Exclusive Interview: Michael Pento

Michael Pento is a straight-shooter. He has had an adventurous career in finance which gives him a very grounded view of how markets work. He started as at a discount brokerage house, graduated to an assistant floor trader at the New York Stock Exchange, and ultimately landed as Chief Economist at money management firm Delta Global Advisors.

Although most Wall Street economists promote advice to help make rain for their banking clients, Michael sinks or swims based solely on how well he performs for his investing clients. Luckily for them, Michael has made some great calls including some macro sell calls in March 2000 and May 2006.

In addition to managing money, Michael frequently appears on CNBC and writes a popular column at greenfaucet.com. Michael and I had a chance to discuss his career, the affect the Federal Reserve has had on our currency, and some advice for how investors should proceed in this environment ...

Damien Hoffman: Michael, you have had a diverse and adventurous career in finance. Can you share your story with our audience?

Michael: It all started when I was a young boy asking my father why he was watching some stupid business stuff on TV. After being forced to listen, I realized I loved what I was hearing and I had a propensity to understand the financial environment.

After graduating school I decided to make finance my career. I started with a discount brokerage house. I was later promoted to the New York Stock Exchange where I worked as an assistant trader for stocks like Disney. That experience taught me how the mechanisms of the stock market functioned -- the raw nuts and bolts of trading. Over time I developed a small following of traders and specialists who wanted my take on the markets. So I eventually left the NYSE and opened my own retail shop. After several more years of experience, I was offered a great position as Senior Market Strategist at Delta Global Advisors. Currently, I am Chief Economist at Delta Global.

Damien: That’s a very nice variety of market experience. What were some of your best moments during those years?

Michael: I am most proud of making some huge macro contrarian calls when the rest of Wall Street was on one side of the boat. For example, during the Y2K frenzy and dotcom bubble I stepped back and sold all my clients’ internet stocks in March 2000. Likewise, in May 2006 I sold my home in Florida which had appreciated over 60% in less than two years. At the time I was writing in great detail why I thought the housing and real estate markets were in a bubble. So, I’d say my best moments have come while being a contrarian and getting it right.

Damien: Unlike the Jim Cramers who look like geniuses on the way up and Nouriel Roubinis who look like geniuses on the way down, you have done a good job going with the market cycle both ways. How did you know when to exit given that many permabears got out years earlier and the permabulls got axed in the crash?

Michael: First, I had to be an independent thinker. I am not influenced by everything I read or see. That is a very critical reason for my success. I like to compile and process my data without being unduly influenced by someone I think knows more than I do.

Second, I had to have a solid fundamental economic thought process. I have my own models in which I run my data so I can reach my own conclusions. Then, I have to hold on to those conclusions despite the “experts” coming on television saying I’m wrong.

For example, let’s look at the housing market in 2006. In the spring and summer of 2005 I was writing about why I thought the housing market was overpriced based on population growth, wage growth, construction rates, demographics, inflation rates, money supply, and more. Every metric I studied pointed to an overpriced market. I didn’t care if the National Association of Realtors came on television and said, “Home prices have never declined on a national level in the history of the United States.” That was true at that time, but my analysis was telling me to get out.

So, I’d say my success is the result of thinking independently, doing my own homework, and maintaining my position no matter the herd opinion on the Street.

Damien: How has your experience on the exchange floor influenced your work as an economist?

Michael: Trading on the floor taught me to be neutral and have no agenda. Most people in the media are there to push their own particular agendas. For example, if you are a retail sell-side analyst, you must come to a certain conclusion to generate revenue for your firm. I have never had that position -- and I would never want it.

My goal is to make my clients money. So, I have to go where the market is going rather than where my banking clients want me to go with their stocks. Also, I am a proud American, but I don’t get caught up in the BS about staying a bull because I am wrapped in the American flag. I look at one thing only: I treat my clients’ money like it’s my own and look for the best place to earn a real after-tax return. If that leads me to Chinese assets, gold, or even a US Treasury, I would take that position and stand by my conclusion. As a side point, I would never invest in a US Treasury at this point. [Both laugh]

Damien: You recently wrote an article sarcastically stating that the Fed has “prevented all recessions, defended our currency and have prevented all asset bubbles from occurring.” Can you explain the point you were making?

Michael: I was trying to show the lunacy of certain people who constantly follow the mantra of being bullish. While I was debating Mr. Mark Vitner of Wachovia on CNBC, he went off the deep end explaining how great the Federal Reserve has been for Americans. I am very educated about the history of the Federal Reserve and money. So, Mr. Vitner was completely incorrect. Since 1913 the US Dollar has lost over 95% of its purchasing power against gold. The Dollar has lost 13% of its value against a basket of six other flawed fiat currencies since this March. That’s a long term crash by any measure -- it’s an absolute disaster.

The US Dollar is under attack. This is the way the US Government and Federal Reserve have decided to make our debts less valuable. They are making it much easier to payoff our debts by increasing the inflation rate of our currency. It’s much less painful than taxing the citizens -- so, it’s a tax without consent and in many cases without knowledge.

Damien: Last week I spoke with Congressman Alan Grayson who, with Congressman Ron Paul, is pushing hard for legislation which will mandate transparency of the Federal Reserve’s actions. What do you think about this mission?

Michael: It’s way overdue. If I had my way, I would close down the Federal Reserve. They are completely unnecessary. If you look at the history of the United States since 1913 we’ve had an endless series of recessions, asset bubbles, unstable prices, and a destroyed currency. If we simply allowed money supply growth to be commensurate with increases in the work force and productivity, we will have a sound and stable currency as well as prices. And, stability in your currency brings about stability in prices, which are necessary conditions for economic growth.

When the Federal Reserve artificially increases the money supply we get inflation. When we get inflation, that money is never evenly distributed throughout the economy. Rather, it goes to pay off debts. You never see the money spent to benefit the retirees living on a fixed income or the poor. The inflation alone kills these people. Basically, those who cannot afford assets move from the middle class to the lower classes.

Why is the middle class in this country disappearing? Because of the Federal Reserve and our banks. Through the fractional reserve system, banks have helped expand the money supply to the detriment of those not able to borrow those funds.

Damien: Given this phenomenon, how do you recommend middle class investors proceed?

Michael: The next great asset bubble to pop will be the US Treasury bubble. There is an almost 30-year bull market which has built to a bubble. The 10-year Treasury is yielding about 3.5%. If anyone out there thinks inflation will be 3.5% over the next 10 years, I will order them a straight-jacket. This is impossible when you have a monetary base which has doubled in the last few months alone and a Federal Reserve that is going to expand its balance sheet to over $3 trillion. If and when the Fed ever decides to unwind their positions, interest rates will skyrocket.

So, I would be short Treasuries. I would keep an eye on the US Dollar. If it continues to decline, I would pick up precious metals, base metals, and energy -- all of which have a history of holding value during a monetization effort by the Fed. I would also put a significant portion of money overseas. Some of the emerging markets -- Singapore, Hong Kong, Brazil -- will offer more opportunities to grow your money safely. Make sure you own diversified mutual funds which pay dividends. Dividends were once the primary way people made money in the stock market. That’s before we had this speculation economy.

Damien: Michael, you’ve had an adventurous career from the exchange floor to a macro economist on CNBC. What advice do you have to those who are interested in following your path?

Michael: Do what your heart and mind tell you your best at. Do what you love to do. If you can’t live without being involved in this industry, then follow your dream. I followed my dream by combining my analytical skills with my writing skills. If you can come up with great ideas and communicate them, you will get picked up by the major media outlets. But this will only happen if you have a passion for what you do. So, find you passion, follow your heart, and your dreams will come true.

Damien: That’s great advice. Michael thank you for taking the time to share your interesting story and thoughts about the Fed and markets.

Michael: Anytime, Damien. I really enjoyed talking with you.

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