Peter Schiff: Investor Optimism Is at Odds With Reality

Optimism is driving the markets. Most investors seem to believe the economy is strong. The consumer is resilient. Price inflation is easing. And most people think the Federal Reserve is finished hiking rates. In his podcast, Peter Schiff explained why this investor optimism is at odds with reality.

Stocks have been rallying, defying the fundamentals that would argue for significantly lower stock prices. Peter called it a “rather narrow” rally driven by a handful of stocks.

The generals are going but the troops are not coming along with them. All of this, I don’t think, is going to end well for the longs in the stock market.”

Peter noted that the Russel 2000, a broader measure of stocks, is at roughly the same level as it was in the summer of 2018 while the NASDAQ has nearly doubled in price.

The valuations are extremely stretched.”

So, what is driving this rally?

Peter said it’s the perception that the Federal Reserve is finished hiking interest rates after the central bank kept its finger on the pause button at the November meeting. In fact, the markets are pricing in 75 basis points in cuts during 2024. Peter said he thinks the markets will likely price in even deeper cuts moving forward.

If the Fed starts cutting rates, it’s because the economy is very weak — weaker than it already is — and potentially we have a banking crisis, a financial crisis, or something breaks, which will require the Fed to be far more aggressive than 75 basis points.”

Last week, Federal Reserve Chairman Jerome Powell participated in a panel discussion and said the Fed isn’t even thinking about rate cuts. Peter said the markets clearly don’t believe him, and he thinks it’s “a lie on its face.”

How could that possibly be true? How could the FOMC members not even be talking about rate cuts? Even if they don’t want to do it, how could they not be talking about it? After all, what do they do over there? They move interest rates. They move them up. They move them down. They’re either hiking them or they’re cutting them. How could they not talk about the prospect of cutting rates? Even if they’re going to reject it, clearly, they’re talking about it. Even if they don’t want to do it, they have to talk about doing it to decide that they don’t want to.”

Why would Powell even say they aren’t talking about cuts?

Because he really wants to make sure that the markets take seriously the tough talk about inflation. Because he keeps reiterating how far inflation is from their 2% target, how much higher it is, and how much further they have to go to bring it back down. So, part of that is to not even let the market think that they’re discussing rate cuts when, of course, they’re discussing rate cuts. This is all just BS. You’ve got to talk tough because, at the end of the day, they don’t have any stick at all, let alone a small stick based on how indebted the economy is — everybody, from the government, to the corporations, to the household sector.”

Powell also talked bout the “resilient consumer.” But is the consumer really resilient? Sure, people are still spending money. But they’re running up massive credit card bills to do it. And Peter pointed out that you have to ask why they’re spending.

It’s not like the consumer is resilient like Superman is resilient to bullets. You shoot Superman and the bullets just bounce off his chest. The consumer is not resilient like that. The consumer is getting shot, and those bullets are hurting. They’re doing damage. The consumer is bleeding and hurting, but he’s still breathing. He’s still alive. He’s badly wounded, but he’s resilient enough not to be dead. How is the consumer staying alive with all these bullets? Well, one way he’s doing that is by depleting his savings. … The other thing he’s doing is maxing out the credit cards.”

These “resilient” consumers are buying groceries with credit cards and paying nearly 21% interest on top of the higher food price.

So, I wouldn’t say that’s resilient. I mean, they’re surviving — barely. But it’s not really resiliency that is enabling it.”

The other thing that is keeping the consumer from completely bleeding out is taking on extra jobs. We see this with the record number of multiple job holders in the BLS data.

Eventually, there’s no way to survive. [The consumer] is mortally wounded. He’s just delaying death by all of these means he has at his disposal. But eventually, these lifelines are gone. Your savings are zero, so you can’t deplete that anymore. At some point, you max out your credit cards. At some point, you can’t borrow any more money because the credit card companies cut you off.”

And people can’t work 24/7. So, there is even a limit to moonlighting.

But Peter said there is one thing that has no limits – price inflation.

Prices are going to keep on rising because the budget budget deficits are skyrocketing. The money printing is going to continue. The inflation burden is going to be heavier, and heavier, and heavier. And this consumer, who has already been shot up, is going to get shot some more.”

The reality is the Fed hasn’t done enough to stop price inflation. They haven’t tightened enough to stop the borrowing. But they have tightened enough to break an economy that is rooted in artificially low interest rates.

So, all of this economic optimism is unwarranted. It is based on an illusion. But at some point, reality will break through.