Peter Schiff: Has Fed Talk Pricked the Mother of All Bubbles?

It appears talk of less loose monetary policy has pricked the bubble. Peter Schiff talked about it in a recent podcast.

We’ve seen a significant rotation out of the overpriced, high-risk momentum stocks that enjoyed the benefit of the bubble. They are now collapsing – not because the Fed has actually tightened monetary policy, but just because it talked about it.

That’s all it took to prick the mother of all bubbles. But as the air is coming out, that air is flowing into the ‘value’ sector of the global markets, which have been overlooked for the entirety of the move up as people were using those stocks as a source of funds, selling value dividend-paying stocks to free up the capital in order to invest in the momentum stocks.”

Peloton’s announcement that it will stop production of its bikes was one of the catalysts for last week’s sell-off.

I think that caused people to worry. Hey, look what’s happening to Peloton. This could happen to other stocks. Demand is not what we thought, and this could apply to a lot of companies, not just Peloton. So, I think other stocks were sold in sympathy.”

Peloton rallied a bit on Friday when the company’s president did some damage control. But that didn’t help the rest of the market. The Dow was down 450 points and the NASDAQ plunged 385 points (2.7%). Friday’s carnage was sparked by Netflix’s 4th quarter report revealing weakening subscriber additions. Netflix stock lost about 20%.

Looking at some of the yearly numbers, the Dow is down 5.7% on the year and 7.3% from its peak. The S&P500 is down 7.7% on the year and 8.7% from the high. The NASDAQ is down 11.6 year-to-date and 14% from its peak. That means the NASDAQ is in correction territory. The Russell 2000 is doing even worse. It’s down 11.5% so far this year and 19.2% from its previous high.

Peter said the dip in the Russell 2000 isn’t because of declining tech stocks. It’s more a reflection of the real US economy.

This really tells the story of what’s going on, and we are almost in bear market territory.”

Then we have the Ark Innovation Fund. It reflects these momentum tech stocks. It was down 5.7% on Friday alone. It plunged 10.9% on the week. Year-to-date, Ark is down 24.4%. And from the high — it’s down 55.2%.

Some of the “stay-at-home” stocks are also getting clobbered. Zoom video is down 65% from its top. DocuSign is down 63%. Teladoc is down 77%.

Peter noted that this isn’t a global selloff. This isn’t like 2008 when everything tanked along with the US stock market and the dollar went through the roof. In fact, the dollar was down slightly on Friday, and it’s also down a bit on the year. Investors certainly aren’t taking refuge in the dollar at this point.

What’s more significant is it’s not up.”

Gold and silver both finished with gains on the week.

There is some tremendous underlying strength in that sector that I think is going to manifest itself in a much bigger way in the weeks and months ahead.”

And Peter said it’s not too late to get in on this rotation.

This creates a dilemma for the Fed. It is about to embark on a monetary tightening campaign even as the economy and the markets are rolling over. That’s why the Fed has telegraphed this incremental tightening even though a more aggressive approach is warranted with 7% inflation. It doesn’t want to spook the markets. But they’ve already caused a selloff in the market simply by talking about raising rates. The same dynamic happened in 2018, but the Fed was actually able to raise rates a few times before the market broke.

But at this point, the bubble is now so big that the market breaks even before you raise rates. The market breaks just on the talk that in the future, the Fed may raise rates, which means they may never get around to doing it. Because, what’s going to happen in March, when everybody expects the Fed to raise rates if we’re in a bear market in stocks? If the economy is rolling over? Will the Fed raise rates? I doubt it. And in fact, what the Fed will say is they will claim that the weakness in the economy, the reverse wealth effect from falling stocks, the increase in unemployment, that will take care of the inflation problem.”

Well, they’re wrong.