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Peter Schiff: Are Rising Interest Rates About to Prick the Bubble?

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The end of last week was tough on US stock markets. The Dow fell off about 200 points on Thursday and another 180 on Friday. But despite those drops, the Dow was only down slightly on the week. The NASDAQ, on the other hand, fell more than 3% last week and the S&P 500 was off about 1%.

As Peter Schiff pointed out in his most recent podcast, the catalyst was rising interest rates, which the markets have been basically ignoring up until last week. Granted, the stock market drops weren’t steep compared to an October crash, but there is still plenty of time left in the month. Peter noted that high interest rates served as the backdrop for Black Monday in October 1987.

We have interest rates rising now. Of course, they are not nearly as high as they were back then. But the percentage-wise is probably even higher given where we’re starting from. But of course, the economy is much more highly leveraged now than it was in 1987, and it’s actually far more vulnerable to a rate-shock now than it was then. Of course, back then, people were worried about rising trade deficits. They’re even bigger now than they were back then.”

In 1987, the dollar was also dropping. That’s not happening yet. But Peter said he thinks it’s just a matter of time.

I believe we are going to get the trifecta. It’s not just going to be the bond market that’s going to be falling. It’s going to be the dollar that’s going to be falling, and the stock market is going to fall for the same reasons that it fell back in 1987, except now it should fall a lot more given the fact that the problems everybody is ignoring are so much worse.”

The Labor Department released the September jobs report Friday – as Peter put it, “one of the most hyped up economic numbers that come out.” The expectation was about 180,000 jobs created. The number came in at 134,000 – a pretty big miss. But the government revised both the July and August number up. So, as Peter noted, it wasn’t really that much of a miss. And of course, everybody was willing to overlook the lower than expected number because of the Hurricane. The headline number was the drop in unemployment to 3.7%. Meanwhile, wages were up 0.3%.

People are talking about this is ‘Oh great, wages are finally going up.’ They are going up, but they’re just not going up as the price of other things.”

Peter noted that consumer credit hit new record levels in August.

So clearly, their jobs are not adequate to cover the cost of living. That’s why they’re having to borrow so much money to make ends meet. And of course, the cost of borrowing that money is going up and it’s going to continue to rise.”

That brings us back to interest rates. They are rising quickly. Rising Treasury yields were the catalyst for the market selloff late last week. There is a glut of bonds out there in the market as the Treasury tries to finance the massive debt. Peter said he thinks interest rates are going to go much higher.

If you look at a chart, there’s nothing but air. I mean, we have a long way to go, especially when you consider how low we’re starting from.”

The spin we’re getting from the pundits is that “rates are rising for the right reasons.” And since they are going up for the right reasons, we don’t have to worry about it. They are going up – so we’re told – because the economy is strong and that’s the price we pay. If we want a strong economy, rates are going to go up.

First of all, they’re wrong. Rates are going up for the wrong reasons. But even if they were correct. Even if the reason rates are going up is because we have a strong economy … the bottom line is Americans are too broke to afford those higher rates. It’s everybody. It’s individual households, it’s corporations, it’s the government. And not just the federal government, but local governments and state governments. Everybody loaded up on debt when interest rates were low. People say, ‘I’ll take advantage of this. You’re a fool if you don’t go out and borrow money. Look how cheap it is.’ I used to say, just because alcohol is free doesn’t mean you keep on drinking. Because, what’s going to happen to you? Right? Well, you might black out, or worse. So, this is the problem. We binged on all this free alcohol or cheap alcohol. But it’s worse than alcohol. It was narcotics. It was heroin or heavier drugs than this. Just because drugs are free doesn’t mean you keep doing them, because obviously, they are going to do damage. And that’s what happened. So, we’ve built this so-called strong economy on a foundation of cheap money. So, if the economy is strong because interest rates are super low, and if interest rates go up, well now the economy can no longer be strong because that shaky foundation you built the economy on collapses and the whole house of cards comes tumbling down with it.”

The fact is, the economy isn’t strong. It’s a bubble and the air filling the bubble is cheap money. Rising interest rates have pricked every recovery that we’ve had.  So, now the air is coming out and the bubble has to deflate.

Peter goes on to talk about the real reason interest rates are rising. It’s not a “strong economy.” It’s inflation.

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