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Peter Schiff: The Eye of the Financial Hurricane

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Stock markets appear to have stabilized after a “December to remember.” But in his most recent podcast, Peter Schiff said we’re really just in the eye of a financial hurricane.

The selloff began after the September Fed rate hike. At the time, Peter called it the hike that broke the camel’s back. The market plunged in October and Wall Street ended up having its worst December since 1931. But over the last few weeks, things have calmed as we entered the eye of the storm. 

We entered the eye when the Federal Reserve came out and rescued the markets by backtracking on their previously indicated path of continuing rate hikes and quantitative tightening.”

Last week, the minutes from the December FOMC minutes came out revealing a very dovish Federal Reserve. Meanwhile, Fed Chair Jerome Powell made several dovish comments, emphasizing the word “patience.” As we put it last week, the Powell Put is in. This past week, several Fed officials doubled down on the dovish sentiment.

Everybody is a dove. There are no stock market hawks. Kind of like there are no atheists in a fox hole. Well, in a bear market, there are no hawks. There are only doves.”

It’s not just current Fed members sounding all dovish. Former Fed Chair Janet Yellen came out and said the December rate hike could possibly be the last one of this cycle. Peter said she’s right. “It’s not just possible. It’s probable,” he said.

Peter reiterated that interest rate normalization was a failed strategy from the get-go. The central bank inflated all kinds of asset bubbles with zero interest rates and QE.

I knew if they tried to normalize interest rates, if they tried to shrink the balance sheet, they would never complete the process — that they would have to abort it somewhere along the way and reverse course. They would have to go back to zero. However high they managed to raise rates, they’d have to go right back to zero. And if they managed to shrink the balance sheet at all, well they were going to have to blow it even bigger when they had to do QE4.”

Peter said that since he knew the Fed couldn’t do what it was claiming it would do, he figured it would be better for the central bank not to try – to simply make excuses for why it wasn’t raising rates as promised.

I think what just happened, where you now have the Federal Reserve basically calling off all the rate hikes that they had planned, pretty much vindicates me.”

If you look back to the first Fed hike in December 2015, everybody thought that was the first step back to “normal.” And everybody pretty much considered “normal” somewhere between 3 and 4 percent (even though that is still historically low).

What just happened now proves that I was correct initially in my belief that if the tightening process ever began, it would never conclude — that they would have to cut it off prematurely because of the effects that raising interest rates would have on the market.”

It is true that the Fed was able to raise rates a number of times, but Peter said you have to consider what made that possible. Remember, the Fed waited a year to raise rates again after that initial hike in December 2016. It didn’t really get going until the stock market boomed in the aftermath of Donald Trump’s surprising presidential election win. Everybody was excited. There was talk of tax cuts. So, in that environment, the Fed finally had the ability to raise interest rates for a second time.

With the stock market temporarily juiced by corporate tax cuts and optimism about the Trump economy, Powell was able to raise rates several more times.

People want to say, ‘Oh, see, Peter you said the Fed couldn’t raise interest rates. Look, they’re at 2%.’ I said they couldn’t normalize interest rates. That if they raised interest rates they would never get to normal. That’s exactly what happened. I was 100% right. Now, where I was wrong was in overestimating the intelligence of the people on the Federal Reserve to figure that out. I said that since they will never be able to normalize rates, they’d be foolish to even try. So, they’d be better off staying at zero.”

But Peter says the markets haven’t figured all this out. They think that with the Powell Put in, everything will be fine and the economy will avoid a recession.

It doesn’t matter. They still don’t realize that the past rate hikes already did it. We’re already guaranteed to have a recession.”

Peter said analysts continue to basically ignore the bad economic data. He went on to highlight some of those numbers. Peter also talked about the notion that inflation isn’t a problem. He contends it is.

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