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Peter Schiff: Markets Still Operating on False Confidence in the Fed

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The four-week win streak in stocks came to an end last week with all of the major indexes down significantly on Friday. As Peter explained in his podcast, it appears the markets are coming to terms with the fact the Powell Pivot may not come as quickly as anticipated. That means interest rates may go higher as the inflation fight continues. But Peter says the markets still don’t get the big picture. The Fed can’t win this inflation fight without wrecking the bubble economy.

Peter said the wild ride on the so-called meme-stocks such as Bed Bath and Beyond typifies “the casino-like mentality” the Fed has created.

You have so many people mindlessly piling into trades just chasing momentum.”

Bed Bath and Beyond is on the verge of bankruptcy. The company’s bonds are trading around 50 cents on the dollar.

If the bondholders don’t expect to get their money back, there’s no chance that the common stockholders are going to get theirs back. So, people who are paying $30 a share for Bed Bath and Beyond have no idea what they’re doing. The only people who had a clue were the people who were selling the stock on the way up.”

Peter said it’s hard to think of a company in a worse position to weather the current economic storm. Bed Bath and Beyond is a brick-and-mortar company heavily tied to housing and discretionary spending.

Consumers are getting killed with inflation. They’re paying more for food. They’re paying more for energy, for rent. They don’t have money to splurge on some fancy bath products or stuff from their kitchen. … Why this is the stock that people chose to buy makes no sense. They’re only buying it because it’s going up, and it’s only going up because other fools are buying it who don’t understand the fundamentals of the company. They just think they’re going to make money because the price is going to go up. It’s the greater fool theory. And unfortunately, that’s how most people are investing. They’re fools. They just haven’t figured it out yet. But so many fools are in for a rude awakening when the music finally stops on all of these types of trades.”

Peter noted that more broadly, the momentum stocks got beat up the most last week. They were the stocks that went up the most in the recent bear market rally. He said the reason these stocks declined so much is because the markets are coming to terms with the fact that the Powell Pivot may not take place as soon as they thought. The expectation for an end to rate hikes is being pushed back. This is bad for growth stocks for two reasons.

  1. It means higher interest rates. That is a big negative for growth stocks because it discounts their future earnings by a higher interest rate.
  2. If the Fed is going to have to stay higher for longer, that means the economy will be weaker for longer. That will weigh down earnings.

We’re starting to see the shift coming back to value and dividend-paying stocks and away from momentum growth-type stocks. And I believe this is going to gain steam. I’ve always thought that what we were experiencing was a bear market rally, a sucker rally, a correction. And I think that correction has ended and the primary trend has resumed.”

The notion that the Fed pivot will be delayed and the central bank is going to keep pushing rates higher is being felt even more strongly in the bond market. Yields continue to spike.

Oddly, the 2-year is the high point on the yield curve.

What that indicates to me is that markets do believe that the recession, which if it’s not already here will arrive sooner than most people thought, and therefore the Fed will start cutting rates earlier over this 5-year time horizon, and so investors expect rates three or four years from now to be lower than where they are now.”

Peter said that the markets still have a lot of false confidence in the Fed’s ability to bring inflation down to 2% and keep it there for most of the next 30 years.

Now, talk about living in a fantasy land. There is no way the Fed is going to even come close to achieving that for 30 years. They’re not even going to achieve it for three years. Yet, investors are still operating under the delusion that the Federal Reserve can do what it claims it’s going to do. But because the Fed still has that credibility, and because the Fed is still talking tough about its resolve to fight inflation, you’re seeing this reaction in the bond markets.”

The perception of a more hawkish Fed is also driving the dollar higher. Some economic data that wasn’t as weak as expected also buoyed the greenback.

We didn’t really get any strong data. We just got data that wasn’t as weak as people had expected. That, together with the Fed minutes and all this hawkish talk by a lot of FOMC members. But again, it’s all talk. And of course, that’s exactly what you’d expect when you have no stick. You have to scream as loud as you can and pretend that you’ve got one. And that’s exactly what these FOMC guys are doing.”

All of this is having the opposite effect on gold. Gold was down about $50 last week. Peter noted that it wasn’t down nearly as much as other foreign currencies and called that a positive sign.

But why is this happening?

Because investors are confident that the Fed is going to fight harder to win the war against inflation. Investors still don’t understand that no matter how hard the Fed fights, it is going to lose. Because it can’t really fight hard enough to win. Yes, the Fed is going to pretend that they’re willing to put the economy into recession. But that’s only because they believe any recession will be mild and short-lived. They are not prepared for the type of depression that would actually result from a winning fight against inflation. In fact, it’s not just a depression. It’s a far more severe financial crisis than the one we had in 2008. And if the Federal Reserve was not willing to allow the 2008 crisis to run its course, why would it be willing to allow this worse crisis to run its course?”

Instead of taking the hard medicine in 2008, the Fed blew more air into the bubble. We now have a much more dysfunctional economy. There is more malinvestment. More debt. More misallocation of resources.

If the Fed wouldn’t allow the economy to swallow the bitter-tasting medicine back then, why would they force-feed even worse-tasting medicine now?”

In this podcast, Peter talks about how not as weak economic data is the new strong and the continuing woes in the housing market.

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