Investors must understand that we are living in an unprecedented period in the history of financial markets. We have entered a condition where we are rapidly moving back and forth between inflationary and deflationary cycles. The reason for this problem stems from decades of excess money supply growth, asset price appreciation and debt accumulation in the developed world economies. To be specific, the total level of U.S. non-financial debt is at an all-time high 250% of GDP. Therefore, a secular period of deflation—which is, in fact, a healthy period of reconciliation–is needed to bring those conditions back to sustainable levels. However, the government and our central bank are fighting that rebalancing with unprecedented measures of borrowing and money printing. Meanwhile, global central banks are actively engaged in yield suppression, causing investors to seek income from companies that pay dividends. Market forces now demand that a period of selling assets and paying down debt occurs. However, policymakers and the Federal Reserve find it politically untenable for any period of deflation to take place. Deflation is painful to voters and politicians because they are usually thinking more about the next election, than the long-term fiscal health of the nation. So, the US economy swings back and forth between inflation and deflation cycles as the government steps in and out of market manipulation. When the Fed and policymakers intervene we see inflation occur, and when they are not acting, and market forces take over, and we experience deflation. You need to have active management of your money to profit from this dynamic. Pento Portfolio Strategies (PPS) uses models to determine the future economic condition we will face by analyzing the Fed’s monetary base, bank lending practices, growth in the monetary aggregates, the primary trend of the U.S dollar, the government’s fiscal condition as well as many other metrics not mentioned in this marketing material. PPS also determines if we are in a dollar-neutral cycle, in which a bar-belled approach is deployed between the two portfolios. After PPS determines the economic prevailing condition, a rigorous method of security selection is utilized. That’s because not all asset classes move with the same velocity and in the same direction, so the investment backdrop is not always black and white. For example, during an inflationary cycle, food and energy prices can go up while housing prices fall. The simple reason for this is because those assets that have just exited a bubble may take more than a decade before rebounding. It is vitally important to have your money at a firm with both trust and experience. And it is also crucial that they understand markets and economics. In the most general of terms, here is what our portfolio construction consists of: Our Inflation/Deflation-hedged Portfolio is constructed using primarily precious metals, base metals, energy and agricultural stocks and ETFs during times when inflation is prevalent. During times of deflation, the fund will hold cash and long-USD investments, while shorting growth-related ETFs. Our Global Yield-Enhanced Portfolio owns a basket of globally-diverse ETFs and equities that provide dividends. The fund does not invest in sovereign debt. A covered call strategy is utilized to enhance the stated yield. PPS utilizes a comprehensive risk management strategy to help lock in gains and limit losses in our portfolios. PPS risk management employs covered call and long put option strategies. It is PPS’s policy to never use leverage in the management of client’s money. When investing your money, you want someone with experience and someone that you can trust. And you want to be treated fairly. PPS’s motto is “Analysis without an Agenda”.

Michael Pento is a well-established specialist in the Austrian School of economics and a regular guest on CNBC, Bloomberg, FOX Business News, CNN and other national media outlets. He is also the author of, “The Coming Bond Market Collapse”. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, a contributing writer to TheStreet.com and is a blogger at the Huffington Post.

 

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