Peter Schiff: A Gift From the Federal Reserve

The Dow Jones closed out Q1 2019 with its best quarterly gain since 1998, rising 10.3% through the first three months of the year. And the Dow Jones wasn’t alone in its bang-up first quarter. The S&P 500 rose 12.3%. The Russell 2000 was up 13.8%. And the Nasdaq led the entire pack with a 15.6% gain.

As Peter Schiff said in his latest podcast, the entire rally was a gift from the Federal Reserve.

Had the Federal Reserve stayed on its course that it had set out on last year, or several years earlier, had the Fed continued to indicate that more rate-hikes were coming, three of four this year, had the Fed continued with its planned autopilot reduction in the size of its enormous balance sheet, the stock market would be considerably lower. In fact, we probably would have added to the losses experienced in the fourth quarter of last year with additional losses early this year. But the Fed, as I had been predicting it would for many years, reacted to the weakness in the stock market, and the weakness in the economy, by reversing course.”

So, the Powell Pause did exactly what it was supposed to do. It lifted the markets and puffed a little air back into the deflating bubbles. But Peter has been saying this won’t be enough. And in fact, mainstream pundits are starting to anticipate a rate cut. Peter said where they are getting it wrong is that they are underestimating the cuts that are coming down the pike. They are generally pricing in a 25 to 50 basis point reduction.

In fact, we’re going all the way back to zero.”

Peter said the Fed is really keeping us from solving the underlying structural problems in the economy. But that would take some short-term pain and nobody seems willing to suffer it.

It is a very healthy process that would be good for the economy in the long-run, but instead, the Fed has interfered with the market’s medicine and substituted its own quackery, just substituting a bubble to create the illusion of economic growth as the economy is actually worsening.”

Peter noted that housing starts were stronger than expected in February. This was also indirectly a gift from the Fed. The Powell Pause has pushed mortgage rates back down.

It was the big drop in mortgage rates that gave a short-term boost to new home sales. But for that reduction mortgage rates which made these expensive new homes more affordable to buyers, we would not have seen this number.”

Peter noted that both personal spending and income both missed expectations in February. He pointed out that it’s really hard for consumers to spend today when they are struggling to pay the bills for past consumption that they put on credit cards in the past.

Peter said all-in-all,  it’s pretty amazing that the central bank has managed to keep the bubble inflated for this long. And he is a little surprised the Fed even tried to raise rates and shrink its balance sheet. He figured it would only try to maintain the pretense that it was going to normalize long enough to come up with an excuse not to. But ultimately, it was never possible. The Fed was never going to be able to approach normal.

It’s not really because of the economy not being strong enough. It’s not about the strength of the economy. It’s about the sustainability of the bubble. There is no economic strength. There is a bubble that is masquerading as economic strength. And because of the enormity of the leverage in this economy, and it’s not just the existing leverage — in order to keep the bubble going, we need to take on more debt; in order for consumers to keep spending, they have to be able to keep borrowing. So, we have to be able to not only handle the debt we have, but handle the additional debt we have to accumulate in order to keep this whole house of cards from collapsing. So, that is the real reason the Fed has to stop raising rates, and that’s the reason it’s going to have to reduce them back to zero. That’s the reason it’s going to have to do more quantitative easing.  It’s because we don’t have a real economy, we have a bubble. And that’s what the markets have to figure out.”

Peter also mentioned the final Q4 2018 GDP number that was released last week. With the number revised down to 2.2%, Trump missed his goal of 3% GDP growth on the year. The final number for 2018 came in at 2.9%. That equals Obama’s best year, which was 2015. But Peter said there was one big difference. Trump has created a lot more debt.

In 2015, the national debt grew by about $850 billion. In 2018, the national debt grew by $1.48 trillion.

So basically, Trump was able to achieve the exact same growth number as Obama, yet the government had to incur 74% more debt to achieve that growth.”

Peter went on to talk about Lyft’s IPO as an example of the insanity of the asset bubbles created by Fed monetary policy.

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