Michael Pento: When The Yield Curve Inverts Soon, The Next Recession Will Start

Collectively, the world's major central banks have pumped $1.1 trillion into the markets over the past year.

The result of all this money printing is now well known: massively inflated real estate, stock and bond asset price bubbles, as well as extraordinary wealth and income gaps across society.

Some day all of this insanity will end. But how? Will it unwind in an orderly and polite way, as the world's central planners hope? Or will be disorderly, resulting in painful portfolio losses and mass layoffs?

Michael Pento, fund manager and author of The Coming Bond Bubble Collapse returns to the podcast this week to offer his prediction that events will most likely take the latter route. In fact, he sees the developing inversion of the yield curve as a dependable precursor to the US economy entering recession as soon as this Fall:

The Fed is now raising rates. They raised rates from 0% up to 2%. They're supposed to do it again in September/October. And again in December. That will be four hikes this year. 

They are also selling assets, aka 'draining their balance sheet'. I say 'selling' because that's exactly what they have to do. Let's say the Fed is holding a 10-year note that's due: if they want to destroy that money, they say "OK, Treasury, give me the principal". The Treasury doesn't have any money so it has to go the public and raise money. Well, the Treasury will have to do that to the tune of $50 billion per month come October. Right now it's $30, it has to go in July to $40 billion a month then it goes to $50 billion. That's $600 billion a year added to the public supply of Treasurys they have to actually finance at a market rate. That's on top of the $1.2 trillion debt we're going to have in fiscal 2019.

So the Fed is tightening. But here's the problem: the spread between long-term rates and short-term rates is about as narrow as it can be without being inverted.

Right now, as we record this interview the spread between the 2 and 10-year Treasury note is just 34 basis points. That means when the Fed tightens rates in September, which they've pretty much promised to do, assuming the 2 and 10-year note stays at that same spread above the Fed funds rate, we're going to have a yield curve that is almost completely flat. And will be inverted when they go again in December.

Why is that so important? Well, when the yield curve inverts it almost always brings about a recession. In fact, I can say pretty distinctly that in modern times, in this fiat currency regime, given the conditions today, it will definitely cause a recession. The reason is because the fuel for asset bubbles is monetary creation, a boosting booming money supply which we don't have any more. And the reason why the money supply gets shut off when the yield curve inverts is because banks' loans are earning less than their liabilities, which are deposits. So when your assets are earning less than your liabilities, you don't make any more loans. You don't want any more assets. That's a great way to make your bank insolvent.

So what happens is that the money supply gets completely shut off. You're not going to make a loan against a deposit -- you don't even want these deposits anymore. By the way, when there's a recession and there's a withdrawal of asset prices, a contraction in those prices usually results in a run on the bank as well. So asset prices get stumped because there's a run on the bank and these deposits get withdrawn. That is what usually causes causes a recession. And that's exactly where we are going to be come the fall, and even closer towards the end of this year.

Click the play button below to listen to Chris' interview with Michael Pento (35m:59s).

This is a companion discussion topic for the original entry at https://peakprosperity.com/michael-pento-when-the-yield-curve-inverts-soon-the-next-recession-will-start/

Recessions are a part of the business cycle, what we should be worried about is the final nail in the coffin of the global economic system. It was nearly lights out in 2008 if it weren’t for bailing out the TBTF Banks. Don’t know if they can do it again. Too much debt in the system after that mess.

Maybe we should go out and invest in thumb drives, instead of wheel barrows? I can put a trillion on a thumb drive no problem.We don’t need no stinking paper!

Good morning folks,
I am a bit confused. First gold is discussed as having intrinsic value, which I interpret to mean that gold has the same REAL value independent of how it is measured in fiat currency. Next the bid for gold is something not to be missed - the next financial wave to be caught.
If there is a huge increase in the price of gold, like say from $1K to $10K, and if gold has a value independent of the fiat currency measurement stick, shouldn’t we care more about how much gold it takes to buy a basket of groceries (another item with intrinsic value) and not the fact that gold is now worth $10K? When a dollar is worth a dime, is it not time to abandon the currency? Maybe before your original dollar is worth a penny?
Next, I have been paying attention to the idea that unsustainable debt will implode someday and that “someday” really should have been yesterday. But that day has not come. Is this a problem with how the world actually is or is this a problem with our model of how the world works? We humans look at the world through the lens of models that help us epxlain how it works. If our models stop working, it usually is not a problem with the world, but is a problem with the lens we are looking at the world.
So I humbly ask, is there somehting that we are missing that is keeping this house of cards afloat?
Thank you,

You have every right to be confused. The natural laws of economics 101 have been thrown out the window by the Banksters and financial magicians. What we have had for the last 30-40 years and more so recently since 2008 are financial and Bankster magicians who are conjuring up every trick in the book so the population doesn’t figure out what’s being done to them, which is basically stealing their/our money.
Think David Copperfield running the banks and you get an idea why the financial, money and banking system makes absolutely NO sense. It’s why banks have multiple owners for the same bars of gold. Think crazy greed. It’s why Chris decided the phrase demoralized is the appropriate term instead of depressed for people.
The population is being hoodwinked by a bunch of hucksters. Think 3 card monty if you will. The House always Wins!
So you have every right to be confused as to why none of this makes any sense and why this entire House of Cards i.e. Ponzi Scheme has not blown up yet.

Chris you should post this on the main page. It’s awesome and I never knew of that experiment and it really does explain a lot about the ill’s and the fighting amongst ourselves.

Is the transcript on the way?