Peter Schiff: The Party Is Over

As Peter Schiff put it in his podcast, if the first trading day of the fourth quarter was a sign of things to come, bulls on Wall Street are in for a rough end to the year. In fact, Peter said the party is over and you don’t want to be the last one to leave.

The Dow was down 343.7 points and the Nasdaq shed 90 on a day that started out all sunshine and roses.

For a couple of days, the economic news wasn’t quite as bad as it could have been, or maybe some of the numbers actually were a little better or beat the numbers, and I think there was some idea that, hey, maybe the economy is not as bad as some people had feared, but then reality reared its ugly head at 10 a.m. when we got the ISM Manufacturing numbers.”

US manufacturing dove to a 10-year low. The ISM index of national factory activity dropped 1.3 points to 47.8 in September. That was the lowest number since June 2009 – as the US economy was emerging from the Great Recession. A reading below 50 signals manufacturing is contracting. The weak September number follows on the heels of a 49.1 print in August. Analysts had expected a bounce-back to 50.

Yet Donald Trump wants us to believe we have the greatest economy ever. How do we have the greatest economy ever when we have one of the worst manufacturing economies ever? Especially when it was manufacturing that was supposed to ‘Make America Great Again.'”

Instead, we’re back where we were during the Great Recession. Peter said the only thing this economy really has going for it is massive deficit spending.

What is driving US GDP is consumers spending borrowed money and the government spending borrowed money. That’s it. That’s the secret. Have a borrowing binge and spend a bunch of money to try to artificially boost GDP while the actual economy — the real economy — is imploding.”

Most mainstream analysts blame the bad manufacturing number on the trade war. Peter said he thinks we’d probably have weak manufacturing without the trade war. In fact, the notion that the trade war could end soon may be causing a false sense of optimism. Peter said it may be a “buy the rumor, sell the fact” scenario if there is a resolution to the trade war and people realize it’s not a big deal.

Once we have a deal, the markets will have nothing to look forward to. I mean, what do they got? QE is already restarted. The Fed is already cutting rates. I mean, what is going to help this market? The only thing that’s out there that can help it is a trade deal. So, once we have a trade deal there is nothing that can help the market and the market’s going to go down.”

Peter said the real drag on the market is the collapse of the money-losing stocks. He’s talking about all these overvalued IPOs for money-losing companies. This is where you saw all of the speculative money. He called these companies, like Chewy, Uber and WeWork the poster-boys of this bubble. These stocks are the weak links in the chain. The weak links break first and the rest of the chain follows.

If investors are no longer willing to finance money-losing companies, if that type of speculative fervor has come to an end, this is a huge bell ringing on Wall Street, and it has massive implications, not only for the stock market, but for the overall economy.”

In a nutshell, these companies never bothered with making a profit. They were focused on the IPO. The strategy was to cash out on the backs of stock market investors who didn’t care whether or not the company was making money. They sacrificed profitability to deliver value to the customer in order to create a “sexy” story.

This was a great party while the party lasted but the party is now over.”

Where did all of this malinvestment come from?

Artificially low interest rates, cheap money sloshing around causing non-economically viable businesses to exist and to thrive.”

As Peter said, at some point, you have to pay the piper.

Photo by Eric Sonstroem via Flickr