Peter Schiff: Signs of Inflation

Last week, Federal Reserve Chairman Jerome Powell said he wasn’t worried at all about inflation. But there are signs that inflation is heating up everywhere, from surging commodity prices to rising bond yields. In his podcast Friday (Feb 12) Peter Schiff talked about increasing inflation and the unreasonable expectations Wall Street has when it comes to the Fed’s willingness or ability to do anything about it.

Commodity prices and bond yields continue to climb. On Friday, oil closed over $59 a barrel, a new post-COVID high. Peter said he thinks after some consolidation around $60, oil could make a beeline to $80.

I think we have a good chance of seeing $100 oil before the end of the year.”

The last time we had $100 oil was in 2014. But a lot has changed since then.

The US economy is in much worse shape, and therefore, $100 a barrel oil will be a far bigger burden now than it was back in 2014.”

Not only do we have a lot more unemployed people, but the US is also producing a lot less of its own oil. That means America will be more dependent than ever on imported foreign oil. That will exacerbate the surging trade deficit which is already at record levels. On top of that, we have a new administration in the White House that is very antagonistic toward the oil and gas industry.

Oil isn’t the only commodity charting soaring prices. Lumber prices hit an all-time record high Friday, rising 10% last week alone. They have more than doubled since February 2020.

Now, what’s driving the increase in lumber prices? Well, first of all, inflation. We’re printing all this money and all this money obviously is being used to bid up the price of lumber. But in particular, a lot of the lumber demand is coming from housing. We’re having a boom in home construction and in home remodeling. Now, that is also being funded by the Fed. It’s the artificially low interest rates that are giving Americans the purchasing power to buy new homes and to add on to their existing homes. If Americans couldn’t borrow money so cheaply courtesy of the Fed, then we wouldn’t be seeing this big boom in construction. But because we are getting all this money printing and all this cheap money, that is what is fueling the boom.”

On the other side of the equation, COVID has disrupted lumber production.

The increasing price of new home construction is also pushing up the price of existing homes.

So, you have all this massive demand being fueled by the Fed, being fueled by money printing, and artificially low interest rates. And lumber prices are just surging, and there really is no end in sight.”

Much to the dismay of precious metals investors, the only commodities that don’t seem to be surging are gold and silver. So, the question is if most commodity prices are rising, why are gold and silver prices not also rising?

I think the reason for that is Wall Street expects the Federal Reserve to raise interest rates and tighten monetary policy sooner than everybody expects.”

Peter said he’s seen a lot of research reports circulating around investment banking houses and hedge funds building a narrative that the economy will recover and grow stronger faster than the Fed expects based on all of the stimulus coming down the pike. It will force the central bank to tighten monetary policy, and this will be bullish for the dollar. That of course would be bearish for gold and silver. Peter said he thinks this is complete nonsense.

 None of it is true. But I think it is setting us up for a huge drop in the dollar and a big rise in the price of gold.”

Peter noted that there was a strong consensus up to a couple of months ago that the dollar was going to go down. A lot of people went really bearish on the dollar. Peter said we need to shake out those bears before the dollar really takes a tumble.

We need to have more people bullish on the dollar to really take it lower. Because that’s generally how markets work. They try to defy the consensus. They try to move the direction that they’re going, but get rid of as much excess baggage as possible. So, I think it’s a good sign that people have built this ridiculous narrative of a strengthening dollar. And that is causing people to abandon some of their positions in gold and gold mining stocks when the case for the dollar going down has actually never been stronger.”

In another sign of heating inflation, bond yields continue to claw upward. On Friday, the yield on the 10-year hit a new high since the COVID collapse, closing at 1.2%. Meanwhile, the yield on the 30-year Treasury has pushed back above 2%. That’s still low historically, but Peter said he thinks recovering to a 2% handle could be significant.

There’s going to be a lot of upward pressure on interest rates from here. I think the yield can go to three, four percent unless the Fed steps up with an unprecedented increase in the amount of quantitative easing.”

Of course, the backup in rates is helping to validate the narrative that the Fed will be forced to tighten and driving the frequent selloffs in gold we’ve seen of late.

They’re looking at these rates, and they’re thinking they’re a reflection of the strength of the US economy. They’re not. They’re a reflection of inflation.  And it’s the rising inflation premium that is pushing up interest rates. And the fact of the matter is the Federal Reserve is not going to do anything to alleviate those inflationary pressures. Everything they’re going to do is going to fuel the inflationary fire.”

Consumer sentiment dropped last month according to the latest data released Friday. The numbers reflected rising inflation expectations among consumers. According to the data, consumer sentiment is that prices will increase by 3.3% year-over-year. This is the highest consumers have expected inflation to be since the summer of 2014. Peter said he thinks the cost of living will actually rise by a lot more than consumers expect.

Meanwhile, Fed Chair Jerome Powell says he’s not worried at all about inflation.

Here’s a case where the consumers are far more likely to be accurate than is the Fed.”

In fact, Powell said that one of the reasons he’s not concerned about inflation is because it’s all about expectations.

Powell said he’s not worried about inflation because he doesn’t see rising inflation expectations. Well, has he not looked at these consumer confidence numbers from the University of Michigan? If this is the highest increase in prices that consumers have expected since July of 2014, why isn’t Powell taking that into consideration? Especially since he places so much weight on expectations. Well, consumers are expecting a lot more inflation than the Fed. And the Fed claims that they couldn’t care less, that they’re not even worried, which means that that rate is likely to be even higher.”

In this podcast, Peter also talked about the growing trade deficit. He said it’s not a sign of economic strength. It’s a sign of weakness.