Bubbles Popping on Wall Street for New Year (Audio)

Wall Street ended the year on a sour note and wrapped up 2015 down on the year for the first time since 2008.

Peter Schiff believes this is just a sign of things to come. He’s been saying consistently that the December Federal Reserve rate hike was likely a one-time deal with another round of quantitative easing and possibly negative interest rates in the future. Why? Because the data simply doesn’t support the economic optimism the rate hike was supposed to represent.

In episode 127 of his podcast, Peter looks closely at the numbers, and makes the case that despite the Fed’s desperate attempt to tell us otherwise, we are heading toward recession and bursting bubbles.

The economy is clearly weakening every way you want to measure it, and it’s kind of ironic that the Fed waited until the very moment that the economy was at its weakest point of the year to raise rates, which again proves to me that the Fed was never data-dependent. If they were data dependent, either they would have raised rates a long time ago or they wouldn’t have raised them at all. What they really were is calendar-dependent…When it got to the last two weeks of 2015 and rates were still at zero, they were afraid to leave them there because they didn’t want to send a message that the economy was much weaker than they thought, and that they were wrong.”

Follow along with the complete transcript.

Well, let me begin the final podcast of 2015 by wishing all of my listeners a very happy new year.

It certainly wasn’t a happy New Year’s Eve day on Wall Street today. Normally, the last day of the year is a positive one. You normally have a Santa Claus rally, and it continues on to New Year’s Eve. That wasn’t the case today. The Dow Jones finished out its first “down” year since 2008, down 178 points. We were down a little more than 2% on the year. The SMP was also negative on the year. NASDAQ, though, managed to gain about 5% or so, I’m not sure exactly. It was its weakest gain, or smallest gain, in a number of years.

Of course, I’m hearing a lot of people wanting to blame the weakness on oil prices, even today’s decline on oil prices, but the entire year seems to be being blamed on the drop in oil prices. I mentioned this before but the transports were the weakest index of the year. I think they were down about 17% in 2015. Now, that is the index that is the biggest beneficiary of lower oil prices. Clearly, if the transports are the weakest of the indexes, the weakness can’t be because of the cheap oil. It’s got to be another reason, and again, I think it has to do with the economy.

Oil is being impacted by a weakness in the economy and so are economically sensitive stocks like transportations. Another interesting element of today’s sell-off is something that I’ve been observing now for some time. The market not only closed on the lows, but made its lows on the close. I mean, we’ve been seeing this now, where the last 10, 15, minutes has some violent selling. We got to down about 150 at one point earlier in the day for a minute. The DOW actually almost rallied back to unchanged, not quite. I think I saw it down only about 20 points, but then it rolled over. Going into the last hour, or last half hour, it was still down 100, 110, but just got clobbered again. In the last final seconds, it was down more than 180 points.

All of this selling into the close, to me, shows that something big is going on here. You’re getting some professional selling at the end of the day. Early in the morning on the open, maybe you get some of the retail guys just putting their orders in to buy the market at the open. But I think you get more professional-type selling when you sell market on close, and I think that’s what’s going on. Obviously, people are bracing for a very weak 2016 to follow on with 2015. Remember, the Fed had interest rates at zero for all of 2015. It didn’t raise them to a quarter a percent until the waning two weeks of the year. Imagine how the DOW is going to have to contend with the threat of rising interest rates as 2016 continues.

The other problem for 2016 is the economy. We got more evidence of an extremely weak economy. In fact, I had mentioned on one of the earlier podcasts that the Atlanta Fed GDP now has already got the fourth quarter estimate down to 1.3. Based on the numbers that we got today, my guess is that maybe even next week, the first week of the new year, they’re going to be ratcheting those estimates down again. First of all, we got the weekly unemployment numbers. Of course, this series has been very, very low for a long time. It really has one place to go, and that’s up when you’ve got such record low numbers. In fact, the weekly unemployment claims, we’re getting numbers we haven’t seen in like 40 years. Clearly, that has to change. I’ve been saying it was going to change next year because I do believe that the retail shopping in the holidays was not what people were expecting. In fact, you have record amounts of inventories which need to be worked out.

I do think that there’s a lot of layoffs coming in January. Apparently, a lot of the employers couldn’t hold off until January and they started the layoffs in December. We got the biggest increase in unemployment claims in a week in ten months – in fact, closer to eleven months. Since February, we haven’t seen a jump this big. We had a 20,000 increase. We got 287,000, and that number is the highest number of unemployment claims in five months. The four week moving average is also at the highest it’s been in five months.

Now remember, when Janet Yellen raised interest rates a couple weeks ago, the basis for the decision was supposedly to strengthen the labor market. No sooner did the Fed raise interest rates based on the strength of the labor market, now the labor market is rolling over. I think it’s got a long way to go on the down side. Again, unemployment is a lagging indicator. It doesn’t lead. It doesn’t tell you where the economy is going; it tells you where it’s been. So if you have low unemployment, that might tell you the economy has been strong, but it doesn’t tell you anything about where it’s headed.

But what is more indicative of where it’s headed is the Chicago PMI number which came out a little bit later in the morning. It was abysmal, probably one of the worst economic reports of the entire year to close out 2015. Last month we got 48.7, which was weak – below expectation – in contraction territory. They were looking, as they often are, for an improvement in December over November. They were looking for a bounce back to 50, which would still not be a good number. But instead of improving to 50, the index crashed all the way down to 42.9. That is a horrible number. That is a huge miss, number one. It is the lowest number since 2009, since we were in the Great Recession. Supposedly, we’ve now recovered from the Great Recession to the point where the Fed can finally raise interest rates after keeping them at zero for seven years. Now we have the worst Chicago PMI since we were in the depths of that Great Recession.

By the way, this is not just manufacturing. This encompasses services as well. This is a horrible, horrible number. In fact, if you look beneath the surface, the new orders are way down but there’s one series on order backlogs that has now been down for 11 months in a row. This is the worst performance in that component since 1951. 1951! That was, what, 12 years before I was born. You’ve got to go back to find a year where that series was that bad. This is some pretty bad numbers.

In fact, if you go back and you look at Chicago PMI, the only time we’ve really been at anywhere near this level in the past was during the recession. We were there during the Great Recession of ’08 and ’09. We were also there briefly during the short recession of 2001, 2002. We were there during the recession in the early 1990s. In fact, even during that recession, the ’90, ’91 recession, the PMI did not even…I guess it got this low, just barely. Just barely touched this level. Then it was down at this level, a little bit lower, in the recession in the early 1980s. That was the one with Paul Volcker, when Ronald Reagan first came in and interest rates went up to 20%. Yes, we got a Chicago PMI that got down this low. But we’ve got the Chicago PMI this low with interest rates at zero! Well, they’re not zero anymore, they’re 0.25. Imagine where the Chicago PMI would go if we had to jack interest rates up to where we were in 1980. Imagine where we’d go if we just raised them another one or two percent. This is unprecedented if we’re not in a recession because we’ve never had this index registering such a low number when we were not in a recession.

It is possible that we are in one. It is possible that the 1.3% estimate for fourth quarter GDP is too high. Maybe it’s going to come out as a negative number. If it is a negative number and if the first quarter’s a negative number, then we’re in a recession. Although, it’s possible that they will originally report the fourth quarter GDP as positive and maybe even the first quarter, but then later in 2016, go back and revise the data to show that we were in fact in a recession. That’s what they did with the Great Recession. They didn’t report. The recession started in the fourth quarter of 2007 but we didn’t know that. We didn’t know that, I think, until the end of 2008, early 2009, just when the recession began, because the government went back and revised all their data. So, we didn’t know it until well after the fact. It’s very possible that they’ll do the same thing again.

But also, another reason that I believe that the economy is weaker than the numbers suggest is because the inflation rate is being under-reported. If the inflation rate is actually a couple percentage points higher than what is being officially recognized in the GDP deflator, then obviously we’re in a contraction. We’ve been in a contraction during most of this recovery, if not the entirety of the recovery, which might explain why we’re getting PMI data like this. Because if you only get PMI data this bad when we’re in a recession, and now we have PMI data this bad, what is the logical conclusion? Well, we must be in a recession, right? If the only time we get it this bad is if we are in a recession and we’ve never had data like this when we weren’t in a recession, then it certainly makes sense that we’re in one. And if it’s not being reported, it’s probably because the numbers are not accurate, because I believe what’s actually happening in the economy, not what the government is pretending is happening in the economy.

Despite these horrible numbers – and I was watching the markets pretty closely when these numbers came out – and as bad as they were, they did not provoke any reaction in the currency markets, in the precious metals markets, nothing. My guess is that if we had had a really good Chicago PMI or a big drop in unemployment claims, the dollar would have spiked up on that, maybe gold would have sold off, but we get horrible numbers and nobody seems to care. It’s because, you know, I think we’ve been getting so many bad numbers for so long that nobody even pays attention anymore because people have decided that it doesn’t matter how bad the data is, none of the data matters because the Fed doesn’t acknowledge it. The Fed doesn’t want to accept it. It’s like no one wants to believe the economy is weak until the Federal Reserve actually comes out and admits it officially. As long as they’re ignoring all the data, then everybody wants to pretend that everything is okay.

Probably the only data that the markets won’t ignore is the payroll number. That’s because jobs are all the Fed seems to talk about. Jobs, jobs, jobs. Once we see the official confirmation of all the other data with the back-up and unemployment, which I think, maybe it started already, this report that we just got in the final week of 2015, this big spike in claims, this might be the beginning of the new upward trend where unemployment claims keep rising and the unemployment rate, the official rate, keeps rising and the number of jobs that we’re creating is diminishing. And remember, we got a lot of states and cities that were dumb enough to increase their minimum wages effective January 1 of 2016. A lot of companies are going to be under increased pressure to reduce the number of employees that they have or certainly cut back the number of hours because they don’t want to have people with overtime, certainly. That’s just going to add to the pressure of a weakening economy.

The economy is clearly weakening every way you want to measure it, and it’s kind of ironic that the Fed waited until the very moment that the economy was at its weakest point of the year to raise rates, which again proves to me that the Fed was never data-dependent. If they were data dependent, either they would have raised rates a long time ago or they wouldn’t have raised them at all. What they really were is calendar-dependent. They were running out of time. They had been talking about how they believed the economy would be strong enough for a rate hike all year. And then when it got to the last two weeks of 2015 and rates were still at zero, they were afraid to leave them there because they didn’t want to send a message, (a), that the economy was much weaker than they thought, and (b), that they were wrong. They thought the economy would be strong enough for a rate hike, but in the end, they didn’t hike rates because it wasn’t strong enough, so they were wrong. What they decided to do was to look foolish later rather than look foolish at that time in December.

A lot of people, they want to say, “Oh, Peter Schiff was wrong. Peter Schiff said that the Fed wasn’t going to raise rates.” That’s not exactly what I said. What I said was, I didn’t think the Fed would raise rates, that I thought the odds were that we would not get a rate hike in 2015 because I thought the Fed would be smart enough to realize that if they did hike rates in 2015, that they would look like complete idiots to have to reduce them again in 2016. I said, “If the Fed is smart, they’re not going to raise rates.” I gave them the benefit of the doubt. I thought that they would be smart, because I knew that the data would be bad enough for them to justify not raising rates because they said they were data-dependent. The data clearly showed that a rate hike based on their criteria was not warranted. But I always said, “It’s possible that I could be wrong and that the Fed will raise rates anyway, that the Fed will raise rates even though the data doesn’t support it.” And then I said, “If they do that, if the Fed does make a mistake…” and again, it’s a mistake from their perspective, not from my perspective, right? Raising rates is not a mistake. In fact, what’s a mistake is not raising them more. The Fed needs to raise rates a lot more, not because the economy can handle it but because it can’t, but because this economy is a bubble and we need to prick it – the sooner the better.

I’m not naive enough to think we can raise rates and everything’s going to be great. It’s not. Everything’s going to fall apart. There’s going to be a huge crisis. But that crisis is part of the solution to the problem, and unfortunately, we need to endure that pain. “No pain, no gain,” and that’s true in economics as well as athletics or weight lifting. From the Fed’s perspective, raising rates is a mistake if they ultimately have to reverse direction and lower them back to zero. What I said all along was, “If the Federal Reserve raises rates – I don’t think that they’re going to raise rates – but if they do…” and I never said it was impossible that they could raise rates, I just said it was likely that they wouldn’t, that it was a higher probability that they wouldn’t raise rates than that they would. Although, as it got closer and closer to that meeting, you could certainly see from my last podcast I did about “data be damned, rate hike ahead,” by then I was pretty sure that they were probably going to raise them.

But what I’ve always said was that if they do raise them, they’re going to have to cut them, that they’re going to have to abort the tightening cycle and they’re going to have to go back to zero and launch QE4. If that actually happens, if the Fed does end up having to reduce interest rates back to zero, then I wasn’t wrong, then I was right. I said, “One or two things are going to happen.” I said, “The most likely scenario is the Fed doesn’t raise rates at all because they’re smart enough to recognize how dumb they would look if they raised them and then had to reduce them.” But I also said that I could be wrong and the Fed might be dumb enough to actually raise interest rates in 2015, which they did in December, and now they’re going to have to go back and cut them again and look like fools, which is what’s going to happen. If that happens, then I was right.

Most people out there that thought the Fed was going to raise rates in 2015. First of all, they thought they were going to raise rates a lot earlier in 2015, so they were wrong about that because the Fed waited until December. All those people think that the Fed is going to keep raising rates and that QE is over and we’re off of zero, that that’s history, that that era is over and now we’re…we have years and years to go of this recovery in this bull market and we’re going to have a tightening cycle. That ain’t going to happen. If that does happen, then maybe you could say that I was wrong. If the Fed ultimately has to abort this tightening cycle prematurely and go back down to zero and relaunch QE and crank up the printing presses again and warm up those helicopters that are in the hangars, then I was right.

I think that the economic data certainly shows that I was right. Look at the stock market data. What happened in 2015? Why was 2015 the year that the stock market didn’t really go up? Because that’s the year the Feds stopped supporting the market. Now, they didn’t remove the props completely. They stopped doing QE and they talked about raising interest rates. They didn’t do it until December, but it was that headwind that hurt the market. Without the Fed coming in with additional stimulus, the markets weren’t able to make any more headway. It’s not just the stock market that’s rolling over; the bond market appears to be rolling over. Look at the yields on the 30-year treasuries and look at the price of the chart there. The real estate market, looking at the numbers that have come out recently, the real estate market looks to be rolling over. And higher mortgage rates are certainly not going to help the real estate market. They’re just going to be another nail in the coffin.

All of these asset markets, which still had some Fed support in 2015, but which supposedly have no support at all in 2016 – and in fact, have the opposite of support with the Fed threatening to raise rates even further – the Fed is now working against the market. What’s that old Marty Wagg expression, “Don’t fight the Fed.” I don’t think anybody will until ultimately the Fed gets back on the side of the markets and tries to prop them back up again. I don’t believe the Fed is going to be able to use the stock market as an excuse this time. They’re going to have to wait until they get economic data that is very weak, and it’s not going to be the type of data that we’ve already gotten because it’s already dismissed that data. I think the only thing that the Fed can really act on is going to be weak job numbers, which they very well may get. We may start shedding them out for our payroll. We may start to see some upward movement in the unemployment rate.

And also the GDP numbers. Again, we’re going to get probably a very weak number for the fourth quarter of 2015, which will make the entire year probably the weakest year of the entire so called “recovery” and the beginning of the next recession. If we do get these weak GDP numbers also for the first quarter, then that number too might be something that the Fed would use as a rationale for reducing interest rates and launching QE4. Remember, the Fed, when it raised interest rates, is still looking for growth 2.5 to 3%. That was also what it was basing its decision on. If that deteriorates along with the employment outlook, then the Fed is, of course, going to be doing something, because it is an election year. The Fed is not going to sit idly by and watch the economy slip deeper into recession and basically destroy Obama’s phony legacy. That’s his whole claim to fame, right? “I inherited a disaster and now everything is better. I saved everybody.” Bush screwed up the economy and Obama came in and everything is better. Well, if we’re back at a recession as he’s on his way out – we started in a recession and he ended in recession – that’s a very different legacy. That’s not something that’s going to sell very well at the polls. It’s not going to be something that Hilary Clinton can run on if she wants to run for four more years of Obama, because, obviously, if we’re in a recession, nobody wants four more years of that.

I think the Fed is going to do everything it can to artificially stimulate the economy. Of course, it won’t work. It hasn’t worked at all in the past. The only thing it’s done is stimulate the stock markets and allow us to go deeper into debt. Eventually, the day of reckoning is coming, and I think 2016 is going to be the year that that is reflected in the markets, both in the foreign exchange markets and the precious metals market.

Gold finished the week on a down note, another down year, the third consecutive calendar yearly decline for the price of gold. I can’t remember the last time that’s happened. I don’t think it’s ever been down for four years in a row, so it’d be very, very abnormal to see gold down in 2016. In fact, I think 2016 could be a huge, huge up year for the price of gold. Of course, I’ve said this in the past, but of course, as each year goes by and the problems that are making me so bullish on gold get bigger and bigger…there’s so much bearishness now. I mean, I thought they were bearish at the end of 2015, but they’re way more bearish now.

And of course, gold didn’t fall as much as people thought. Everybody was talking about $700, $800 gold, certainly gold below $1,000. Gold was not nearly as weak as everybody thought it was going to be when the year began. Everybody is looking for even more weakness in 2016 with record short interest among the hedge fund community. These hedge funds have been making a lot of bad bets, and being short gold is one of them. And also being long the dollar is the other one because everybody is expecting the Fed to continue to raise rates in 2016 albeit at a slower pace than what the Fed is hinting. What really is going to surprise everybody is not only that the Fed doesn’t raise rates but that the Fed lowers them again and does QE4, and none of that is in the gold market. None of that is in the foreign exchange markets. In fact, even if the Fed doesn’t lower rates but it just refuses to raise them, that should be very, very negative for the dollar and very, very supportive of gold.

The opposite has already been reflected in the price. Of course, if the overseas economies end up being stronger than is currently forecast and we start to actually see rate hikes coming from other countries rather than the Fed so that we reverse the narrative – the Fed is easing while everybody else is tightening or other nations are tightening, not necessarily everybody. The consensus is so wrong on this and the trade is so crowded on the opposite side that when everybody rushes to move at the same time, we could be talking about a massive move, really a crash, huge decline in a short period of time in big markets like the foreign exchange markets.

I’ve seen certain currencies, emerging market currencies, I remember in the Asian economic crisis when you saw the Thai baht or the Malaysian ringgit or currencies like that drop 10% in a day, but the dollar…a couple of percent is a huge move in a currency like the dollar or even the euro or the yen, drop 2% to 3%. It happens, but it’s pretty rare. I would be surprised if we really start to see the numbers that I think we’re going to see and the Fed reacts the way I think they’ll react. We could see a huge move down in the dollar, 5% to 10% in one day in the U.S. currency.

Of course that wouldn’t be the end of it. That might be the beginning of a much, much bigger move, which is one of the reasons why I feel so confident that people should not be trying to time this thing and just maintain your positions outside the U.S. dollar despite the fact that it’s risen recently. This is the nature of bubbles. They always get bigger than you think, but they pop. If you’re on the sidelines and you’re trying to time it, it gets very, very difficult to get back in. The bigger the bubbles are, sometimes the longer they can go. But once they end, they end with a “bang,” and I expect this bubble to be no different.

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