Deja Vu All Over Again: Stocks Plunge; Gold Surges; Markets Ignore Reality (Video)

In the latest Schiff Report, Peter Schiff looks back at the first week of the new year, examining the performance of the US and Chinese stock markets, the price of gold, and a collection of other economic data. Peter was one of the only analysts who insisted gold would rise after the December rate hike, but mainstream financial media and investors seem determined to ignore his warnings. Peter can’t help but see the parallels between today and the years leading up to the dot-com bubble and housing crisis.

The one thing that hasn’t declined since the Fed raised rates is gold… If you remember, everybody was unanimous that if the Fed raised rates, gold was going to tank… But I was saying the opposite, because I knew the price of gold had been falling for years, anticipating the Fed raising rates… In fact, this week alone, the price of gold was up 4%. We closed at over $1100 an ounce. If you want to measure the stock market in gold, the Dow dropped better than 10% this week in terms of gold, which is a horrible week for the market in real terms. And I think there is a lot more coming.”

Follow along with the complete transcript:

Wall Street just finished the worst opening week to a new year in the history of the stock market. The Dow Jones was down another 1% on Friday, to finish the week off better than a thousand points. It was a 6% decline on the week. Now, there have been weeks that have been down more than 6% in the history of the stock market. In fact, we had one about four years ago. But we’ve never had a week this bad in the first week of January.

Now, the media is coming up with all sorts of excuses, at least the financial media, to blame this big decline on. Earlier in the week, on Monday, they were blaming the sell-off on the rumors that North Korea tested a hydrogen bomb. But for most of the week, they were blaming the sell-off in the US stock market on the sell-off in China, despite the fact that China rallied on Friday, and we sold off. The Chinese market was down about 10% on the week, despite the Friday rally. But the US stock market is not falling because of the Chinese stock market. The Chinese stock market and the US stock market are falling for the same reason. It’s not that one is causing the other. They’re both going down, and the reason they’re falling is because of the Fed.

The Federal Reserve raised interest rates, as you know, towards the end of December, and they are threatening to raise them again at least four more times, based on the most recent minutes. And that is what is causing a problem. Because the idea, the belief, that the Fed is going to keep raising rates is putting pressure on the Chinese currency, the yuan, to decline along with a lot of other currencies that have already fallen substantially against the dollar on anticipation of higher interest rates. And it’s the weakness in the Chinese currency that is pulling down the Chinese market. It’s all because of the Fed.

That’s the same reason we’re going down. If you remember, all year, I was saying that I didn’t think the Fed was going to raise rates at all in 2015. And the reason for that, and there were several, but one, I thought the economy wouldn’t be able to handle it. The Fed always claimed that they were data dependent and I thought they were hiding behind that. But I thought that they could use the weak data, which I believed would be coming all year, as cover for not raising rates. And in fact, that was their cover, up until they backed themselves into a corner. They have been hinting or promising that they would raise rates by the end of the year. And when it got to two weeks left, they felt that if they refused to raise rates that it would be an admission that the economy was much weaker than they had been forecasting. So they decided to raise rates anyway, despite the fact that data would have supported that they continue to leave rates at zero. So I said that I thought that the Fed would look at that data and not raise rates.

I also said that I didn’t think the stock market could handle a rate hike, that the market had stopped rising based on the absence of quantitative easing. But if the Fed actually increased rates, the air would come out of the bubble a lot faster. I mean, it was seeping out, but once the Fed put a hole in it by actually raising rates, I thought it would go down a lot faster. So I thought that the Fed wouldn’t raise rates, because I knew that if they did, the markets would tank. So with the economy going down and the stock market going down, I knew that if the Fed raised rates, the next thing they would do is reduce them back to zero and launch QE4, and they would look like complete fools. So in order to avoid looking like complete fools, they would just look like a lesser fool and not raise rates at all, and then maybe claim that they were actually smart when they had to launch QE4, because then they can say, “Oh, you see? It was a good thing we didn’t raise rates, because the economy ended up going back down, and we need more stimulus.”

Instead, they are going to have to come up with an excuse to try to save face, because the economy and the stock market are both going down. In fact, we may already be in a recession. The Atlanta Fed has already downgraded their forecast for the fourth quarter of last year to just 0.8% – point-eight. And I think by the time we actually get the first estimate on the 29th of this month, we could actually have a negative number for the fourth quarter. If you look at all the data that’s coming out, and I’ll get to some of that in a minute, but we can easily have a negative first quarter of 2016, and we’re in recession. And if the economy is in recession, and we are either in a bear market in stocks or close to it, we’re now in a correction mode. I think we’re now off at least 10% from the highs. And I think without the Fed, there’s nothing to stop this market from falling.

Well, they’re going to have to come to the rescue of both the market and the economy with quantitative easing. But if you remember, a lot of analysts were very sanguine about the market’s ability to handle a raid hike. But here we are. The Fed raised rates just a few weeks ago, and the Dow has dropped better than a 1,000 points. Better than 1,100 points, I think, since the Fed raised rates.

The one thing that hasn’t declined since the Fed raised rates is gold. Gold is actually up better than $40 an ounce since we got that rate hike. And if you remember, everybody was unanimous that if the Fed raised rates, gold was going to tank, because, after all, higher interest rates were going to crush the gold market. But I was saying the opposite, because I knew that the price of gold had been falling for years, anticipating the Fed raising rates. So my perspective was, “Well, when finally they do raise rates, well, then, you know, you buy the rumor, sell the fact.” And I thought the price of gold would go up. In fact, this week alone, the price of gold is up 4%. We closed at over $1,100 an ounce. And, of course, if you want to measure the stock market in gold, the Dow dropped better than 10% this week in terms of gold, which is a horrible week for the market for real terms. And I think there is a lot more coming.

Now, to me, what’s happening right now in the economy and in the markets is very reminiscent of what happened in 2001 or 2008. Just before the major meltdowns there, everybody seems oblivious. Of course, in 2001, it was very different, because back then you have the stock market bubble, but the dollar was at record highs and had been rising for four or five years, based on the idea that we were going to pay off the national debt, that we had surpluses as far as the eye can see. The rest of the world was a mess, and everything in America was perfect. Yet, there was evidence that that was not the case. Yet, people ignored it until it was too late, even more so in 2008. Because, by early 2008, all of the problems that I had been warning about for years in the housing market were finally blowing up. You can see that there was a big problem. Yet, everybody was still oblivious.

And, of course, it was very frustrating to me, argue with people in early 2008, people who were telling me that there wasn’t going to a recession anywhere in sight, and we were already in one. People who said there was no housing bubble, and it was obvious that it had already burst. Then they would say, “Well, you know, it’s contained as subprime. You don’t have to worry about it. It’s just in subprime. And I kept saying, ”No, it’s the entire mortgage market. It’s not just subprime.” Well, they’re doing the same thing now, in every aspect.

First of all, look at manufacturing. Manufacturing is clearly in a recession. In fact, even Wall Street bulls will acknowledge that we are in an industrial recession. But then they say not to worry, because manufacturing is a small part of the economy, and it’s contained in manufacturing. First of all, the fact that manufacturing is a small part of the economy, that is a big problem in and of itself, because it shouldn’t be. But to believe that the problems that we’re witnessing are contained to the manufacturing sector, yeah. They’re as contained to the manufacturing sector as mortgage problems were contained to subprime. They’re not. In fact, the biggest irony is that the consumer and the service sector is actually in worse shape than the manufacturing sector. In fact, manufacturing sector could come back at some point. The consumer is going to go down for the count, because the only thing sustaining the consumer right now is credit. The fact that he can borrow money and spend it, and the fact that the things he’s buying are artificially cheap because the dollar is artificially high, because everybody believes that this bubble is a legitimate recovery, and the Fed can actually raise rates without pricking it. But once the dollar turns, and the credit dries up, there goes the consumer.

Meanwhile, all the evidence is already there. That the consumer has run out of purchasing power, despite the fact that we’ve got a better-than-expected jobs report that came out today. And I want to talk about that, because so many people, again, look at the jobs numbers as proof that the economy is strong. Yet, they ignore all the other data points that show that it’s not strong. In fact, all of the data that nobody seems to care about is weak, all of it. Yet, the one data point and the only data point that anybody seems to care about, the jobs numbers, come out strong, at least superficially are strong. But what should really give people pause is that all the data that is weak is forward-looking. The jobs data is backward-looking. It’s the lagging indicator. Employers do not lay people off because they see a recession coming. They lay people off because they’ve been blindsided by a recession that they didn’t see coming. I think all these jobs that we got in 2015 and in 2014, assuming we actually got them…because I think the government may have overestimated these jobs, and they may come back and tell us later on that they were way off. But assuming these jobs are real, I think a lot of them are going to be lost in 2016 when this recession begins. And of course, a lot of these jobs are low-paying jobs and temporary jobs and part-time jobs anyway. But they are going to be lost when the recession begins.

But all the other data shows there’s a recession. What really drives me crazy is when I see these analysts on television, and they actually will acknowledge this dichotomy, and they’ll say, ”Well, it’s kind of strange, there is a disconnect; because, see, you got the great jobs numbers, and you got all this other data is bad.” And their conclusion is that all the other data must be wrong, and that the jobs data are right, which makes no sense, because if you get all these data points and say one thing, and then you get one outlier that says something else, why would you assume it’s the outlier that’s the right information, and all the other information is wrong? Right? The logical conclusion is there is something wrong with the jobs numbers. But no one wants to see it that way. They all want to make lemons out of lemonade, so they are just going to look at the jobs numbers and claim that everything is okay.

Now, let’s get in to the nonfarm payroll number. This was the number for December. It was the last month of the year. And, of course, December is going to include a lot of part-time jobs, because people are hiring for the Christmas season. I mean, how many Santa Clauses do you think all the department stores had to hire for the month of December? Those jobs are in there, right? But, anyway, we were supposed to create 200,000 jobs. That was the consensus. And we came in to 292,000, way above estimates. But not only did we beat the estimate, but they went back to the prior two months, and they revised those up about 50,000 a month each. So we actually got about 200,000 more jobs in the quarter than people had anticipated. Now, the unemployment rate held steady at 5%. The only blemish on this report was our average hourly earnings, which were actually down slightly, instead of up to two-tenths of 1%, which was the forecast. So this was the data point that people point to and say, “Oh, the U.S. economy is strong, because look at all this job growth.” But, again, all this is backward-looking, and all these jobs are going to go away, because all of the other data, including data that came out today, shows how weak the economy really is.

And, of course, it doesn’t even make sense. If the Atlanta Fed is right, if GDP is barely above zero, how is an economy that’s barely growing creating all these jobs? I mean, none of that makes sense. Now, all the data that came out earlier in the week was also bad. But I don’t want to get into that in this video blog, because I already discussed it in two podcasts that I recorded earlier in the week. So if you haven’t listened to those, go to Schiff Radio and listen to my two most recent podcasts, where I go over in depth all the economic data that came out earlier in the week, prior to the fact that we got this jobs report on Friday. But we got two other reports today. Then again, no one is going to talk about these reports because they are bad and because nobody cares. One of them was on wholesale trade, and wholesale trade numbers were bad. And, in fact, this was one of the reasons that the Atlanta Fed revised down their GDP forecast today, because of these bad numbers on wholesale trades. They were expecting a flat number for November. Instead, we got minus three-tenths of 1%, and they went and they revised down the number for the prior month, from minus 0.1 to minus 0.3. But the biggest problem was that inventories were declining on a wholesale level, mainly because sales were declining even faster. Inventories went down, but sales went down even faster. So the inventory to sales ratio actually went up, despite the fact that inventories went down. It’s now at 1.32. This is the highest it’s been since the great recession of 2008, 2009. In fact, the only other time that we have been so high in the last, what, 15 years or so was in 2001, when we were also in a recession.

In fact, there is a lot of data that came out this week where we have not seen data this bad unless we were in a recession. So one or two things are possible. We are actually in recession, which makes sense, because we have all this data that we have never seen unless we are in a recession, or there is something really weird about this recovery, where it’s a recovery that actually looks like a recession. Now, to me, it makes sense that if it looks like a duck, it quacks like a duck, it walks like a duck, it’s a duck. And this recovery looks like a recession and quacks like a recession, and walks like a recession, so you know what? It probably is a recession. It’s just that the Fed doesn’t want to admit it. Because to admit it, the Fed has to admit it’s a recession, they have to admit that their policy didn’t work.

See, meanwhile, Ben Bernanke wrote a book, “The Courage to Act.” And, of course, I said he should have called it the coward’s way out, but he has did a whole book tour proclaiming victory, right? Everything is fine. Well, if the Fed has to go back to zero, then that proves that it’s not. The raising of interest rates was supposed to be the icing on the cake, right? The economy is great, and we are going to prove it by raising rates. See, one of the reasons I thought they wouldn’t raise rates is because they could pretend that they could. Because the minute they actually raise interest rates, they prove they can’t. See, they wanted to pretend the economy was strong enough to withstand the rate hike. But I knew if they actually raised rates, they would prove that it wasn’t, and that is exactly what’s happening. And, you know, the economy was already slowing down before the rate hike, right? They are just accelerating the process.

Now, the other weak number we got today was consumer credit, and consumer credit was supposed to expand. They were looking for $18.8 billion. Instead, we got growth of just $14 billion, right? That’s the lowest of the year. And if you look at auto loans, the growth of those, that’s the lowest in four years. And there’s all sorts of evidence that the auto bubble has burst. I mean, I’ve discussed that in my other podcasts earlier this week. But there’s ample evidence that that Federal Reserve induced bubble in basically subprime auto loans and auto buying has burst. The evidence is crystal clear. And, of course, a lot of this phony recovery was based on people buying cars they couldn’t afford with cheap credit. And as this bubble bursts and all these automobile are piling up on showrooms that nobody could buy anymore, there’s going to be massive layoffs in the auto sector, there’s going to be massive layoffs in the supply chain.

Not only there, I was saying all last year that I thought we were going to have a bad holiday season for the retailers and that the layoffs were going to begin early in 2016. And, sure enough, Macy’s, who has reported lousy results, announced massive layoffs earlier this week. And, of course, more layoffs are coming. Look, the Gap came out today with bad earnings. At Old Navy, the stock price was down 15% on the day. I think it’s back down to where it was…it’s almost at the same price as 2004, 2005. It’s not quite at its 2009 low yet, but it could be there very soon. But all these retailers are blowing up. In fact, the financials are starting to blow up. We’re seeing layoffs there, and so it’s only a matter of time before we start to see some negative, nonfarm payroll numbers.

But, of course, by then, it’s too late to avoid the recession. We are going to be deep in it. One of the most ridiculous excuses I heard today, as to why nothing that’s happening internationally matters, was from Steve Liesman, the senior economist over at CNBC. You know, never believe anything that comes from a television economist. But he was trying to reassure the CNBC audience that we have nothing to worry about from what’s going on overseas. Now, I don’t believe that our stock market is falling because foreign stock markets are falling, but they do. And what Liesman was trying to say was, “Hey, we don’t have to worry. Just because things are bad oversees doesn’t mean they’re going to be bad here, because we are the least globally dependent economy in the world.” This is what he said. He basically said that we’re an island unto ourselves. We’re self-sustaining and self-sufficient. So it doesn’t matter what’s happening to other economies, because we don’t need any other economies. We can function on our own. Now, he acknowledged that that might not be the case for the stock market, right? Because, obviously, we have a lot of multinational companies. And, clearly, what happens internationally affects those companies, and he acknowledged that. But he said the US economy is a different story, and the stock market is not the economy. And the economy can be fine, because it doesn’t matter what happens oversees, because we’re so self-sufficient, and we don’t depend on anybody else. And that is such a laugh, because not only is not that true, it couldn’t be further from the truth, because the United States is probably the most economically dependent country in the history of the world.

Think about it. We run trade deficits of about 500 billion dollars a year, a little bit more. So every two years we have to borrow over a trillion dollars from the world. We depend on the world for all the goods that we’re consuming. All these consumer goods come from other countries. I mean, to say that we are independent, imagine what it will be like in America if we didn’t have any foreign products, if we could only consume the products we produced ourselves. How different would life be in America? Is it possible that we could begin making some of the products that we are now importing? Sure, but they might cost two or three times as much. How many people could afford to buy them? Our standard of living would collapse if it wasn’t for the rest of the world supplying us with all these goods, at prices we could never produce the goods for ourselves.

Also, what about all the money we borrow? Americans can’t spend if they can’t borrow. Where’s all that money coming from? We don’t save anything. It’s the rest of the world that does the saving for us. So they loan us the money that we spend, and they produce the goods that we consume. Yet, Steve Liesman thinks that we are completely independent of the rest of the world, and it doesn’t matter what happens. Of course it matters.

And what’s ultimately going to happen is when the Federal Reserve is forced to acknowledge, for whatever reason, that we are back in recession, and they have got to rev up those printing presses once again, and in an even bigger way – because, remember, when the Fed screws up an economy by keeping interest rates artificially low, right, the lower they are for a little longer, they remain there, the more screwed up the economy gets. And it was pretty screwed up during the financial crisis. I mean, imagine how much worse it’s going to be now. Because Alan Greenspan, he had interest rates at 1%. Kept them there for what, a year and a half? Then he slowly raised them back up to 5%. And during that period of time, he did so much damage to the economy that we had the financial crisis of 2008, and it was almost a repeat of the great depression. Well, imagine the extent of the damage that’s been done in the last seven years. Seven years at 0% interest rates with a balance sheet of four and a half trillion. This is on a level that…it’s like on a Richter scale level. The damage that the Fed has done, is a multiple of what it was before. So this next crisis is going to require a much bigger round of stimulus than the last, if that’s even possible.

I don’t think it is, because I think the next round of stimulus is going to be the last one that we overdose on, right? The real reason that the stock market is tanking and the economy is headed back into recession, it’s not because of North Korea. It’s not because of China. It’s because the Federal Reserve is taking the heroine away, the monetary heroine away from the drug addicts. And even though they’re still giving us some heroine, because, after all, interest rates are barely above zero, the problem is it’s not enough. Because they’ve got everybody addicted to an even bigger dose, and now that they’ve tried to dial back the dosage, it isn’t working, and the withdrawal is already setting in. But the problem is the amount of monetary heroine they are going to have to inject into everybody’s system to try to stimulate us back from this, is going to be a lethal dose. And when I mean lethal, I mean to the currency, and then ultimately the economy.

And that is the biggest irony, because the dollars had this huge rally because everybody believes that this recovery is genuine. Everybody believes that what the Fed did worked, just like they believed everything was great in 1999, early 2000, or just like they believed it was great at the end of ’07 or early ’08. It’s the same people making the same mistake, because it’s the same problem, only bigger. The Fed didn’t solve the problem. It created the problem, and then it covered it up and made it much bigger. And the consequences are about to materialize when we get this reversal. I think the reversal in the foreign exchange market, in the commodity market, in the gold market is going to be very sharp, because people are all going to come to the same conclusion at the same time, and everybody is on the wrong side of the tree. Everybody is positioned for the wrong outcome. And when they realize how wrong they are and that they have to reposition, it’s impossible, because everybody is coming to that same conclusion it was. And the bottom drops out of the market, and you see these huge, huge moves in a very short period of time.

Well, given that the stock market closed on the low of the week, and it is a Friday, there is a potential for a follow-through decline on Monday. And, of course, there could be a lot more weakness coming throughout the remainder of the month. You know, there is an old adage on Wall Street, “So goes January, so goes the rest of the year.” And, generally, the month of January is determined by the first week, and the first week generally gets determined by the first day. And so far, the first day of January was a very good indicator for the first week, and the first week is probably going to be a good indicator for the first month and the first year. And again, the only thing that I believe will stop a full-fledged bear market, and not just a regular bear market, a vicious bear market.

Remember, the last two times that Fed bubbles burst, the Dow lost about half its value. So I think this market would lose at least half of its value, if not more, if the Fed actually were to follow through with its promised rate hikes. The only reason I think that the downside will be limited to maybe 20%, is because I believe the Fed is not going to follow through with these rate hikes. I believe that they are going to reduce rates back to zero and launch QE4. The only question is how much more is the Fed going to allow? How much more pain is the Fed going to allow, and how much longer is the Fed going to deny that the recession is coming, in order to save face and to pretend that A, their policy has worked, and that B, their forecast was correct, and their decision to raise rates was a prudent one.

So keep tuning in, make sure to listen to my podcast, because I will probably do several of them next week. And there’s going to be a lot going on, and you are going to want to get my take on the markets, on the economy, throughout the week. You are not going to want to wait for the next video blog. Again, you can get the podcast at schiffradio.com, or you can watch them on my YouTube channel, Schiff Report. Bye for now.

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