to um one percent for a period of time two years and we engendered the housing bubble and that was the housing bubble circa 2008 uh 2005 2008 but that was just a housing bubble it wasn't a stock market bubble yeah and and today we have and let me be specific we have a real estate bubble where you see the the home price to income ratio at an all-time record high higher than it was leading into the to the the global financial crisis we have the total market cap of equities as a percentage of gdp at 235 percent where it was just 140 percent at any peak in in in the nasdaq bubble so there have those two bubbles and then we have the credit bubble the student loan debt and the private private credit debt um the the the household debt the 40 trillion dollars in national debt these these are records so and even if you look at the percentage of gdp total non-financial business debt which incorporates the ai debt it's at 75 percent of gdp it was 73 heading into the global financial crisis so yes in nominal terms it's it's a it's a massive credit bubble but even if you look at it in terms of gdp it's a credit bubble um so when you have three bubbles existing concurrently which has never before happened and that record proportions that's your problem and if you you don't acknowledge that then you know you're gonna have a really difficult time because in the next recession the average recession brings stocks down by 37 percent that's the average recession this is not going to be an average recession now you can make an argument that the recessions have been abrogated abrogated and canceled and annulled i don't i don't agree with that so if you agree with the business cycle and we're going to have a recession in 2027 looks primed for that but given the increase in borrowing costs and the lack of roi on an ai investment you you could assume 37 is a starting point for how far the market could drop [00:07:42] Speaker 1: not good uh michael the as we talked about you talked about the u.s debt we know it uh surpassed 40 trillion so at what point does the debt burden become mathematically impossible to manage without some form of a financial repression monetization or default and my other part of the question is what actually keeps the government i don't know to reach 80 trillion debt what keeps it from reading 88 [00:08:14] Michael Pento: well someday i think it will i mean yeah it's you know it's just a function of revenue and spending that's what debt is but you have interest on the debt now which is 1.2 trillion dollars in interest on the debt i would i guess to answer your question is once the interest on the debt becomes almost you know all of your revenue then it's just you're just raving right and here's the thing um lucien a lot of people say well the jack did i've actually heard this on on a very popular financial network from a gentleman who who was a more or less of a permanent bull who says a permanent keynesian bull i won't mention his name but he says he says well the debt to gdp is it's actually 123 percent but if you look at just the publicly traded debt to gdp it's a national debt to gdp is a hundred and about a hundred percent so he made he made this assertion that you well it's very easy to pay off because with the with what the america produces internally every year is equal to the debt so we could just tax that and then pay off the debt and i had a lay i said wait so you're saying what you're saying is you could tax a hundred percent of gdp lucian what would gdp be if you told everyone that you're going to take 100 of their income and wages in in taxes well what wouldn't that be zero yes i mean very close zero only volunteer work would occur in this country so it's asinine to say you could 100 of gdp you you you're pretty much frozen i mean you could lower if you cut taxes too much you get less you you could cut it a little bit get more revenue but if you cut it to zero you'll get you'll get zero revenue this is art lapper's per famous napkin um postulate if you raise it to 100 you're going to get zero so there's some kind of and we're right there we're kind of in a happy meeting like i think it's like um 16 um so you're you're not the revenue is the revenue and it's a little bit over five trillion dollars but the expenditures are in flux and they're way over seven trillion dollars seven and a half trillion two trillion dollar in deficits but here's the here's the metric that hardly anybody uses but it's the only one that really matters it's the debt as a percentage of your revenue you know you know it's your revenue and that's 720 percent so that's a very daunting figure and that's what you have we're technically when you're when your debt is 720 of your revenue then you've got a big problem yes there is one other [00:10:52] Speaker 1: argument uh we const const we always hear that the us can sustain enormous debt because the dollar is the world reserve currency i'm hearing that every day how much longer can that argument actually hold [00:11:06] Michael Pento: well it's been eroding uh it's it's it is the silver world's reserve currency but you know it's taken that place is gold so so here's what happens when the foreign foreigners have a lot of excess dollars because accredited donations they just just usually recycle them into our treasury market that's just where they stay so you and that's the backed by dollars that's the world you know world reserve currency but due to confiscations and sanctions our creditor nations and also because of a diminished trade surplus our creditor nations are now saying i'm going to sell your dollars and i'm going to buy gold so that that's that's so slowly supplanting the dollars the world's reserve currency but you know rome had something called a denarius and and that was the world's reserve currency that didn't stop inflation from going in rome to a thousand percent it per annum you can have hyperinflation and still have the world's reserve currency we've proved that before in the past so i don't take any solace really because we're losing that status and even if we maintain it it's not going to stop the fact that we we as a central bank the united states central bank the federal reserve is going to be forced to monetize trillions of dollars in the next recession just like they do all the time but last few times last two times to be specific but instead of monetizing a couple hundred trillion dollars a couple a couple of trillion dollars they're going to have to probably monetize four to six trillion dollars in annual deficits um that's going to cause uh our foreign creditors to eschew treasuries and dollars to reject them on moral grounds and here's another here's one one more thing i want to add the the united states administration current administration has taken a public stake in private companies about 40 to 40 i think it's 41 private companies one of them was intel one of those stocks dropped 30 percent in a day what's going to happen when the if we keep going towards this socialist past and i know path and i'm talking to someone from europe so maybe you can understand what's going on in france right now and in other parts of europe we keep going on this path this path the fed is not only gonna have to monetize treasury debt they're gonna have to buy stocks to bail out the government whose assets rely are parked in equities this is the dangerous path that we're going on so i believe we could have disinflation deflation for a very short period of time next year but as the as even ken work kevin warsch is forced very reluctantly back into the zrp and qe and helicopter money regime you're going to see stagflation hyper stagflation sometime in the future in the very near future to maybe 28 i don't know the exact date but it's going i i don't see any way out of because when you when we just talked about the three credit bubbles equity bubbles and real estate bubbles popping concurrently and simultaneously the the result the resulting destruction from that event is going to be so uh pernicious that the amount of money printing they're going to have to do and and the and the helicopter money that's have to have to be sent you know that called the the evil marriage between the treasury and the fed we have fiscal and monetary stimuli like we've never seen before you're going to see stagflation in this country like you've never seen before uh mike in that environment [00:14:55] Speaker 1: in those scenarios how do you see the stock market how do you see the big in how do you actually see the big indices in 2027 are could we experience a real meltdown well i i look so you asked me you asked me [00:15:11] Michael Pento: specifically about the stock market so i'll just going to quote i'll quote you two statistics and okay so the total market cap of equities as a percentage of the money supply is 270 that shows you that you there just isn't liquidity there to meet the redemption so when that and everybody likes to quote mike green he's a wonderful person um and a very smart individual we talk about this like passive income flows you know you get a job you fund your 401k this really has happened since the 1980s in this country women join the workforce work the workforce population as a percentage of the um general population increased dramatically so when that goes into reverse when people start getting fired and that's what happens in recessions you know the unemployment rate goes from three four percent to double digits yeah it'll happen again so people will say instead of instead of being able to fund their retirement they're going to be withdrawing from their retirement because they don't have no longer have a job and then people that do have a job call up their plan administrator and say stop funding my 401k and if it gets bad enough and i think it will you're going to get redemptions from them too the employee part of the population it's called employment to population ratio so um the other metric i want to cite to you is the total market cap of equities as a percentage of gdp which i mentioned before is 235 percent the average ratio is about 100 95 to 100 that's the average of that ratio so we could technically drop by 50 percent or more assuming the denominator doesn't change and it will it'll drop as well so you're looking at when this when the what i call the great reconciliation of asset prices occurs it will occur because of a burst of the credit bubble which will cause a recession and that will start this process it's that simple you're looking at a 50 drop plus [00:17:23] Speaker 1: there we go just to get back to normal understood uh do you think are we experiencing a point where central bank independence becomes largely theoretical uh because governments simply cannot afford the consequences of the restrictive monetary policy there is no independence i mean let's just let's just let's [00:17:45] Michael Pento: just give you the latest example you have kevin warsh newly appointed in may of this year he says we're going to get inflation back to two percent in a timely manner that was in may we are we had a meeting just a a few weeks ago when inflation accelerated from 3.4 when he hiked to 3.7 but because it was just prior to the november elections the midterm elections it didn't hike so there's no independence there's never been any you if so let's put it this way if you don't believe that in our you don't like that argument you say it wasn't political it's because he's taking his time blah blah whatever what central banker is going to watch three massive bubbles implode the unemployment rate leap to double digits the money markets freeze in other words the money market funds break the bug commercial can't float commercial paper any any overnight paper is frozen the repo market's no longer functional the entire economy starts to melt down i don't mean full i mean melt goes into nuclear reactor meltdown mode just like it did in global financial crisis and do nothing and do nothing and let it happen so there's no independence the the fed's mandate is they have a dual mandate but their real mandate is i'm i need to protect banks and i need to make sure the stock market never has a really uh uh we never have a a bear market no recessions not no no bank can go under that's their real those that's the real mandate too big to fail exactly they'll run they'll run under the guise of well you know um the unemployment rate we have matt we're not reaching maximum unemployment but listen the central here's the fact let me get let me get let me get on the record and be clear about this not just the fed but most developed world central bankers have failed their mission completely they have destroyed the middle class of their nations under the guise of these mandates because they've repressed interest rates they in the united states 90 of the time between the year 2008 and 2022 real interest rates were negative and that's what that's what caused these bubbles to be created that i just mentioned the credit equities and real estate and in the process of doing that in order to keep the top percent of you know the top few percentage of the economy and the and the citizens happy they've destroyed they've eviscerated they've destroyed the middle class of their nations and that's the saddest [00:20:31] Speaker 1: part of all yeah uh let's touch on gold uh if we enter a deflationary recession could gold initially sell off alongside equities as investors scramble for liquidity before eventually benefiting from monetary [00:20:45] Michael Pento: stimulus so exactly correct um so this is the process i see in goal i just recently like a week ago after being out of it for a while i bought gold miners about a week ago so far so far the time is working perfectly and the reason why i did that is because there's a real there's there's going to be three regimes for gold and two of them are really big sweet sweet sweet spots so right now we're in the very beginning early early stages of the um manifestation of a slowdown in inflation and economic growth so what happens in that is you're going to have the central bank go from i'm going to hike interest rates just like they did in you know this the beginning of 2027 they were going to cut rates several times but then because of the war they went from that from a hiking regime from a cutting regime to a hiking regime and that just that really that's one of the reasons why i sold my gold miners and i i took i took down my allocation to the physical goal but i recently upped the both of them um i put took miners a week ago or two weeks two weeks like i said um because now the new regime is going to be oh we we can hike more than once they'll hike in december and i think in 2027 we're going to get rate cuts as this second derivative of inflation starts to really come in hard so that's that's beautiful for gold it's gonna be great for the gold it's gonna be great for the miners as they start as that realization begins to manifest if if and this is the big if if i'm correct and it it it metastasizes into a deflationary collapse and a depression if that happens no guarantee but it has a very high high high likely of a current there will be a liquidity crisis in that case like you mentioned you sell everything everything gets sold the only thing that does really well is the dollar uh short-term bonds and shorts those are really the only things that work and cash so cash and short-term treasuries the dollar and shorts four things so um then after that and that'll be a truncated period of time where gold gets sell off for everything but then when the fed and treasury join hands and the fed is forced to monetize trillions of dollars in this the you know that the uh this the the money that goes out to people because of unemployment insurance or snap funds or helicopter money or universal basic income you name it yeah who knows what kind of tar programs they come up with that will eventually reliquify the system and then you're going to get stagflation where the fed is repressing interest rates so nominal rates stop rising very or if they rise they rise much more slowly then inflation is increasing so real interest rates are plunging that's the best environment for gold [00:23:44] Speaker 1: final question michael okay we named a lot of red flags over here uh however what's your take what should america what should u.s government do to to to fix things i mean what is the first thing on your mind that you think that the government should impose should do well the first thing they need to do i would [00:24:06] Michael Pento: say is embrace markets stop this meddling so you need to you need to fetter the central bank we need to stop the central bank of the united states increasing its balance sheet the balance sheet has to stop increasing especially not more than one or two percent a year that base money supply should be fettered to around one to two percent per annum maximum growth never again should we monetizing trillions and trillions of dollars because then you you just destroy the the savings and investment dynamic you destroy the middle class and you create these this this this this oligarchy oligarchy society where you have just the top one or two percent they're doing fantastic and the rest of the the country is you know close to revolt yeah is there any middle class left there's not much there's not much it's not much not not in europe and not in the united states it's very you know look look at this blue to tsunami that just occurred you know the reason this is one of the things you asked me what they can do they should we should be able to if we can still do it i don't know if you can but to end the war with iran get them to get the oil flowing freely yeah um get we get energy prices and here's i'll give you a little bit of hope there's two things that could happen that would make that recession prediction for 2027 not come true of mine and of course i would invest differently i would see it happen in my model to pick it up number one we can have oil prices crash they oil prices go back down to 60 70 a barrel you would really do a big service to the middle class of this country you see not only food prices would fall energy prices would fall everything would come down virtually everything would come down in price the other thing we we could do um is if if the ai um the return on investment for ai if if if there's some kind of productivity boom were to emerge very quickly we don't see it yet yeah luciana we do not see it yet most companies i think 80 80 of companies say there's just not the return there on their on their spending i mean it's a great technology it is it's a wonderful technology very helpful um it's just like just like there was a great internet was a great technology railroads were a great technology the you know radio tv electricity there but they didn't stop you know the roaring 20s there's over investment that occurs in in late 90s over investment in switchers and routers over investment in hyperscalers causes a bubble to burst and you have carnage that ensues doesn't mean the technology stinks doesn't mean we didn't use railroads or the internet and we're going to use a ai it's just the over investment leads to a massive misallocation of capital that has to be um it's like a cathartic [00:26:51] Speaker 1: cleansing you know over investment and greed if you agree yeah exactly so but if if we can get the [00:27:00] Michael Pento: energy prices to crash and there is a a boom in ai productivity then my the recession and prediction will be wrong so i'll keep an eye out for that and hope and hope that's the case it is a low probability [00:27:13] Speaker 1: scenario agreed uh michael how can my followers follow you see your work tell me more so um the [00:27:21] Michael Pento: website is pentoport.com port.com pentoport my last name and on that you'll see a uh a section called the midweek reality check it's only fifty dollars a year you'll get my high level view of the economic data and the salient economic news um and if you are a u.s citizen and you have a hundred thousand dollars to invest and you qualify for a long short portfolio i will manage your money directly in the inflation deflation economic cycle model which tries to make money in all markets all macroeconomic conditions bullish or bearish and a lot of people have lucien a lot of people they not only have never seen a bear market they don't believe one can happen exactly i know that at least then that there's a bear market as possible well the federal just cut interest rates well didn't the fed cut interest rates in 2000 didn't the fed cut interest rates in 2007 actually the summer of 2007 did that stop the the carnage and and i'll leave i'll leave one leave with this the next time we have a recession the fed is probably with reluctance you know in arrears ex post going to cut interest rates dramatically it's going to be too little too late but in this scenario this is the first time we're going to have a recession where inflation had been a problem for a very long time and we have an insolvent nation so when the once again if the fed is forced to monetize trillions and trillions of dollars in debt we know what happens we we've seen this movie before it we don't have to look too far back we know that the result of that is double digit inflation and no one's going to pay five percent for a treasury bond a benchmark treasury when inflation is 10. the only person who would ever do that the only entity would be the federal reserve so you're going to have you're going to have tremendous upward pressure on interest rates and tremendous pressure on the central bank to create inflation to solve the problem so watch out for those negative real interest rates and watch out for this process to start all over again and just get worse and worse with each inner iteration yes that was [00:29:32] Speaker 1: michael panto michael i want to thank you for the great discussion today and i look forward to host [00:29:37] Michael Pento: to sometime soon again god bless you have a great day take care uh