Peter Schiff: Sooner or Later Every Bubble Finds Its Pin

Stocks sold off Monday as markets fretted over the lack of progress on stimulus and a rise in COVID-19 cases. In his podcast, Peter talked about the sell-off and the political dynamics driving the markets right now. He also drove down to a question nobody seems to want to grapple with: why are the markets and the economy so dependent on and desperate for stimulus?

The Dow was down 650 points on Monday. A 300 point rally off the interday low kept the carnage from being even worse. The Nasdaq fell 189 points and the S&P 500 lost 1.86%. It was the worst day on Wall Street since mid-September. Two factors drove stocks lower – the lack of progress on a stimulus deal and a surge in COVID-19 cases.

The selloff could have been worse if it wasn’t for a big move out of recovery stocks into the “stay-at-home” stocks benefiting from the pandemic. But Peter wondered how long these stay-at-home stocks can continue to buoy the market given they are already significantly overvalued.

And of course, if all of the people who are staying at home and shopping never go back to work and never actually have a job, and the only money they have to spend is the money the Fed creates out of thin air, eventually the dollar is going to collapse and their real purchasing power is going to go down along with it. And a lot of these stocks are going to crash because they’re not going to have any real revenue because their customers are going to be broke and they’re not going to be able to sell these higher-cost products because inflation will drive up the cost of producing all these products that their consumers really can’t afford to buy.”

Nervousness about the election may have also played in the stock selloff. The markets are concerned about their worst-case scenario – gridlock – coming to pass. This would occur if Biden won the White House but the GOP retains control of the Senate. Polling shows some of the Senate races tightening up. Peter has said this would likely be the best outcome for the overall economy, as it would probably mean less stimulus, less borrowing and less money printing. But stimulus is exactly what the markets want, regardless of the effect on the dollar and the actual economy.

If we end up with divided government, with Republicans holding the Senate, I think Republicans in the Senate will actually put more pressure on President Biden than they would have on a President Trump. They’re more likely to cooperate with Trump to give him the spending he wants. But they are more likely, for their own political reasons, for their own base so they don’t get primaried and lose, they will finally find some religion and they will push back against Biden stimulus.”

As a result, Wall Street doesn’t like the possibility of the Republicans maintaining control of the Senate.

Peter said he’s not buying any of this “nonsense.” He thinks the markets are just trying to convince everybody that a Biden win is good for the economy despite the likelihood of higher taxes. We’ll offset the negatives of higher taxes with the positives of more stimulus, so the thinking goes.

But remember, more stimulus comes with bigger government. Bigger government is not a recipe for economic success and it’s not a recipe for stock market success.”

Peter said if Biden does win, he thinks any Biden-related market rally will be short-lived, just like the sell-off after Trump won was short-lived.

When investors have a chance to really think about what a Biden win means, just like when they actually had a chance to think about what a Trump win was supposed to mean — the Trump win was lower taxes and less regulations. That is good for the market. A Biden win means higher taxes and more regulation. That’s bad for the market.”

Peter said we got a small taste Monday of the downside that’s coming in the US stock market.

Nevertheless, the focus has been almost exclusively on stimulus. The conventional wisdom holds that people and businesses need help and it’s time to stop playing politics and provide the help that’s necessary. But the question nobody asks is why are people in such dire straits to begin with?

Most people will point to the pandemic. But as Peter pointed out, we’ve dealt with other big shocks to the economy without a bunch of government stimulus. Just consider World War II. How did people manage? Because they were prepared. They had savings. The economy wasn’t completely levered up on debt going into the crisis.

The fact that we weren’t prepared at all, that’s the problem no one wants to talk about. Why is it that Americans are loaded up with debt and living paycheck to paycheck? Why is the same thing true for so many businesses? Why are the credit losses now going to be horrific? … Because the Federal Reserve kept interest rates so low for so long that people and companies were able to borrow far more money than they ever would have been able to borrow during a normal lending environment. So, it’s because of the Federal Reserve that the society, the country, is so levered up. That’s why we’re so vulnerable. That’s why everybody needs so much help. Because the government crippled everybody with its monetary policies, and also the fiscal policies, and so now, of course, we can’t walk, so we need more government crutches so we can limp around without realizing that all that is doing is exacerbating the problems that already exist. I mean, we’ve got to fess up to reality and stop trying to sober up by drinking more alcohol. But it is a very sobering understanding to have to do that – for reality to be dealt with and stop pretending there’s a government cure for what ails us. We’re sick because we overdosed on government cures. So, nobody has these conversations. Yeah, people need money. Companies need money. And so we have to stop playing politics and give them the money. Playing politics is giving them the money. The reason everybody needs the money is because we played politics in the past by making them so dependent on that money, by trying to delay and mitigate every single recession – now we’re in a depression. Had we allowed market forces to operate, we would have had a much healthier economy going into COVID-19 instead of a bubble. And the problem with bubbles is sooner or later, they always find a pin.”