QE, but not QE 

EG John Powell recently announced that balance sheet growth at the Federal Reserve was 'not quantitative easing'. What impact may this have on U.S. Treasuries and Central Banks worldwide?
 

MP: The Fed is printing $60 billion each month to purchase short-term debt and steepen the yield curve. Jerome Powell claims that his new QE program isn’t QE but what else would you call monetising debt? Central banks are forcing asset prices far above what the underlying economy can support. Eventually, investors will lose faith in fiat currencies and inflation should run intractable. 
 

EG: With recent events at the Fed, how critical are new developments in the repo market for forecasting pertinent economic trends? 
   

MP: Keeping the money markets free of friction is essential to keep the economy and capital markets from freezing up. Remember, the market for overnight money seized-up a year ago and the major stock averages lost between 20-30% in a matter of weeks. The fragile state of asset bubbles requires that monetary fuel is continuously pumped into the banking system. The Fed is caught in its own net. It created these bubbles and now it must supply the liquidity necessary to provide all of that related debt—much of which is distressed--with a permanent bid. My model views credit spreads as a crucial component in determining when the chaos will begin.
 

EG: How far off do you think we are from the asset bubble bursting as highlighted in your book The Coming Bond Market Collapse? 
 

MP: Making guesses for when the long overdue reality check begins is not prudent. However, I believe these bubbles will burst once inflation runs well above central banks’ 2% targets and/or when the junk bond market begins to crash. I’ll keep an eye on those two functions rather than pick a date.
 

EG: Aside from gold and precious metals, what are some industries that we can expect to offer productivity for investors after the crash? 
 

MP: After the crash I would expect investors to do well in an internationally-based strategy that focuses on dividends. Companies that focus on producing green energy and have high levels of free cash flow should do very well. Countries and currencies that return to the gold standard should fare much better after the dust clears.
 

EG: And what impact will there be on an ageing population of retirees when the bond market does finally burst? 

 

MP: Retirees may finally be able to earn a positive real rate of interest in a bank after the crash, but I’m afraid most will suffer the third 50%+ haircut in stocks since 2000. Making matter worse is that they will also witness a huge drop in the principal of their fixed income holdings. In other words, because interest rates are already at record lows their bond holdings will not offset losses from equities. They will need to know when to head out of the market but not too early. Otherwise, they risk losing out of potential gains in stocks and also suffer a decrease in purchasing power while hiding in cash. 
 

EG: Given all of this data, if you could serve in an advisory capacity to the President of the United States on markets and the economy, what would your advice be and why? 
 

MP: My advice won’t be taken well because the global economy has been living in a fantasy world for a very long time. What is needed is to allow interest rates to become a function of the supply of saving vs. the demand for credit. In other words, stop QE and all rate targeting. This would allow rates to rise and prick the bubbles in bonds, real estate and stocks. It will be painful no doubt, but it is the only way to provide for a viable economy. Also, it is the best way to rectify the wealth gap and restore America’s middle class. 
 

EG: What do you predict for the U.S. dollar as world reserve currency, given all of these geopolitical and financial headwinds? 
 

MP: The US dollar is already losing its status as the world’s reserve currency because China, Europe and Russia don’t want to be subject to dollar hegemony. These countries are already taking steps to not only conduct trade without using the dollar but also to back their currencies with gold. Therefore, I do not think the dollar will be replaced by another fiat currency. I believe only a currency backed by gold will be able to supplant the dollar as the reserve currency. This is most likely to occur after the crash.
 

EG: With over 27 years of investment experience, what can global institutional clients expect when investing with Pento Portfolio Strategies? 
 

MP: Trust and transparency are of course crucial. Investors need to know what you are doing with their money and why you are doing it. They will also get a proven strategy that actively monitors the dynamics of the business cycle. I also record a podcast each week called the Mid-week Reality Check and publish a commentary several times a month as well. Investors can expect the best service that is offered for a fee that is much lower than most active managers and hedge funds charge. We also are fiduciaries and put our clients interests before those of our own.   EG