PodcastAdam Taggart | Thoughtful Money®Michael Pento

Real Estate To Drop 30%, Stocks To Fall 50%? | Michael Pento

The conversation centers on a fast-moving risk backdrop driven by Iran-related shocks and rising inflation, which have compressed business-cycle moves into days and kept oil volatile ahead of the midterms. Guests argue the Federal Reserve under Kevin Warsh will prioritize price stability, leaning on balance-sheet tools, and warn that large private AI-related borrowing and existing credit pools ($1.6T private credit, $1.4T CLOs, $1.5T junk) amplify refinancing stress. Markets have already repriced—July's synchronized moves in equities, bonds, and oil—and the guest positions defensively in a 'stasis' allocation while outlining a five-stage macro path that could end in extreme stagflation, for which he favors hard assets and active management.

Recession RiskInflationInterest RatesEnergy MarketsPrivate CreditReal Estate

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Key Takeaways

Iran-related geopolitical shocks since February 28 have compressed business-cycle timing into weeks or days, driving repeated oil-price-driven market whipsaws that the guests expect to keep oil elevated and volatile through the midterms, complicating timely portfolio positioning.

The guest highlights large projected AI-related debt issuance—citing Morgan Stanley's ~$570bn 2026 estimate—adding to already-large fiscal supply and increasing refinancing pressure on markets, which compounds concerns about elevated national debt dynamics.

Benchmarking shows some Chinese AI models (Deepseek V4 Flash at ~3 cents per run) are dramatically cheaper than U.S. flagships, and the guest warns broad adoption could force hyperscalers to cut profit forecasts as routine workloads migrate to lower-cost providers.

The episode argues issuing very long corporate debt (examples ~100–150 bps over Treasuries for 50-year bonds) is implausible given long-run inflation and tech uncertainty, implying future borrowing costs will rise and strain cash flows for leveraged issuers amid cooling semiconductor leadership.

With Kevin Warsh publicly prioritizing a 2.0% inflation goal, the guest expects the Fed to emphasize balance-sheet reduction over hikes, but warns that shrinking reserves could pop concentrated credit risks—~$1.6T private credit, $1.4T CLOs, and $1.5T junk bonds—while broader policy responses risk complicating outcomes.

GEO-POLITICS

Iran Whipsaw — Since February 28 the guests say Iran-related geopolitical swings have compressed business-cycle timing from months or years into weeks or days. That has produced repeated oil-price-driven market whipsaws, making timely positioning difficult and likely keeping oil elevated and volatile through the midterms.

“But usually these cycles Adam take the duration is like months and years. models the business cycle which is a function of fiscal and monetary policy…”—

TECHNOLOGY

AI Issuance — The guest cites large projected AI-related debt issuance (Morgan Stanley's 2026 estimate of roughly $570bn mentioned in the transcript) and warns that this private issuance adds to fiscal supply pressures against an already-large national debt, increasing refinancing pressure on markets.

“There's been there's going to be this is Morgan Stanley's estimate that's not Michael Pento's estimate…”—

Cheaper Chinese Models — Benchmarking cited in the episode shows some Chinese models are dramatically cheaper per run (Deepseek V4 Flash at about 3 cents versus U.S. flagships). The guest warns widescale adoption of cheaper models could force hyperscalers to revise profit forecasts downward as routine workloads migrate to lower-cost providers.

“The price of artificial intelligence just printed a new low. Deepseek's V4 Flash, officially released Friday, costs roughly three cents to run through a standard battery of benchmark tests.”—

ECONOMY

Warsh Tools — The guest notes Warsh's public commitment to hit 2% inflation and frames the Fed's two tools as rate hikes and balance-sheet reduction. Pento argues Warsh is reluctant to hike and will therefore focus on shrinking reserves, noting the Fed's balance sheet grew modestly since Warsh took office.

“He said and very emphatically, we are going to get inflation back to 2%. We will meet our target. And there's only two ways that he can do it…”—

Credit Bubble — Pento warns balance-sheet tightening could pop concentrated credit risks—he cites roughly $1.6 trillion in private credit, $1.4 trillion in CLOs, and $1.5 trillion in junk bonds—and predicts deficits will 'blow out', potentially forcing monetization and further complicating policy.

“Decided now to shrink the balance sheet and that will engender the popping of the credit bubble which is absolutely immense.”—

Stagflation Risk — Drawing on prior episodes of balance-sheet expansion, the guest warns re-liquifying the banking system could push the Fed's balance sheet into double digits and materially weaken the dollar. He says if equities, bonds, and real estate crashed together, the policy response could produce 'hyper stagflation.'

“And the effect this time around when the balance sheet went from 800 billion to four and a half trillion, it was pretty devastating…”—

MARKETS

July Repricing — The host summarizes July moves: the NASDAQ had its worst July in 22 years, bonds saw their biggest July yield spike since 2005, and oil posted its largest July price increase in over 30 years—signaling a synchronized multi-asset repricing.

“Here's some stats about it. It was NASDAQ's worst July in 22 years…”—

Sector Three — In response to whipsaw, the guest says he 'neutralized' portfolios into 'sector three' (stasis): heavy equal-weight S&P exposure plus dividends, some international equities, hedges, and gold (to be increased later). It's a defensive, income-and-hedge-oriented stance.

“So what I have done is I kind of neutralized the portfolio and what that means I've just gone mostly heavy in equal weight S&P 500.”—

Valuation Extremes — The guest highlights extreme equity valuations—market cap about 230% of GDP and price-to-sales roughly 70% above the long-term average—and record margin debt near $1.5 trillion. He warns concurrent equity, credit, and real-estate bubbles increase the chance that tightening triggers a severe correction.

“Right? The price to sales on the S&P 500 is 70% above its long-term average. We have we have $1.5 trillion dollar in margin debt…”—

FORECASTS

Macro Sequence — The guest forecasts a multi-stage sequence: an interim chaotic period with elevated inflation and yields, then a deflationary depression that drags assets down, followed by massive fiscal/monetary reflation to re-liquify the system and an eventual phase of extreme stagflation. He recommends hard-asset positioning in that final phase.

“I do believe the next iteration is going to be a deflationary depression after how however long this sojourn into chaos lasts and reflation and disinflation that that carnival ride…”—

Five-Stage Model — He outlines a five-stage macro model—deflation, disinflation, stasis, reflation, hyper/stagflation—with distinct allocations per phase and says he's presently positioned in 'stasis' (sector three).

“So first off, as I mentioned, your portfolio has or your model has five stages and in each stage it has an allocation for that stage.”—

– July’s painful stats: NASDAQ’s worst month in 22 years, biggest bond yield spike since 2005, oil’s biggest jump in 30+

July saw synchronized market stress: NASDAQ had its worst July in 22 years, bond yields spiked the most since 2005, and oil posted its largest monthly gain in over 30 years, signaling acute market repricing.

– Pento’s proprietary 20-point model and its five stages/sectors

Pento explains his proprietary 20-point model that defines five macro sectors—deflation, disinflation, stasis, reflation, and hyper-stagflation—and uses it to guide allocation decisions.

– Why 2026 has been so difficult: extremely compressed cycles since the February 28 Iran conflict

He argues 2026 has been difficult because the February 28 Iran-related shocks compressed business cycles into weeks or days, creating rapid, unpredictable market swings.

– Current portfolio positioning: neutralized, heavy equal-weight S&P 500, some inflation/disinflation protection, gold &

Pento says his current portfolio positioning is neutralized: heavy equal-weight S&P exposure, dividend income, some inflation and disinflation hedges, gold, and targeted downside protection.

– How the Iran conflict drives U.S. yields higher through Japan, the yen, and Bank of Japan Treasury sales

He lays out the mechanism where the Iran conflict pressures oil, weakens the yen, and causes the Bank of Japan to sell U.S. Treasuries, which pushes U.S. yields higher.

– Long-term outlook: deflationary depression after the current chaos ends

Pento forecasts a long-term endgame of a deflationary depression after the current period of chaos and argues this will be deeper than a recession.

– Clarifying Sector 3 as the current “stasis” / safety positioning

He clarifies Sector 3 (‘stasis’) is his current safety posture—collecting dividends, holding hedges and balanced exposure while awaiting clearer macro direction.

– Sector 1 defined as deflation + recession/depression

Sector 1 is defined as the deflationary depression outcome—severe asset deflation, bank distress, and prolonged weak returns for equities and real estate.

– New Fed Chair Kevin Warsh, his inflation target, and the growing balance sheet

Pento critiques new Fed Chair Kevin Warsh’s stated 2% inflation target and emphasizes Warsh’s focus on the Fed balance sheet as the key policy lever.

– Why the Fed must move from an “ample” to a “scarce” reserve regime

He explains why the Fed must shift from an ‘ample’ reserve regime back to a ‘scarce’ reserve regime to arrest inflation and reduce excess bank liquidity.

– The credit bubble: $1.6T private credit, $1.4T CLOs, $1.5T junk bonds + $570B in AI-related debt expected in 2026

Pento details the scale of the private credit bubble—$1.6T private credit, $1.4T CLOs, $1.5T junk bonds—and warns AI-related borrowing will add hundreds of billions more.

– National debt at 123% of GDP and 720% of revenue — government balance sheet is broken

He highlights the broken federal balance sheet—national debt around $40T, 123% of GDP and 720% of revenue—limiting government ability to respond to the next downturn.

– Next recession likely drives annual deficits toward $6 trillion

Pento estimates the next recession could drive annual deficits toward roughly $6 trillion because automatic stabilizers and policy responses will dramatically raise outlays.

– Preparing clients for another lost decade in stocks

He urges clients to prepare for another lost decade in stocks based on historical precedents and consequences of large valuation compressions.

– Why Pento believes Warsh will eventually attempt balance-sheet reduction

Pento explains why he believes Warsh will ultimately attempt balance-sheet reduction and how that action has historically precipitated market distress.

– Extreme valuations: market-cap/GDP 230%, price-to-sales 70% above average, record margin debt

He points to extreme market valuations—total market cap/GDP ~230%, price-to-sales ~70% above average, and record margin debt—heightening vulnerability to shocks.

– First time in history with concurrent equity, credit, and real-estate bubbles of record size

Pento notes it’s the first time in history that equity, credit, and real-estate bubbles are all concurrently at record or extreme proportions.

– 30-year yields at highest levels since 2007; bond vigilantes taking control

He documents 30-year Treasury yields hitting their highest levels since 2007 and describes this as ‘bond vigilantes’ reclaiming control from policymakers.

– What the bond vigilantes are reacting to: debt supply (AI + Treasuries) + Japan catalyst

He argues bond vigilantes are reacting to massive debt supply—AI-related issuance plus large Treasury rollovers—compounded by Japan’s selling of Treasuries.

– U.S. intervening in the yen market as a short-term band-aid

Pento says recent U.S. interventions in the yen market are only short-term fixes and that solving energy-price pressure is the real solution to BOJ Treasury sales.

– Would the U.S. be in better economic shape without the Iran campaign?

He explores whether U.S. policy toward Iran has materially worsened the macro outlook and concludes the conflict has increased energy and fiscal pressures.

– Implications for the K-shaped economy and the bottom 80%

Pento discusses K-shaped economy implications: a crash in asset prices will likely reduce top-20% wealth while leaving the bottom 80% suffering or worse.

– Expected sequence: bubble burst → banks fail → unemployment spikes → hyper-stagflation policy response

He outlines an expected sequence: bubble bursting, bank failures, sharp unemployment spike, and then a fiscal/monetary response that risks hyper-stagflation.

– Signs the AI mania may be cooling (semis, South Korea, plunging Chinese model inference costs)

He points to early signs the AI mania might be cooling—semiconductor weakness, South Korea corrections, and plunging Chinese model inference costs that compress profit margins.

– Economy already slowing: household survey shows large job losses year-to-date

Pento presents labor data indicating the economy is already slowing—household survey job losses year-to-date—and argues these lead indicators signal deeper weakness ahead.

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Important Disclaimers

Not Investment Advice: For education only — not financial, tax or legal advice.

AI-Generated: Made by AI from source transcripts and may contain errors.

No Guarantees: Past performance does not predict future results; investing carries risk.

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