Way Out of the Box: Pento’s Warning

(Money Metals News Service) In this Money Metals podcast episode, host Mike Maharrey talks with money manager Michael Pento of Pento Portfolio Strategies about what he sees as a dangerously distorted financial system. Pento jokes that he feels “better than terrific,” but admits he is “faking it” as he watches the middle class and buy-and-hold investors getting “flushed down the toilet.”

He points to runaway debt, embedded inflation, out-of-control central banking, and massive asset bubbles. In that world, he argues, gold is the ideal store of wealth, bonds are extremely risky, and the classic 60/40 portfolio is a trap for complacent investors.

(Interview Begins Around 10:36 Mark) 

Gold, Silver, and Liquidity Crises

Maharrey opens with the recent pullback in gold and silver and their quick rebound. Pento is not surprised. Gold, silver, and platinum went vertical, corrected, consolidated at lower prices, and are now climbing again.

He warns, though, that precious metals are highly vulnerable during true liquidity events. When markets crack, he says, correlation goes to one. AI stocks, energy, gold, silver, platinum, palladium, commodities like soybeans—all tend to be sold at once as investors scramble for cash.

In those moments, the things that usually work are short-term Treasuries, cash, short positions, and sometimes the U.S. dollar. He doubts the dollar will be as reliable this time. Anyone who owns only risk assets and no cash or high-quality short-term bonds, he says, can get wiped out in a liquidity crunch, even with metals in the portfolio.

Debt, Deficits, and Helicopter “Dividends”

Pento is especially irritated by new proposals for helicopter money in the form of tariff rebate checks. He highlights a plan to send 2,000 dollars to everyone earning under 100,000 dollars a year, a program he estimates at roughly 300 billion dollars.

Tariff revenues are only a little over 100 billion dollars. The gap must be borrowed. With the national debt around 38 trillion dollars and the annual deficit near 1.8 trillion dollars, Pento scoffs at political promises to “give a dividend,” balance the budget, and pay down the debt.

He argues this is not sharing surplus cash flow. It is layering more debt on top of an already unsustainable structure, dressed up as generosity. The real cost, he says, will be more inflation and a weaker financial system for everyone else.

The Fed’s Real Priority

When it comes to the Federal Reserve, Pento is blunt. Inflation has been above 2 percent for about four and a half years, yet policymakers are talking about a series of 50-basis-point cuts and an end to balance sheet reduction.

He argues the Fed is effectively back in quantitative easing already. QT is scheduled to end in December, but the balance sheet has stopped shrinking and is growing again. The Fed does not lower rates by decree, he says. It prints money, dumps reserves into money markets, and forces short-term rates down. That process creates more credit and more inflation.

Pento insists the Fed’s real priority is not the American public but the banking system. Stocks, bonds, mortgage-backed securities, and related assets on bank balance sheets must keep rising. If home prices, bond prices, and stock prices fall sharply, banks and shadow banks risk insolvency. Permanent inflation and repeated asset support, he concludes, are deliberate features of this regime.

Embedded Inflation and a Strained Middle Class

Pento stresses the difference between the rate of inflation and the level of prices after several years of high inflation. Headline inflation may have dropped from around 9 percent to roughly 3 percent, but the damage is already done.

He argues that the current level of prices has effectively bankrupted the middle class and much of the lower three or four income quintiles—the bottom 60 to 80 percent. Many households can no longer realistically afford housing, health insurance, taxes, and quality food. Corporate earnings increasingly reflect this stress as consumers run out of slack.

Even at 3 percent, prices are still rising from a much higher base and remain above the Fed’s 2 percent target. Pento rejects the idea that there is “no inflation” and sees fresh helicopter programs as direct attacks on what little purchasing power households have left.

Bonds, Rising Yields, and De-Dollarization

Maharrey notes that yields across the Treasury curve have risen even as the Fed cuts, suggesting the central bank does not fully control rates. Pento says bond buyers care about solvency and inflation. On both counts, he believes the United States is failing.

He describes the country as essentially insolvent with an intractable inflation problem. In that environment, bond prices must fall and yields must rise to reflect the risk. Higher yields then drive up interest on the national debt, mortgage rates, corporate borrowing costs, and many consumer loan rates. The real economy, he says, gets washed down the toilet as debt service crowds out everything else.

Globally, he ties this into de-dollarization. Surplus countries once loved Treasuries because they offered a good yield in a stable dollar. Today, Treasuries are volatile, the dollar is steadily losing value, and the United States uses sanctions and asset seizures as policy tools. If you are Russia, China, or any surplus nation, he argues, it is rational to accept dollars, sell them, and buy gold stored in your own vault. Maharrey notes that reserve data already shows falling Treasury shares and rising gold holdings.

The QE Era and Gold’s Role

To show how extreme the current era is, Pento sketches the Fed’s balance sheet. At the end of 2007, it was about 700 billion dollars. Between 2008 and 2022, it swelled to roughly 8.3 trillion dollars. Even after some QT, it still sits around 6.5 trillion today, mostly Treasuries and mortgage-backed securities.

He sees this as debt permanently turned into money and removed from the public market into the warm and loving hands of the Fed. He expects the balance sheet to return to around 9 trillion dollars and likely move into double-digit trillions next time the system wobbles. That, he says, is why people are buying gold and why the case for gold will strengthen.

For Pento, gold is not primarily an investment. Gold does not truly go up; fiat currency goes down. Gold is the perfect parking place for someone approaching retirement who wants to preserve purchasing power and standard of living. If you want to earn a real return above inflation, you might look at gold mining shares or other assets. But gold itself, he says, functions as an inflation-adjusted savings account.

Asset Bubbles and the 60/40 Trap

Pento believes two decades of negative real rates have produced enormous bubbles. From the beginning of modern finance to about 2000, real rates were usually positive. From 2000 to 2022, and especially from 2008 to 2022, they were often negative and at times near minus 8 percent, with near-zero nominal rates and 8 percent inflation. Borrowing cheaply to buy assets became an easy trade.

He points to big institutions borrowing to buy land and single-family homes, then renting them out to people priced out of ownership. He notes that the total U.S. equity market cap is now around 220 percent of GDP, versus a historically rich level near 100 percent, and that home prices are above five times income instead of a more sustainable three.

He calls a grand reconciliation of asset prices inevitable. Bubbles built on leverage do not fade gently; they rise and then collapse when rates normalize. That is why he is so critical of the classic 60/40 portfolio. The 60 percent stock sleeve is heavily concentrated in expensive AI names, and the 40 percent bond sleeve is threatened by rising yields. When yields rise and stocks fall, both sides can be hit at once. The supposed ballast fails exactly when it is most needed.

Pento’s Model and the Cracked Building

Pento runs Pento Portfolio Strategies and manages long-short portfolios for qualified U.S. investors with at least $100,000. He also publishes a weekly podcast, the Midweek Reality Check, for $50 a year, where he highlights what he considers the most important developments and outlines his broad positioning.

His approach is built on an inflation-deflation and economic cycle model that tracks the second derivative of inflation in the context of growth. He aims to participate in bull markets but step aside or go short ahead of recessions, depressions, sharp deflation, disinflation, stagflation, or hyperinflation. He notes that major breakdowns in 2000, 2008, 2018–2019, 2020, and 2022 were all broadly predictable and that he is currently long with a solid gain this year.

He ends with an image. The financial system, he says, is like a tall building with a cracked foundation and a weakening frame. He will go inside, eat lunch, have dinner, and even attend a dance party. But he will not live there, because he knows it will eventually fall. His job is to spot the warning signs early enough to get out before the collapse.

Stay connected with Michael Pento at his website.