Market Correction May Turn into Bear Market (Video)

CNBC’s Futures Now got Peter Schiff’s take on United States stock market volatility. Peter refuted the idea that Chinese markets may be influencing US stocks, arguing that the Federal Reserve’s lack of transparency about its monetary policy is really to blame. He also briefly discussed the gold market, and why hedge funds shorting the yellow metal could be in for a world of hurt.

Yes, I’d be buying gold. The hedge funds have actually been shorting. Apparently a few weeks ago it was the first time ever that the hedge funds have been net short. Of course, we’ve had an $80 rally in the past couple of weeks. We’ve given back about $20 now. But I think there are a lot of people who are trapped short gold who are going to be in for a world of hurt. In fact, if we get back above $1200, it’s going to be some real pain for those shorts…”

Highlights from the interview:

“In the past, it was the Fed that was there to catch the markets and support the markets and talk about more quantitative easing. But right now, the Fed is still pretending that they’re getting ready to raise rates, which is really what’s behind the stock market sell-off. People want to blame it on China, but it’s not about China. The US market was falling before the Chinese slight devaluation. I wouldn’t get too excited about this turn around Tuesday rally. They are notoriously suspect. I think there has been a lot of technical damage done. If the Fed isn’t going to come out and come clean about the fact that it’s not raising rates, I think this correction will turn into a bear market…

“The surprise that they [the Fed] have is to announce that they’re not going to cut rates and that they’re going to do QE4, which is what I think they’ve been planning the entire time. It’s just that they can’t admit that. They can’t acknowledge that we don’t have a real recovery, that we just have a gigantic bubble. They can’t acknowledge that even a tiny rate hike would prick that bubble. So they have to pretend that what we have is legitimate. And they can’t do that unless they’re going to pretend they’re going to raise rates. But the markets don’t realize they’re pretending. They think rates are going to go up, and that’s why the markets are going down. For a while, people thought the stock market can handle higher interest rates. That was just a pipe dream. They can’t. That’s the only thing propping up the market. The Fed had two props, really: quantitative easing and zero percent interest rates. They’ve already removed the first prop. If they remove the second prop, there’s nothing beneath the market but air. What’s particularly problematic now is normally, when the Fed begins to raise interest rates after having kept them low, the economy is accelerating. The Fed is trying restrain a runaway economy. Corporate earnings are improving. This would be the first time the Fed has ever raised rates as the economy is decelerating, as corporate earnings are falling. The Fed should have raised rates years ago, but they couldn’t do it back then. They waited until the economy was at its weakest point. In fact, it’s teetering on the edge of recession now, and any kind of rate hike would probably push it over the edge. In fact, this most recent decline in the stock market could be enough to do it…

“What the Fed should do and what the Fed will do are two different things. They should raise rates and allow the financial crisis that began in 2008 to finish. If they raise rates, we’re going to have a big bear market in stocks; we’re going to have a big drop in real estate prices; we’re going to have more defaults like we did in 2008. All those too-big-to-fail banks that we bailed out are going to fail again, and they’re even bigger. We’re going to have to let that financial crisis run its course. It’s going to be very painful, but the Fed doesn’t have a stomach for that pain. That’s why it doesn’t want to raise rates, because if it does, it’s going to have to immediately cut them back to zero. It’s going to have to launch QE4, and it’s going to look ridiculous. They’d just as soon stay at zero and look prescient, because they can say, ‘Well, we knew the economy was a little too weak. That’s why we held off. Now we’re just going to do another round of quantitative easing just to make sure everything is okay.’ …

“Gold is only $1140 now. It’s not that far from their price target. But I don’t think higher rates will be bad for gold, because if the Fed raises rates again, it’s going to push the economy into recession. It’s going to push the stock market into a bear market. Then what is the Fed’s response going to be? They’re just going to cut rates back to zero and do more quantitative easing, which is going to be extremely bullish for gold. Meanwhile, people have been anticipating this rate hike for years. It’s the most highly anticipated rate hike ever. It’s already built into the price of gold. So even if the Fed actually raises rates, I think it will be buy the rumor, sell the fact. People will actually buy gold on the rate hike, especially if we do get the rate hike, then the Fed backtracks by talking about how it’s not going to raise rates again, how it’s going to be extra cautious, how it’s going to be extra patient, how it’s going to take a step back. People are going to start thinking it’s one and done. And if it’s one and done, a quarter point interest rate is not going to restrain gold, and it’s not going to restrain inflation. In fact, when people perceive that it’s one and done, we’ll have a huge rally in the price of gold…

“I’ve been a buyer for a long time. Yes, I’d be buying gold. The hedge funds have actually been shorting. Apparently a few weeks ago it was the first time ever that the hedge funds have been net short. Of course, we’ve had an 80 dollar rally in the past couple of weeks. We’ve given back about 20 bucks now. But I think there are a lot of people who are trapped short gold who are going to be in for a world of hurt. In fact, if we get back above $1200, it’s going to be some real pain for those shorts…”

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