Fed Will Sacrifice Dollar on the Altar of the Stock Market (Video)
Peter Schiff appeared on CNBC this week with a dire warning on America’s economic future – “It’s gonna be awful!”
Do you guys remember the financial crisis of 2008? Did you think that was bad? This is going to be worse.”
Peter said this time around, we’re not looking at a financial crisis. We’re staring down the barrel of a currency crisis. Ultimately, the central bankers and government policy makers will sacrifice the dollar on the altar of the stock market. Their main goal is to make sure the stock market doesn’t crash again. Peter said they might succeed, but only at the expense of the dollar.
So we’re going into a currency crisis, and this crisis is going to be much bigger than a financial crisis. The impact it’s going to have on the average American, on his standard of living, on his way of life is going to be much more profound. And sure, people won’t lose as much money in their stock portfolio, but if they try to sell their stocks and spend the money, the purchasing power that they lose is going to be much greater then what was lost in ’08.”
Peter went on to defend his position, arguing that the only reason the dollar is so strong right now is because people actually believed Federal Reserve policy is working. What are people going to do when they finally figure out that it was a failure and we’ve been in a phony recovery?
Follow along with full transcript:
Female Host: Let’s go bear hunting with Peter Schiff President and CEO of Euro Pacific capital. Peter, good to have you with us.
Peter: Good to be in the studio.
Female Host: Does it matter to you that they’re coming over to your bear side? I mean does it make you worried because you’re the contrarian?
Peter: No because they’re just still little cubs, I mean they haven’t really matured into a full blown bear yet. They have no idea just how bad it’s gonna be.
Female Host: Okay, so how bad is it going to be?
Peter: It’s gonna be awful. But, you know…
Female Host: How much worse, because since we saw you last we got a jobs report that some people will say was terrible.
Peter: Well you guys remember the financial crisis of 2008? Did you think that was bad?
Female Host: Yes.
Peter: This is gonna be worse. But it’s not necessarily gonna be concentrated in the stock market. See I think that the government, the federal reserve, their main goal is to make sure that the stock market doesn’t collapse again, to make sure that the real estate market doesn’t collapse again. And they may succeed, but only by sacrificing the dollar. And so we’re going into a currency crisis and this crisis is going to be much bigger than a financial crisis. The impact it’s gonna have on the average American, on his standard of living, on his way of life, is gonna be much more profound. And sure people won’t lose as much money in their stock portfolio but if they try to sell their stocks and spend the money, the purchasing power that they lose is gonna to be much greater than what was lost in ’08. And of course ’08 gave way to a huge comeback in 2009. So we got saved. We’re not gonna have that kind of reprieve again.
Male Host: Peter, first of all thanks for coming into our gym and you make a lot of very important points. I think a lot of them I actually agree with. I mean we’re in a place here where Federal Reserve is, I think there’s financial oppression going on, I think a lot of people are truly suffering. But the problem is how do you play that? And to me all I’ve heard from you for the last five years or six years is that the market’s going to hell in a hand-basket, or that the dollar’s going to hell, and that treasuries are going to 6 or 7% yields. And in fact really almost the opposite has happened. So I’m curious on how you’re positioned now and ultimately what you’ve been doing over the last couple of years to counter treasury yields that have fallen a couple hundred basis points. A dollar, as we say, our dollar, your problem. The dollar does what it wants to do, and the dollar until proven otherwise is the global reserve standard.
Peter: Well first of all, I haven’t been saying stay out of the stock market. I’ve been saying stay out of the dollar; I’ve been saying buy foreign stocks. And that trade worked until about 2014. That’s when the dollar started to rally. And the dollar only started to rally because everybody believed that the Fed’s program actually worked. That we had a real sustainable recovery, the Fed could actually normalize policy, raise interest rates, shrink its balance sheet, and everything was gonna be fine. That’s why the dollar started to rally. So it’s only been a couple years. But now, people are just beginning to realize that that wasn’t true, that the policy didn’t work. In fact, it not only didn’t work it made everything worse. We’ve dug ourselves into a deeper hole. People are gonna find that out now and the fed can’t raise rates when they have to go back to zero and when they have to do QE4. And so I think the dollar’s gonna implode. Meanwhile, look at the trade, right? You mentioned this DOW hit what above 18 thousand today?
Female Host: Yes.
Peter: What is it up 3% on the year? The average gold stock is up 90%, the average silver stock is up maybe twice that much.
Male Host: But talking about gold stocks in a very, I think kind of convenient fashion, I mean the reality is you know Barrack sure it’s up from 6 to 18 bucks but I mean what were we doing from 53 down to 6? And it’s very easy to say “Oh I’m long gold stocks now” but you’ve been long gold for 3 years.
Peter: No I’ve been long gold stocks really for, since 1999, 1998 so it’s been a roller coaster ride. And we had some opportunities to take some profits and we’ve been able to add to our positions. But if you look at even the non gold stocks, I mean the US markets are standing still. I have just my strategies that don’t even include gold stocks are up about 15% this year so far and we’re only half way through the year. And I think by the end of the year those strategies could be up 50%. So we are making back the paper losses of the last couple years very quickly, but this trade is just getting started. Because the dollar is falling and gold is rising when people still expect the fed to raise rates. Imagine what’s gonna happen when they expect a cut.
Male Host: So let me ask you this. So, because of what the fed has done, they pushed money out into the world. We have $9 trillion of dollar denominated foreign debt. Foreign companies have taken out this debt in US dollars. If the economy starts to get weak, they’re gonna have to pay back that debt. Doesn’t that support the dollar? And that to me is the bull case for the dollar.
Peter: No in fact, as the US economy gets weak the burden of repaying those debts becomes easier and easier because the dollar goes down. But you know that’s gonna be the problem, because once the US economy, once the Fed has to admit that we’re in recession, what are they gonna do? They’re gonna cut rates; they’re gonna start printing up a bunch of money; the dollar’s gonna tank, commodity prices are gonna rise, and all of the sudden a lot of the emerging markets are gonna be in better shape. A lot of the countries that were hurt by the strong dollar and by the fear of higher fed rates, all of the sudden those economies are gonna take off and those dollar denominated debts are gonna become easier and easier to service. The problem’s gonna be in America, because here’s what’s gonna happen with the Fed. Because even though the Fed hiked rates in December real rates are lower today than they were in December because inflation has increased by more than that pour to point rate hike. And that’s gonna continue, so imagine what happens when the fed starts cutting rates as inflation is getting worse and then real rates really tank and then the dollar just drops through the floor?
Male Host: So Peter, given the power at this time to make you Fed share, what’s the first thing you do? How do you get us out of this problem that I think in a lot of ways I agree 100% with you? How do we solve it?
Peter: Well, we have to do the opposite of what we’ve been doing all these years.
Male Host: So, what would you do?
Peter: Well, we would have to allow interest rates to rise and find a true market level which is gonna be substantially higher than where it is right now. The Fed has to stop buying bonds as it tries to unwind its balance sheet. But in doing that we’re gonna prick a lot of bubbles; stocks are gonna crash; real estate’s gonna crash; banks are gonna fail. It’s gonna be 2008 all over again.
Male Host: Are you writing books right now? Are you trying to make headlines? Because the reality is…
Peter: No I’m just trying to answer the question as to what I would do if I was Fed chairman. Because all we’re doing now is giving more drugs to a drug addict. And that is not going to solve the drug addict’s problem. I want to take away the drugs.
Male Host: Every other central bank in the world is doing the same thing. And they’re following the Fed.
Peter: Yes but they’re all making the same mistake. Just because somebody jumps off a bridge doesn’t mean you’re gonna jump off too. This is the wrong policy.
Male Host: So you’re gonna fight global central bank policy and say, “I think stocks are going down, and I actually think I’m gonna sell bonds.” Because the Ponzi scheme, to use your term, Ponzi scheme, US treasury market. Did you say that?
Peter: Well of course it’s a Ponzi scheme…
Male Host: Of course.
Peter: …but once the Fed lets rates go up the other central banks are gonna do it too. But what’s gonna happen when rates go up and this bubble economy collapses and all of the sudden now Americans have to stop consuming they can’t whip out their credit card and buy things they can’t afford.
Male Host: US government’s refinancing debt at the best level it’s ever done. And it’s reigned of this.
Peter: No when interest rates go up they can’t refinance; they have to default.
Male Host: How will interest rates go up if in fact you’re saying that the world’s gonna come crashing down? And in fact they’re making this all worthless.
Peter: If interest rates go up the Fed can’t refinance. Because the rates are higher, all this short term debt matures at a higher rate.
Male Host: If interest rates go up, the dollar’s going to the moon, your bold [SP] share is going down.
Peter: No. It’s not gonna go up. Because when the US economy is collapsing as the banks are failing and the stock market’s going down and there’s no bail outs. The dollar’s not gonna go up. The only reason the dollar went up in 2008…
Male Host: What do you buy then? Everybody’s gonna go out and buy gold?
Peter: No, you should own gold.
Male Host: The dollar is a safe haven. Every time we’ve had a global crisis the dollar has been a safe haven rally.
Peter: It’s only a safe haven until people realize that’s it’s not safe. There’s more risk on the dollar…
Male Host: So you’re the only guy that realizes this?
Peter: Well more people are gonna realize it. It got a reprieve in 2008. You forget when the financial crisis hit, the dollar was at an all-time record low. And it would’ve kept falling had it not been for that crisis. But the next time this happens, the dollar is going to be the crisis. Because people believed, the whole time, the reason the dollar stopped falling is people believed the Fed could actually buy rates.
Male Host: And they’re gonna buy MMB? I mean come on. That’s nothing.
Peter: Sure, it’s better than the dollar.
Male Host: The dollar is the world’s reserve currency.
Peter: For now.
Male Host: You’re telling me the worst financial crisis we’ve ever seen, and I know you’re telling me it’s gonna be that much worse, and you can probably sell a couple more books.
Peter: No I don’t have any books.
Male Host: But the bottom line here is…that’s what we’re talking about. This is not stuff that’s investable advice. Advice to send them wrong.
Peter: No it’s very investable advice, look nobody has made money is US stocks for the last couple years.
Male Host: Are you kidding me?
Peter: Goldman Sachs…
Male Host: That’s just not true.
Peter: …came out that flat is the new up. Why don’t you look at some of my mutual funds and see what they’ve done this year. This is investable advice. But again, wait another year or two and I’ll come back on this program then.
Male Host: If I wait another year or two on your level of recommendation I’d be out of business.
Female Host: I gotta step in guys sorry.
Peter: No you’d be able to retire because you wouldn’t need any money anymore.
Female Host: Peter, good to see you. From Euro Pacific Capital.
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