Peter Schiff: Bond Bear Will Maul Stocks and the Dollars

Stocks and bonds had a tough week last week. In his podcast, Peter Schiff talked about the market moves in the context of Fed rhetoric and the jobs reports. He concluded that we could be heading toward another big leg down in bonds, and this bond bear will maul stocks and the dollar.

Peter called last week “decisive” and “telling” in the markets. The stock market and the bond market both showed weakness, along with the dollar. But gold finished last week with a small gain.

Given the fact that everything else went down, I think the fact that gold managed to go up could indicate we’ve kind of come to the end of this trend where we’ve had this bear market rally and stocks and the pullback in gold.”

Bonds got clobbered last week driving yield across the spectrum to over 4%. We also had a complete inversion of the yield curve from the 6-month note to the 30-year bond.

The yield curve is clearly flashing recession. Now, you can argue that we’re in a recession even though the statistics don’t reflect that. But what the yield curve is telling you is we’re going to be in a recession. The question is when is it going to start, if it isn’t already here.”

Peter said the yield curve also indicates that price inflation expectations are still anchored, but they may be on the verge of coming unanchored.

If that is the case, I expect to see a sharper increase in yields in the 30-year, and I expect that inversion to reverse. Because as investors begin to have a more realistic outlook on inflation, they’re going to sell bonds, particularly the 30-year bonds. And the fact that the dollar went down and gold went up, may be a reflection of the fact that investors are starting to think this way.”

Peter said he thinks the weakness in the bond market caused the stock market to fall. So, what caused the carnage in the bond market?

For one thing, last week the Fed released the minutes from the June FOMC meeting. That reinforced the notion that more rate hikes are coming. In fact, most of the FOMC members indicated they expected additional hikes.

So, they’re just slowing down the pace of the rate hikes, but they’re not stopping the rate hikes. And of course, a lot of people are betting that the Fed is finished, that the reason they paused is because they’re done. I think there is a good chance that that is the case. But, you know, the Fed is certainly talking like that’s not the case. They’re acknowledging that inflation is still a threat. And it’s actually a bigger threat than what they acknowledge. But they’re not proclaiming victory, and they’re talking about more hikes. So, I think that hurt the market.”

But what really clobbered the bond market and drug down stocks was the much stronger than expected ADP private sector job numbers. In fact, they more than doubled the forecast. This threw fuel on the idea that the Fed is going to have to get even more aggressive in its inflation fight.

The Fed is still under the false impression that inflation is the byproduct of people working, and if more people are working, then we’re going to have more inflation. That is not the case. In fact, it’s the opposite. When people are productively employed, they make more things. You have more stuff. It costs less. When you have a lot of people who aren’t working and who aren’t producing, but they’re spending because they’re getting unemployment checks, or food stamps, or other forms of welfare, all of that is inflationary, because you have less stuff being produced but more money being printed to buy that stuff. And so, the markets and the Fed still haven’t come to terms with that reality.”

But on Friday, the Bureau of Labor Statistics non-farm payroll report came out, and it was a miss. Not only that, the BLS revised the job numbers downward for every month this year. In all, 196,000 jobs disappeared from the numbers.

I’ve been saying all along that I don’t believe these job numbers. I think they’re overstated. And I think that despite this downward revision, they’re probably still overstated.”

Peter noted the big increase in corporate bankruptcies.

The government is still assuming all these new companies are being formed and creating all these jobs. All these bankruptcies would indicate that it’s more companies that are dying. The birth-death model needs to be adjusted to have more deaths. Because that’s what’s happening. These companies are dying, and these dying companies are obviously laying off workers. If we have all these bankruptcies, does it makes sense that we have strong job gains?”

In other words, the government formula is overstating job creation and understating layoffs.

Peter said the market reaction to these contradictory job reports was telling. Bonds got clobbered when the ADP number came out stronger than expected and then bonds sold off again with the weaker-than-expected BLS job report. You would have expected the bond market to enjoy a relief rally.

To me, that was very negative for the markets. Because I’ve been looking for and waiting for a breakdown in the bond market. I’ve been thinking that we’re just going sideways, but that we have another big move down in bonds, meaning a big move up in yields. And that could be happening — where we start to see the movement on the 10 to the 30 from a four-handle to a five-handle. Remember, we’ve already got the shorter maturities in the fives. The longer-term bonds should be up there too. If that happens, if we start moving toward 5% on the 10-year through the 30-year, that is going to be a huge problem. Because that is going to put a lot more downward pressure on the portfolios of banks, and all of their underwater mortgage-backed securities and Treasury portfolios are about to get hammered.”

This will also put more pressure on the stock market.

It’s also notable that even with the selloff in stocks last week, the dollar fell too.

Peter said all of these trends are a negative for American markets but a positive for gold.

In this podcast, Peter also covers some of the negative economic data that recently came out.