Wall Street’s Dismal 2016 Could Be a Sign of Things to Come (Audio)

The new year began with a bang that made Wall Street whimper as stocks sold off on the first Monday of 2016. The Dow suffered its worst opening day of the year loss since 2001. As Peter Schiff pointed out in his podcast, this doesn’t bode well for the upcoming year.

There’s an old saying, you know, so goes January, so goes the year. And so goes the first week of January, so goes the entire month. And so goes the first day, so goes the first week. So, if that’s the case if it’s all one domino after the other and it starts with the first day. Well, you know, this was about as bad a first day as it’s going to get.”

In Podcast 129, Peter goes on to make a pretty compelling argument that we are on the verge of a crisis much bigger and much more pronounced than what happened in 2008. Peter said all the signs point toward a dollar and sovereign debt crisis that’s going to be profoundly felt by average Americans in their wallets. He points out that the Fed and the markets are still ignoring the actual data, but ultimately they will figure it out. When that happens, we can expect falling interest rates and more quantitative easing.

Follow along with the complete transcript:

The U.S. stock market opened the first trading day of 2016 with a bang, but not the type of bang that the bulls were hoping for. The Dow was down 276 points. Of course it was down as much as 450 points in the last hour of trading. In fact, we opened down about 300 and change and sold off to down 400 pretty quickly. And we hung around the down 300 to down 450 level for most of the day. In fact, down 276 at the close, was about the best level of the day.

In fact, I think they did try to break the market for new lows in the last hour. I saw it get down to minus about 430. But buyers came in and bid the market back. Of course, not all the way back. But we did have some buying coming in.

The NASDAQ closed down 104. I think around its lows, it was down about 150 points. The Dow Jones Transports continues to get crushed. Again the weakest index on the day down – another 2% – down 156 points. We’re now down more than 20% from last year’s high. We are officially in bear market territory in the Dow Jones Transportations. And again, don’t try to blame this on weak oil prices, because the transports benefit from weak oil prices. This is all about the economy and economic weakness. These are economically sensitive stocks, and that’s why they’re suffering.

Now a lot of the carnage was blamed on China, because the Chinese market was down 7% overnight. I think that was the worst first day of the year in the history of Chinese stocks. Of course they have had days where the market has swung by those big percentages, but apparently not on the first trading day of a new year. And the supposed catalyst was a weaker than expected Purchasing Managers’ Index, PMI, coming out of China. And you know, I don’t believe for a second that the market was down 7% based on that report.

First of all, there were two PMI’s that were released. One of them actually was slightly better than estimates. And the one that was slightly below this was the one index it came in at 48.2 versus expectations of 49. I mean, that’s not that bad. In the prior month it was 48.6. So it was supposed to increase to 49; it went down to 48.6. The other one beat estimates by as much as this one missed. So it really wasn’t that big a deal, yet, you know, it’s the only thing that they can blame it on. I think that the Chinese market, for whatever reason, might have gone down the same amount even if this PMI had beaten estimates, right? I think this is just the excuse for the decline.

But the irony of it all is we just released our own Chicago PMI on New Year’s Eve. I went over this in my most recent podcast before this one. And our number was way worse than the Chinese number. We were expecting 50, right? An improvement from 48.7 to 50. Instead, we went down to 42.9 and we missed by a mile. I mean, our PMI number was way worse than anything that comes out of China. Yet somehow if there’s bad economic news in China, Oh my God, that’s terrible. But bad economic news in the United States and no one even cares. It’s a non-event. I mean, why?

Because Janet Yellen and the merry men over at the Fed tell us that everything is awesome and so we can ignore all the evidence that it’s not awesome? I mean, far from awesome, it’s pretty horrible. Yet, you know, if there’s bad news out of China, it’s bad news. Singapore, they reported a GDP number, I don’t remember the exact number. I think it was over 5%. It was a really, really strong number. And the attitude in the market was, “Oh, we don’t believe that. There’s no way that number is that good. We’re going to wait and see if the government doesn’t downwardly revise it.” It’s like if there’s good news coming out of another country, nobody wants to believe it. And if there’s bad news coming out of the United States, no one believes that either simply because the Fed’s narrative is still out there.

And look, we got more bad economic news. Today we got another PMI manufacturing number that was supposed to be 52.8. It came in at 51.2. But even worse was the ISM number. This was the December number. Last month was 48.6. It was supposed to improve to 49.2. Instead, it worsened to 48.2. So it missed by a full point. That’s a bigger miss than China.

And yet nobody even cared. Also, construction spending was a huge miss. The consensus was for a gain of 0.7. Instead, we lost 0.4. But it gets worse because last month the gain was supposedly a full point. So they expected an additional 0.7% increase on top of last month’s 1% increase. Instead, they reduced last month’s 1% increase to an increase of just 0.3. 0.3. And now from that 0.3, instead of growing 0.7, we went down 0.4 – so a terrible number. In fact, the numbers that came out today were so bad that the Atlanta Fed, which had just recently revised down its forecast for Q4 GDP, right, the quarter that just ended last week, they were at 1.9. And a week ago or so they went down to 1.3. Well, today they went down to 0.7. In fact, on my last podcast, I said soon the Atlanta Fed is going to be taking their estimate of fourth quarter GDP down below 1. And sure enough, they did it today – 0.7.

But we have a lot more bad economic data that’s going to come out between now and the end of the month when we get the first look or first estimate of fourth quarter GDP. There is a pretty good chance that it’s going to be sub-zero. That it is going to be a negative number, which means we’re halfway to a recession. And I think if we have a negative GDP in the fourth quarter, we’ve got a better than 50/50 chance probably of having another negative GDP in the first quarter, which means we are in an official recession all over again. Hey, just in time for the Fed to raise interest rates again.

Not.

In fact, now more people are coming out. There was an interview I saw with Jim Grant on CNBC this morning, saying basically the same thing that I was saying over a year ago – saying that he thinks the only reason that the Fed raised interest rates was because they backed themselves into a corner. They had been talking about it for so long. They were stuck or they felt that they had no choice; that they had to raise rates, even though the data didn’t merit it based on their criteria; that the Fed will regret this decision and that they’re far more likely to reduce rates back to 0 then to raise them again to 1.5.

Now I don’t know if he’s come to that conclusion because he’s been listening to my podcast because he’s a pretty smart guy. So he might have come to that conclusion on his own. But I came to it a long time ago. But for some reason, you know, when he talks about it, CNBC seems like they take him seriously, you know? If I say something like that, I’m crazy. I make outlandish forecasts. Well, you know, I made the forecast a long time ago. It’s a lot easier. I don’t know. Maybe Jim Grant’s been saying the same thing for over a year or two. But there are some other people that now are starting to think, “Hey, is the Fed gonna raise rates again?” I knew that they were going to raise rates again. And as I said before, I knew that if the Fed made the mistake, and again, it’s only a mistake from their perspective, of raising rates, that they would regret it because they were going to have to reverse their decision because the economy would be very weak.

And it is weak and the market is weak as well.

So you’ve got a combination of a weak stock market and a weakening economy. In fact, last year, the markets were down. And it’s an interesting thing because normally, in years that end in 5, there’s only been one year ending in 5, up until 2015, going back to 1885, 1885, there was only one year where the Dow Jones was down in a year ending in five. And that was in 2005. Now the S&P was actually up 3% that year. The S&P has not been around for as long as the Dow. And the S&P has never had a year that ended in 5 when it was down – until now – until last year when both the Dow and the S&P were down.

And also, the year prior to a presidential election, there hasn’t been a year where the market was down in a year before a presidential election since 1939, during the Great Depression. And that was a re-election of FDR. So 1939, the first time that we’ve had the year before a presidential election, presidential election year, where the stock market went down was last year. So we’re getting a lot of firsts. And of course, today the drop on the first trading day of the year, this was the biggest percentage drop, even with the rally at the end of the day, this was the biggest percentage drop on day one in 84 years. So you wouldn’t have stuff like this happening if it wasn’t the beginning of much bigger moves.

And this is what is coming. I mean, if the Fed really were going to raise interest rates like everybody thinks, this market would get crushed. The only reason that I don’t believe the market is going to get completely crushed is because I think the Fed is going to come to its rescue. The question is when? When are they going to change their rhetoric? When are they going to soften their stance? And how are they going to go about it?

You know, think about this, and I never really talked about this, but if you’d look back at how the Fed eased, the first thing they did, right, was lower interest rates. They brought interest rates down to zero. And then when that didn’t work, right, it didn’t produce enough of a stimulus, that’s when they did quantitative easing. They did 1, they did 2, they did Operation Twist, they did 3. Now the Fed has decided that they’re going to raise interest rates. And then after they raise interest rates, they’re going to eventually shrink their balance sheet. To me, that seem like it’s the backward way to do it. I mean, if the Fed really was going to shrink the balance sheet, wouldn’t it start shrinking the balance sheet while rates were still at zero? Right? Because if you want to reverse the process, you lower interest rates to zero, then you crank up your balance sheet by doing quantitative easing. You would think the next thing you do would be shrink your balance sheet back to normal, and then complete the process by raising interest rates, right? You would just reverse what you did. Why is the Fed skipping the shrinking of the balance sheet and going directly to the raising interest rates? Because when you raise interest rates, you diminish the value of all your bonds.

Remember, because of Operation Twist, the Federal Reserve has a lot of long-term government bonds on its balance sheet. And what makes those bonds less valuable? Higher interest rates. So if the Fed really was intending on selling those bonds, wouldn’t it do it before it raised interest rates? Not after, when the bonds collapsed in value? Now the only way that they can get out of this is if they hold the bonds to maturity. But now you’re talking about bonds that don’t mature for twenty years or so. So, you know, you can’t shrink your balance sheet.

Janet Yellen was talking about getting the balance sheet back down to where it was before the financial crisis by the end of the decade. That’s another way you know the Fed is not telling the truth. Because if the Fed really intended to shrink its balance sheet, it would do that first. And then it would start raising interest rates. But I think the reason it’s raising interest rates instead of shrinking its balance sheet is because it has absolutely no intention of shrinking its balance sheet. Because you can’t. Because if it tried to sell those bonds, bond prices would collapse and long-term interest rates would go up. So instead, they’re just nudging short-term interest rates a little higher. But don’t worry; this is not going to last. They’re going to reverse this process and they’re going to do QE4.

Now in other markets, the oil market open firmer based on all the tension now between Saudi Arabia and Iran but it couldn’t hold its gains. Of course, back in the days when oil prices were in a bull market, this type of tension in the Middle East would have resulted in a much bigger pop in the price of oil. Instead, we got a rather muted rally. And of course, it was quickly sold off. But I do believe that a lot of these speculators who are jumping short every time oil upticks are going to get caught in a huge reversal when the dollar reverses. And of course, the dollar did not reverse today. It was weak against the Japanese yen. In fact, that was the only currency today that was higher against the dollar. Earlier in the morning, the dollar was down against the euro, and the Swiss franc, and the British pound. But the dollar reversed those losses and rose. The commodity currencies were again among the weakest. The Aussie dollar, Canadian dollar, which was initially higher with the higher oil prices, went down.

The one currency that wasn’t down isn’t a currency at all, but money. Gold. Gold was up all day. It wasn’t anything big. It started up about 10-12 bucks. At one point, after we got that really weak economic data, gold did manage to rise to about up $22-23. It got back above 1080, which I think is kind of a key level. But then it surrendered a lot of those gains and kind of ended up back where it began in the morning, up about 13 bucks, just below 1075. But of course, gold in terms of other foreign currencies was very strong again today. Gold stocks were among the only consistent winners throughout the day. They were pretty much in the green all day long and gold stocks were positive. There were a few other, some oil names that actually managed to be positive. Almost all the stocks were negative but the gold stocks were the one standout.

Of course, they’re still very cheap. And we’ll see how this week unfolds. But remember, there’s an old Wall Street saying. You know, so goes January, so goes the year. And so goes the first week of January, so goes the entire month. And so goes the first day, so goes the first week. So if that’s the case if it’s all one domino after the other. And it starts with the first day, well you know, this was about as bad a first day as it’s going to get.

And you know the fact that we did have some bargain hunting, right, or so they think, coming in at the close probably shows that we’ve got more downside to go. And of course, you know, we have had some real vicious last half hour sell-offs. And maybe some people were anticipating that. And so we didn’t get it. I mean it can’t be that easy, right? The market can’t just collapse in the last half hour every day. Otherwise you just sell the futures and you make a bundle. So I think some of the people might have been looking for a late selloff and so we didn’t get it. And some of the shorts who were looking for it covered. But we could have some more selling coming in tomorrow. Though tomorrow, reversal Tuesday, maybe we’ll have a rally. Maybe we’ll have a rally in China or someplace else. But if we gap up on Tuesday, there’s probably a good chance that that rally is not going to hold, that we’re going to get a sell-off. Because until the Fed changes this dynamic, then I don’t see what’s going to prop up this market if everybody believes that rate hikes are coming.

But if the economy is weakening, if earnings are under pressure and you’re fighting the Fed, I mean, there’s not a lot to this market. And if you look at the technicals of the market, you look at the trends that have been broken in the S&P, in the NASDAQ, and in the Dow, I mean there’s a lot of technical damage to this market. It’s going to take some kind of a game changing event. But you know, to me the denial that’s out there is even stronger than it was. Again, I mean, I remember doing these television interviews in early 2008. I mean, people were as clueless as they could be. I mean, there was so much economic data out there, so much data about the problems in the mortgage market, the problems in subprime. Yet nobody could see it. Everybody was oblivious. Especially the Fed. This was in early 2008. I mean, we were right on the cusp. And to me, we are on the verge of something much bigger, much more pronounced than what happened in 2008.

It’s going to be a crisis that’s going to be far more profoundly felt by everybody. It’s going to make a much bigger difference. To the average American – if you don’t have money in the stock market, you don’t own a house – I mean 2008 wasn’t that bad. Some people lost their jobs and most people didn’t. But prices went down, oil prices went down. So it wasn’t that bad. But I think what’s about to happen because we’re going to get a dollar crisis. We’re going to get a sovereign debt crisis. I think this is going to be profoundly felt by average Americans in their wallets, who are already hurting from diminished incomes. But I think we’re going to see a big increase in the cost of living when this crisis hits. Because as soon as the people who are so convinced that everything is awesome and that everything the Fed did work, right, that the Fed solved their problems, when they realize that the problems are bigger than ever, that none of them were solved, that all we did is cover them up with stimulus and 0% interest rates, quantitative easing, and we just kicked this huge debt can down this long road, and we’ve just caught up to that road, and here’s the can again, and it’s now too big to kick.

And when people realize the predicament that we’re in…and all these trades that were made, these big bets that were made based on all these positive scenarios of Ben Bernanke being the hero and saving the economy and everything being great. And now, Janet Yellen took the baton and, you know, all she has to do is declare victory and, you know, raise interest rates and that’s it, you know, game over, everything is great. When people realize that they believed this nonsense for years and none of it is true, when we’re right back in a bigger hole than we first started in, the Fed’s got to launch the next round of QE when the balance sheet is already at $4.5 trillion. And now they’ve got to start cutting interest rates and they’ve got to start the cuts from a quarter, which means they can’t stop at 0. They’ve got to take them negative. When people realize that every single thing they believed about the U.S. economy, about this recovery, about the Fed, when they realize that all of it was wrong, then they have to unwind all the trades. Because all the trades were wrong. These are all bad bets that were based on a premise that is totally incorrect.

In fact, the opposite of what people have been expecting is what’s going to happen. And as we get closer and closer to this event, it seems to me that people get even more and more oblivious. Although, I did hear when I was watching on CNN this morning when Joe Kernen was talking with Jim Grant, you know, he almost starts to question this. Like, “Well, maybe, maybe all this didn’t work. And maybe we, maybe we just postponed the pain. Maybe we prevented things from healing. I mean, maybe these asset bubbles…” I mean, he starts saying like he’s been reading my stuff. Of course, he would never admit to that. But he probably does. But they only start to question it on a big down day, right? When things get…when you get the Dow down 400 points, some of these anchors start thinking, “Yeah, you know, maybe we did drink the Kool-Aid. Maybe it’s not going to work out.”

But then of course, the next time the Dow is up, I mean that they’re right back in their same old mindset. But every once in a while, like a kernel of truth comes out there and they start to question the narrative. Well, imagine what’s going to happen when they really have to acknowledge that the narrative was false. Because once the Fed has to lower rates, once they have to admit that they were wrong about this recovery…imagine, you know, waiting for seven years to raise rates, saying you’re dependent on the data, and waiting maybe until you’re actually in a recession, imagine if we do find out that when the Fed raised rates, we were in a recession.

You know, I think…in a commentary I wrote recently, the average rate of economic growth during a recovery when the Fed raises rates for the first time in a tightening cycle is better than 5%. In this quarter, it could be below 1%. I mean, the Fed has never raised interest rates, certainly for the first time when the economy was growing this slowly. And of course, that’s if you believe these doctored up inflation numbers, which I don’t. I don’t believe at all. So I think the economy is actually much weaker than what the official numbers would claim. And in fact, I think it’s interesting that everybody wants to talk about the Chinese numbers, right? And the Chinese government comes out with numbers. And everybody says, “Oh, we’re not going to believe these numbers, right? Because they’re not going to be honest, because they’re from the government.” Well, but why would our government be any different? Does anybody think that our politicians are going to any more honest than the Chinese politicians? In fact, if anything, you might think that ours are going to be less honest. Because ours have to get elected. The ones in China don’t. So if you’ve got to get elected, I mean you’ve got a greater incentive to lie to the voters that you’re trying to get to vote for you. So if anything, I would question the statistics coming out of the United States.

And look, I think all politicians have reasons to be dishonest. They want people to think it’s better than it is. But why nobody can accept the fact that the same thing is happening in the United States? But even if you take the government’s numbers at face value, the economy is barely growing any way you want to measure it.

You know, we’re going to get some more information on Wednesday; we’re going to get the trade deficit. And you know, if you look at what’s happening with trade, both imports and exports have been contracting all year. I mean, it’s been horrible. We’re importing less and exporting less. It’s just that our imports have been falling more slowly than our exports. And so our trade deficits are getting worse. But we’re going to get the non-farm payroll number. And that’s coming out on Friday. And that’s going to be a big number because it might actually be pretty bad. Because we got the jobs numbers, the weekly unemployment numbers, that came out on New Year’s Eve. And I went over this in the last podcast, which showed the biggest jump in weekly unemployment claims in ten months, to the highest level in six months, and it seems like the layoffs might have started early. I’ve been saying for a long time that I thought that we’d start to see a lot of layoffs in 2016. Just like businesses accumulated all kinds of inventory they don’t need, they also hired workers that they don’t need, and they’re going to be getting rid of the inventory and the workers in 2016. And it looks like some of the employers jumped the gun and already started. Of course, remember, about fourteen states were dumb enough to raise their minimum wage on the first of January. So that’s an extra incentive for companies to lay off more expensive workers. You’ve got also the extra problems of Obamacare. So this could be a huge number.

And it is the only number, maybe, that the gold markets and the currency markets might actually pay attention to. Because that’s what Janet Yellen is claiming she’s looking at. She’s claiming she’s looking at employment. So if we see a jobs number later in the week where we see a spike up in the unemployment rate and/or a minimal number of nonfarm payroll jobs created…and eventually, I think maybe not this number, but I think maybe in the January or February number, we might actually see a negative non-farm payroll number where the government reports a net decline in the number of jobs, and that is something I think the markets will not be able to ignore.

Attention listeners: I have an urgent message for you. We’re in the middle of a war. And the global conflict is destroying the lives of millions without a single bomb being dropped. It’s called the international currency war. And your bank account has been drafted to fight. The victims in this conflict are our currencies: the dollar, the euro, the yen, the pound. They’re all heading to zero as irresponsible central banks compete to see who can print the most the fastest. But there’s one form of money politicians and central banks can’t destroy. Gold. Today it’s more important than ever to understand the value of gold in your portfolio and to keep a close eye on major market developments. Subscribe to my monthly videocast and you’ll be the first to hear my latest analysis on gold investing and the currency wars. Visit goldvideocast.com right now to subscribe for free. I called the dot-com bust, then the housing bust.

And I advised clients to diversify into foreign equities and hard assets, while the rest of Wall Street laughed at me. Now I want to keep you up to date on the next crisis that is brewing. My Gold Videocast also includes personal interviews I’ve conducted with other contrarian investors, like Jim Rickards and Axel Merk. Gold has gone up 256% since 2003. But it has a lot further to go. Don’t miss the rally. You can prosper during this time of currency wars, but only if you stay educated. Get a free subscription to my gold videocast at goldvideocast.com. That’s goldvideocast.com.

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