Peter Schiff: The Confidence Bubble Has Popped

Yesterday was another bad Monday on Wall Street. The Dow Jones dropped nearly 400 points and the NASDAQ fell deeper into “correction territory,” dropping another 3%. All five “FAANG” stocks closed in bear territory. These are the tech stocks that have propelled the long bull market. The NASDAQ is down 12.5% this quarter.

Apple’s announcement that it plans to cut production weighed heavily on the markets, along with another sign of trouble in the housing market — a big drop in homebuilder sentiment.

Peter said homebuilder sentiment is the first sign that the confidence bubble has popped.

This whole rally is built on confidence. The confidence is going to start going everywhere. First, you get the homebuilders – they’re losing confidence. But then I think you ‘re going to see business confidence, particularly small business confidence, which was at a record high — that’s going to start to diminish. Then I think the big companies, corporations, some of these guys are maybe already getting a little worried, the ones that are talking to Jim Cramer. So, I think you’re going to start to see the confidence there fall. Then, of course, consumers, their confidence is going to start to fall when their stock portfolios go down, when their home equity evaporates. And then when some of them start losing their jobs, or their friends start losing their jobs and they’re worried that they’re next. Then investors — eventually they’re even going to lose confidence in the market when they see their accounts going down. Eventually, even the financial media.”

In fact, it may already be happening. When I was at the gym working out Monday, I saw a graphic on Fox News proclaiming “trouble in the economy.”

Peter noted that the first people to lose confidence where gold investors. They lost confidence a long time ago as everybody got caught up in the bubbles.

One of the reasons that I am very confident that the gold bear market is over and that we’re in a bull market is because everybody has already thrown in the towel and lost so much confidence. In the stock market, that hasn’t happened yet. In the bond market, that probably hasn’t happened yet. The cryptocurrency market – not even close to happening. And so, the markets where people are still very confident are the ones that are ripe to decline. I think one where you have maximum pessimism like you did in the gold market, those markets are washed out, and so we’re early in a bull market when it comes to gold.”

Peter also brought up an interview featuring Ray Dalio. Dalio talked about the possibility of the dollar losing its status as the reserve currency. That, of course, would tank the value of the greenback. Dalio said the dollar would lose 30% of its value. Peter said that’s really sugar-coating it. The dollar loses that much in a typical bear market. In fact, the dollar lost 70% of its value after it was de-coupled from gold.

So, if the dollar loses its reserve status, which would be another seminal event, similar to going off the gold standard, this is just not going to be another bear market where the dollar loses 30% of its value. I mean, that’s nothing. I think if the dollar loses its role as a reserve currency, it will be at least as bad as it was in the 70s. And that means a 70% decline in the value of the US dollar. That is enormous!”

That led to massive inflation in the 1970s. That was because the dollar was losing value. You needed more dollars to buy stuff. Peter said today, the economy is way more screwed up than it was then, and there is much more debt. The thing that saved the dollar in the early 80s was the election of Ronald Reagan and Fed chair Paul Volker jacking interest rates way up. Neither of those things is likely.

There’s no end in sight to stop the dollar from falling. So, it could fall — it could be a bottomless pit.”

You’ll also want to hear what Peter has to say about the bitcoin plunge and former New York mayor Michael Bloomberg, so make sure you listen to the whole podcast.

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Photo by Joshua Rothhaas via Flickr