"Analysis Without An Agenda"
"The Last Will Be First and The First Will Be Last" Matthew 20:16
Pentonomics

Central Banks vs. Pension Plans

Illinois officials have been frantically working on a massive 5-billion-dollar tax increase to stop the major rating agencies from downgrading their debt to junk.

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About RIA

Mr. Michael Pento serves as the President and founder of Pento Portfolio Strategies. This Registered Investment Advisory Firm (RIA) is designed to operate like an actively managed fund, but without all the expenses. Our firm operates two distinct portfolios. The Inflation/Deflation Hedged Portfolio focuses our trading strategy towards the secular trend of rising inflation, but we don't hold a static portfolio. The fund uses proprietary macroeconomic models and technical analysis to move between inflationary and deflationary strategies designed to profit from shifts in the domestic and global economy. The Global Yield-Enhanced Portfolio uses covered call writing to augment the yield derived from ownership of a basket of international ETFs and individual equities that offer superior dividends. We charge 1.5% per annum on Assets Under Management, with lower breakpoints depending upon the level of AUM. We think this model is superior to all others in that it allows the average investor the ability to have their money actively managed by professionals, without paying the unreasonable fees associated with a hedge fund. And as an added bonus, you will also have direct access to both myself and my team via email or phone, so there will never be any walls between you and your money.

PENTO PORTFOLIO STRATEGIES INVESTMENT OVERVIEW

In November of 2011, I founded my money management firm, Pento Portfolio Strategies, for the purpose of preparing clients investments for the upcoming debt crisis. I realized a few years ago that the United States faced an entirely new paradigm – namely, that onerous debt levels had reached the point where the central bank would be forced into a difficult situation; either to massively monetize the nation's debt or to allow a deflationary depression to wipe out the economy.

In this current environment, our government is compelled to seek a condition of perpetual inflation in order to maintain the illusion of prosperity and solvency. However, once inflation causes asset bubbles to increase, the central bank shuts the monetary spigot and deflation returns with a vengeance. The longer an economy stays addicted to inflation, the more sever the eventual debt deflation will become. As a result, our central bank is now walking the economy on a tight rope between inflation and deflation.

I developed the Inflation/Deflation strategy with the understanding that we are living in an unprecedented period in the history of financial markets. We have entered a condition where we will be moving back and forth between inflationary and deflationary cycles.

The reason for this problem stems from decades of interest rate manipulation, 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, both public and private, is at an all-time high 350% 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 asset price correction 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.

Our Inflation/Deflation Portfolio model is an active managed strategy to profit from this dynamic. I modeled my RIA to operate like an actively managed fund, but without all the expenses.

Our Model Portfolio uses a proprietary macroeconomic model to determine when and how to invest across an inflation/deflation spectrum. The portfolio is designed to profit from shifts in the dollar and real interest rates. We believe the model is superior to all others in that it allows the average investor the ability to have their money actively managed by professionals, without paying the unreasonable fees associated with a hedge fund.

This model stands in contrast to the routine asset management strategy promulgated by so many portfolio managers. The typical portfolio manager will suggest that the average investor sit out their losses and wait for recovery: that they buy and hold. What they fail to mention is that the larger the loss, the larger the required subsequent return just to get back to even. And recoveries can take years.

And here are some facts things to keep in mind:

  • For the S&P 500 Index, it took nearly 8 years to recover from the 2000 bear market
  • It took 5 years to recover from the 2008 bear market
  • It took 13 years just to get to even when you look at returns from 2000 – 2013
  • And take a look at the Nasdaq - 15 years of lost returns.

Yet, the vast majority of investment professionals are going to put you in their plug and play model according to your age and cross their fingers that as one asset class crashes – namely stocks - it will be off-set by another asset class – namely bonds. And this strategy did hold up during the last market meltdown in 2008 – as equity prices plummeted, bonds did get a bid.

But what you need to know is that we are headed into unprecedented times. With interest rates at unapparelled historically low levels, it is almost certain that stocks and bonds will go down in tandem. And what a majority of advisors deem to be a "diversification", over the next 3 to 5 to 10 years will not be diversifying your risk but diversifying your losses.

Therefore, I encourage you to sit down with your current investment advisor and ask them how they believe you will reach your investment goals with a bear market in both stocks and bonds. But if their advice is to sit through this coming recession with a 40% or more drawdown in both markets, you might ask yourself whether you have the time or the wherewithal to go through that again. And if you are one of the many retirees, that need distributions to support your retirement during a portfolio drawdown, the math gets even harder.

The objective of the Inflation/Deflation strategy is to, over a full market cycle, outperform a buy-and-hold strategy with less volatility. The Inflation/Deflation model is designed to be global in nature, highly liquid and flexible enough to adapt to volatile market environments. It's designed to profit from the market no matter what cycle we are in.

"Analysis without an Agenda" means that we put your needs first. We have freed ourselves to let the data and model guide us where we should be.

Pento Portfolio Strategies Important Disclosures

Past performance is no guarantee of future results. This white paper is intended to provide general information about PPS, its strategies, and its products. It is not intended to recommend any security, financial product, strategy or instrument. No mention of any strategy, product or security constitutes an investment recommendation by Pento Portfolio Strategies or Michael Pento.

No statement is intended to be an offer to or a provision of investment advice or opinion regarding the nature, potential, value, suitability, or profitability of any particular security, portfolio of securities, transaction, product, or investment strategy. Different types of investments and strategies involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this presentation will be profitable, equal to any corresponding indicated historical performance level (s), or be suitable for your portfolio. Diversification and asset allocation do not ensure a profit or guarantee against loss. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from PPS, LLC, or from any other investment professional. Any investment decisions an investor makes should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, financial condition, and liquidity needs and any other information the investor can provide to their investment advisor. Investors should request Form ADV Part 2 for a complete description of Pento Portfolio Strategies services or go to www.adviserinfo.sec.gov.

Strategy Risks and Considerations The strategy discussed herein has a limited operating history that advisors and investors can use to evaluate past investment performance and also has a limited history of operating in a declining market. Thus, the Portfolio may not achieve its investment objective and the portfolio's value may decrease. The portfolio will have a relatively high turnover, which could lead to high taxes for a taxpaying investor. Exchange Traded Funds, trade like a stock and there may be brokerage commissions associated with the transactions in the portfolio as well as other potential custodial costs if transactions costs are charged. While the performance presentation has attempted to quantify those, they could be materially higher in the future, which could result in lower returns to the investor. Typically, fees are generated on an asset under management basis calculation. ETFs may have underlying investment strategy risks similar to investing in commodities, bonds, real estate, international markets or currencies, emerging growth companies, or specific sectors.

Investors should carefully consider whether such trading is suitable for them in light of their financial condition. The portfolio will not perform the same as the benchmark over time and there is a significant risk of tracking error, particularly in markets that are flat but have some volatility around a reasonably flat market condition (i.e., choppy markets). In these cases, the portfolio may underperform the markets and such underperformance could be material.

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.

Here’s what you need to know about the functionality of our portfolio modeling system.

Our Portfolio Strategy Implementation

Pento Portfolio Strategies 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.

We also determine if we are in a dollar-neutral cycle, in which a bar-belled approach is deployed between the two portfolios.

After we determine 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.

Pento Portfolio Strategies utilizes a comprehensive risk management strategy to help lock in gains and limit losses in our portfolios. Our risk management employs covered call and long put option strategies. It is our firm’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. Our motto is "Analysis without an Agenda". Please give us a try.

Mr. 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.

On this site you can find all of Mr. Pento's latest commentaries and media appearances. Potential investors can get a free subscription to Mr. Pento’s weekly pod cast called "The Mid-week Reality Check" delivered into their mailbox. You can also leave your contact information in order to learn more about Pento's Portfolio Strategies.

Pento Portfolio Strategies

Pento Portfolio Strategies does not place client funds into pooled investment vehicles

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Investments are not FDIC insured, are not guaranteed by a bank/financial institution, and are subject to risks, including possible loss of the principal invested.
Securities offered through Charles Schwab Institutional Brokerage.
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