Peter Schiff: Trump Is No Reagan; Powell Is No Volker

The dollar has shown some resilience this week. The dollar index clawed back after hitting multi-year lows last week. Meanwhile, gold saw its worst single-day decline in more than a year on Tuesday.

One thing that hasn’t changed is the upward pressure on bond yields. In his most recent podcast, Peter Schiff said he thinks this is the reason we’re still seeing some life in the dollar and downward pressure on gold.

The narrative that higher rates are good for the dollar still permeates the markets. Traders still have not figured out that they’ve got this one wrong. Likewise, they still haven’t figured out that rising inflation is good for gold, not bad for gold.”

Peter said he thinks the main reason for Tuesday’s rally in the dollar and sell-off in gold was negative news that came out last Friday. Export prices were up by 0.8%, but import prices shot up 1%. That calculates out to a 3.6% increase in the price of imports year-over-year – a very inflationary trend considering most of what America buys is imported.

The thinking is rising inflation will put pressure on the Federal Reserve to continue pushing up interest rates, perhaps even picking up the pace this year. That’s theoretically good for the dollar and a problem for gold.

But Peter just doesn’t see this playing out. Why? Because Fed Chair Jerome Powell isn’t Paul Volcker and Donald Trump is no Ronald Reagan.

Think back to the 80s. Volker made the US economy swallow some tough love and pushed up interest rates with Reagan’s support and blessing. The rising rates kicked off the worst recession (prior to the 2008 crash) since the Great Depression. But that ultimately pulled the US economy out of the stagflation of the 1970s. The higher rates allowed the economy to reset.

Ronald Reagan had the integrity to stand by Volcker when Volcker was doing something that was very politically unpopular. A lot of people were being hurt by these sky-high interest rates, but Reagan stood behind his Fed chairman. There is no way that Donald Trump would stand behind Paul Volcker if he jacked up interest rates to slay the inflation monster or prop up the dollar. No way in hell. Because Donald Trump is no Ronald Reagan, and Powell is no Paul Volker. So, at the first sign of trouble, the Fed is going to cave. I mean, the Fed is only able to continue to posture that everything is OK and it’s going to shrink its balance sheet and raise rates because the stock market is going up, everybody believes the economy is booming, and so, the Fed can say what it wants. But if the party comes to the end, there is no way the Fed is going to push it down even further. There is no way the Fed is going to raise rates into a weakening economy. They’re not going to raise rates into a crashing stock market. They’re not going to shrink the balance sheet when the bubble is deflating and the economy is tanking. The Fed didn’t do that for Obama. It didn’t do that for Bush. So there’s no way Trump is going to allow the Fed to get away with it on his watch.”

So, this notion that higher inflation is going to force the Fed to be more aggressive in raising rates is nonsense. It will keep playing the game until the stock market really starts to tank. And as Peter said in a speech last month at the Vancouver Resource Investment Conference 2018, we’re ripe for a 1987 style stock market crash.

Ultimately, higher inflation is going to erode the value of the dollar and be very positive for gold.

There’s not a damn thing the Federal Reserve is going to do about it. In fact, in all likelihood, as the economy goes into stagflation, the Fed is going to pour fuel on the inflationary fire in order to quote-unquote stimulate the economy. But what the Fed doesn’t know yet, and what nobody seems to understand is that it’s not going to work next time. It will be the overdose on stimulus, because when the Fed has to go back to QE and cut rates after pretending for so long it was going to do the opposite, the bottom is going to drop out of the bond market, the bottom is going to drop out of the dollar.”

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