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Peter Schiff: Jerome Powell Goes Uber-Dove, A Beautiful Environment for Gold

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Last week, we saw more huge swings in US stock markets. On Thursday, stocks fell sharply, but they recaptured all the losses on Friday in the wake optimism about trade talks between the US and China,  of a strong December jobs report, and “dovish” comments by Federal Reserve Chair Jerome Powell.

Peter Schiff hit on all of these topics in his most recent podcast.

As far as the trade deal goes, Peter said nothing is going to actually change substantively.

Any kind of deal is simply going to be an opportunity for the president to once again claim credit for doing something, even though he didn’t do anything.”

It would be a boost for the markets though, simply because it would remove the constant uncertainty the trade war has caused over the past year. Peter said it won’t actually benefit the economy, but at least the trade war would be over.

According to the December jobs report, the American economy added a robust 312,000 new jobs during the month. That was well above the projection of 180,000. As far as the economy goes, this should be considered good news. But of late, many analysts on Wall Street have considered strong jobs reports as bad news because they were viewed as a sign the Fed would likely keep pushing interest rates up.

For many, many jobs reports that have come out recently, good news was bad news, because the good news of a strong jobs market meant bad news for the Fed. The Fed was going to keep hiking rates. And since low interest rates were really the fuel that was propelling the markets, the markets kind of wanted bad news because they wanted to keep the Fed out of the game.”

But now everybody believes the Fed is on the sidelines, and so good news is good news again. The markets seem to think we now have the best of both worlds – a growing economy and a Fed that will not keep pushing up rates.

The unemployment rate actually ticked up from 3.7% to 3.9%. This was due to an increase in the labor participation rate. It finally moved above 63% for the first time in about five years. Pres. Trump even mention the labor force participation rate, calling it “incredible.” Peter said that was a bit of an overstatement. It’s an improvement. But considering it was above 67% when George W. Bush took office, 63.1% is hardly incredible.

Here’s another question Peter brings up: is an increasing labor participation rate actually a good sign for the economy? It could signal people are now optimistic that they can find work so they’re willing to start looking. But it could also mean people who weren’t working before now feel like that have to go back to work because their economic condition has deteriorated.

Just because the labor force participation rate is notching up does not mean the economy is all of a sudden getting better. It could easily mean that the economy is getting worse. It depends on why people are moving back into the labor force, and obviously, it depends on the type of jobs that they got.”

Average hourly earnings were up .4%, beating the expectation of .3%. This would normally spark inflation fears, but it didn’t seem to this time around.

You have these hotter than expected wage numbers. Now, normally the markets would be very squeamish about that because the Fed would be looking at these numbers, ‘Oh, more inflation, wage inflation, we’ve got to jack up interest rates,’ and the markets would have sold off. But that is not what happened. The markets are not worried about the Fed raising rates anymore because that has changed. Now they’re worried about the economy. So, they’re looking for evidence of a stronger economy and when they see the higher wage numbers, they look at that as a stronger economy.”

What really boosted the market Friday were comments by Jerome Powell that were largely viewed as dovish. Peter called the comments “tailor-made” for the stock market.

It’s almost as if he brushed up his script, somebody took him behind the barn and got his mind right, and he came out as an uber-dove. All he talked about was why the Fed is going to be patient. Patient now is back – patient in raising rates. The Fed is not worried about inflation. The Fed is not worried specifically about rising wages, about the low unemployment rate. None of this stuff, which would have concerned the Fed a few months ago, all of a sudden the Fed is not worried at all about any inflationary pressures in the market, about wage growth. Everything is fine.”

Powell also walked back statements he made last month about quantitative tightening being on “autopilot,” saying the Federal Reserve would not “hesitate to make a change” to its balance-sheet reduction plan if data showed that it was harming economic growth.

Basically, that’s what the market wanted to hear and that is what caused a rally to move into a higher gear and you saw the big rise in the stock market.”

Powell was essentially saying, “We’re going to let inflation run. We’re just going to keep interest rates low.”

Peter said it really means we’re going to have stagflation. And that is a beautiful environment for gold. It’s just that investors haven’t figured out that that’s the environment they’re living in.

Peter goes on to break down what’s actually going to happen. Fed dovishness isn’t going to fly. Interest rates will climb anyway. And at some point the dollar will tank.

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