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Peter Schiff: The Fed’s Monetary Magic Won’t Work This Time

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The Dow Jones dropped another 296 points on Friday. The NASDAQ is on pace for the largest monthly decline since the 2008 financial crisis. The Russell 2000 has dropped over 12%. And yet everybody still seems to think everything is fine.

But as Peter Schiff said in his most recent podcast, nobody actually realizes when a bear market starts. When they finally do figure it out, it’s too late. During the last two bear markets, the Federal Reserve has saved the day by reinflating the bubbles. But Peter said the monetary magic isn’t going to work this time around. 

Peter had a feeling October was going to be a bad month. After the last Federal Reserve rate increase, he did a podcast and said it could be the hike that breaks the camel’s back. He said he just didn’t understand how the markets could ignore the rate increases, what was going on more generally with interest rates, the trade war, and the overseas markets that had already tanked.

It didn’t make sense that the US markets could continue to defy gravity in the face of overwhelming negative evidence that was taking place. And it seemed to me that if the market was going to break, October was a pretty good time for that to happen, given the history we’ve had with October.”

Peter said he doesn’t see any indication that we’ve hit bottom and yet the market still appears to be complacent. Just look at the price of gold.

The price of gold is still creeping higher, but if there was more fear out there, if people were worried about the market, they would buying gold.”

Peter said if you watch the financial news shows, everybody is saying there’s nothing to worry about.

Which is exactly what they were saying before the 2008 financial crisis.”

Peter pointed out that when bear markets begin, nobody realizes it’s a bear market. A bear market is defined as a 20% decline. So, until stocks hit that level, it’s not a bear. The pundits tell you to buy the dip.

So, whenever a bear market begins, all the perma-bulls say, ‘It’s a correction, buy.’ Then, once the market is down 20% and we’re in a bear market, then they say, ‘Well, you know, it’s too late to sell now. We’ve already had the bear market. Now it’s time to buy more because we’re about to have another bull market. So in other words, you never sell. You just hold forever and hope.”

This strategy he worked during the last two bear markets because the Federal Reserve managed to bail out the perma-bulls with monetary magic. Peter said it won’t work again.

The third time is not the charm. As I’ve been saying, it’s going to be three strikes and everybody is going to be out if they think they are going to be bailed out by the Fed because when the Federal Reserve has to try to revive the markets and the economy by going to a fourth round of QE, when they have to take interest rates back down to zero and do quantitative easing again, the dollar is going to implode. We’re going to have the real crash that was the subject of my most recent book.”

Peter pointed out another subtle indicator that all is not well in the economy. Mohawk Industries’ stock is down some 60%. This is a company tied to the housing and building industry. As Peter has pointed out before, the housing industry is one of the most sensitive to rising interest rates. It’s the first place you will see cracks as rising rates burst the bubbles built on credit and debt. This is just the tip of the iceberg. The auto industry, and retail, in general, is going to be impacted —  not only by rising interest rates, but tariffs as well.

The GDP number for the third quarter came in at 3.5% on Friday. It was predominantly driven by consumption. Peter asked a key question:

How much longer can that consumption go on when wealth is evaporating, when interest rates and prices are going up?”

Peter broke down the GDP numbers and found some things that seem a little bit wonky in the calculations. Listen to the whole podcast for more on that.

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