Peter Schiff: The Dollar and Bonds Are Bigger Bubbles Than Stocks
Peter Schiff recently called the stock market the biggest bubble ever. But he says he should have qualified that by saying it’s the biggest stock market bubble ever. There is an even bigger bubble floating out there – the dollar bubble. Peter talked about that in his podcast.
Tuesday was another bad day for the US stock market. The worst carnage was in the NASDAQ. It fell 4% on the day and entered correction territory, meaning it’s dropped 10% off its high. And that happened in just three trading days. As Peter Schiff said in his podcast last Friday, the stock market bubble may have popped. He reiterated that point on Tuesday’s podcast.
The air could easily be coming out of the stock market bubble. We’re down 10% on the NASDAQ in three days — three trading days. How do you know we won’t be down another 10% in the next three trading days? You don’t. Now, it could come back. Yeah, of course, the stock market could come back. I’m not short the US stock market. And there’s one reason I’m not short the US stock market and that’s the Fed. The Fed has got the market’s back. The Fed is the market’s friend. In fact, the Fed is the market’s only friend. The Fed is the only thing the market’s got going for it.”
The question is will the Fed be able to prop the stock market up higher? Peter said ultimately there is a lot of risk in this market because you’re just betting on the Fed saving it. Of course, that’s been a good bet so far.
But as they like to say in the investment world, ‘Past performance is no indication of future success.'”
There are some politics involved as well. Will the Fed be willing to let the market drop significantly between now and the election, giving a big boost of Joe Biden’s chances? Or will they print all the money necessary to keep air flowing into the bubble?
I think they would have to increase the amount of money printing so dramatically. I don’t think they could just hint about it or talk about it anymore. This market is so expensive and so ripe for a collapse that the Fed is really going to have to surprise the market by getting out in front of the expectations that already exist. Everybody already knows that the Fed’s not raising interest rates any time in the next several years – five years, 10 years – we all know that. The Fed is not even thinking about thinking about thinking about raising interest rates. … Talking about doing more QE in the future when they’re already doing so much QE in the present, that’s not going to move the needle anymore.”
The only thing that’s going to work is a massive shock and awe injection of the monetary drug.
We need something really out of left field. And we might get it. But if we do, then you’ve got to worry about the bigger bubble.”
Last week, Peter did a podcast titled, “The Biggest Bubble Ever.” But Peter said he really should have titled it “The Biggest Stock Market Bubble Ever.”
Because the stock market bubble really pales in comparison to the bubbles in the bond market and the US dollar.”
The two are related. In effect, bonds are dollars. They are dollars that pay a small amount of interest. If you own Treasuries, you basically have dollars but you have to wait until the bond matures to get them.
If you own US Treasuries, you own dollars. Somebody owes you dollars, so you are a creditor who will be collecting dollars. So, it’s all part of your faith and your confidence in the dollar. And that is where you have the biggest bubble. Because people are so confident in what the dollar will buy in the future that they’re willing to loan their dollars to the US Treasury for 30 years for about 1.4% interest, even though the current inflation rate, even the way the government measures it, is higher than 1.4%. So, you’re talking about a massive bubble.”
The bubble is not being filled by investors dumb enough to want to make these loans. It’s being fueled by central banks that don’t care how dumb the loans are. People are willing to buy these overpriced bonds because they expect central banks will continue to print money to buy them and make them even more overpriced. In a nutshell, central banks are creating artificial demand for bonds, and investors are along for the ride.
Typically, investors buy bonds as a safe haven when risk assets like stocks are going down.
The reality is US Treasuries are also a risk asset. They’re just a different risk. And when people figure this out, when risk assets go down, it’s going to include US Treasuries.”
This puts the Fed in a bad spot. The only way the central bank can keep interest rates from rising is to print more money to buy more Treasuries.
But by doing that, they simply erode the confidence even faster in the dollar. They’re creating more inflation, which destroys the value of bonds, which means lenders need to demand a higher interest rate to compensate them for the loss of purchasing power due to the increased inflation that the Fed creates to try to buy those bonds and they get themselves into a self-perpetuating spiral. And this is the bubble that we all have to be concerned about. It’s the bubble in the dollar, both in the cash and dollar-denominated debt, which includes US Treasuries, but also private debt, corporate debt.”