Peter Schiff: These Markets Are Rigged
US stock markets enjoyed another Tuesday rebound with the announcement of even more monetary stimulus from the Fed and the hope of government fiscal stimulus and bailouts. In his podcast, Peter Schiff said this should make it crystal clear that the government and central bank are rigging the markets.
There is talk of “helicopter” cash and tax breaks, along with bailouts for the airline industry and small businesses. The proposed stimulus package reportedly totals over $1.2 trillion.
Meanwhile, the Federal Reserve announced additional monetary stimulus measures.
The Fed said it will begin to hold two daily repo operations instead of one. The New York Fed began running repo operations to stabilize overnight lending markets back in September, long before the coronavirus outbreak.
The central bank has also relaunched the so-called Commercial Paper Funding Facility (CPFF), a 2008 financial crisis program that allows companies to take out unsecured, short-term loans. In practice, the Federal Reserve will buy commercial paper directly from companies. The loans will have to be paid back within a year. The US Treasury will provide $10 billion of credit protection to the central bank’s commercial paper operation.
To go along with the CPFF, the Fed announced a Primary Dealer Credit Facility offering overnight and term funding with maturities up to 90 days.
In simplest terms, it will allow over-leveraged companies to go into even deeper debt and those loans will be backed by the federal government. Peter called it a bank bailout 2.0.
Loaning money to banks and accepting corporate and muni bonds, plus equities as collateral, so the banks don’t have to sell those assets at huge losses, is a bailout. In 2008, I warned the next bank bailout would be even more expensive.”
In his podcast on Tuesday, Peter said he thinks the Fed has already committed to spending more money than it did in the entirety of the 2008 financial. crisis.
The Fed made the moves after the cost of borrowing in the commercial paper market spiked a full percentage point Monday, pushing above 3%, according to Federal Reserve data. That means even with the 100-basis point rate cut, market forces were pushing interest rates higher in response to the increased demand for liquidity. This is another central bank manipulation to keep interest rates artificially low.
With the economy slowing due to the coronavirus, inflation should ostensibly be lower. So, why are bond yields rising? Because everybody governments, corporations and individuals are already deeply in debt. The economy has very little savings. Peter said the Fed is desperately trying to counteract market forces.
The last thing the Fed wants is for the free market to function because then it exposes the gigantic mess that they’ve created. So, they’re doing everything they can to prevent market forces from raising interest rates to a market-clearing level. So, the Fed has to come in with QE and they have to buy up or loan money into the commercial paper market to keep interest rates from rising.”
Yields on US Treasuries are also rising. Peter talked about the fact that the bond bubble may well have popped during a podcast last week. He said we would have to wait and see if yields continued to rise. So far, they have.
That blow-off bottom we talked about on this podcast is looking stronger and stronger. And imagine, where would these yields be if the Fed wasn’t buying all of these Treasuries? I mean, who the hell knows how many they’ve already bought? I can only imagine how big the Fed’s balance sheet is by now. But despirte all of that manipulation, yields are still rising.”
The dollar continues to strengthen. The dollar index was close to 100 on Tuesday. Peter said he thinks this is just a short-term head-fake.
I wouldn’t imagine we would be able to get much higher than that given the massive quantity of dollars that are going to be created and spent into the economy.”
As far as the corporate bailouts go, Peter pointed out that this is just enabling bad decision-making and eliminating moral hazard. Take Boeing for example. The company borrowed billions to buy back its own over-priced stock. Now the company is deeply in debt. It will likely be rewarded for its bad decision-making with an infusion of taxpayer money.
How is that capitalism? To have the government artificially suppress interest rates so that companies can borrow money for below free-market rates, use it to manipulate their own share price, and then when it comes crashing down, then the government bails them out. There is nothing about this that is anything like capitalism. These are not free markets. These markets are rigged by the government.”
Peter said he thinks the $1.2 trillion government stimulus is just the “opening bid.” The recession is just getting started. But he emphasized that this economic meltdown was coming down the pike anyway.
In fact, the Federal Reserve and the US government have been manipulating the economy for decades. They managed to blow up a massive bubble after the crash in 2008 and now they are trying desperately to keep it inflated. It’s almost like coronavirus flipped on a light switch. It revealed the huge mess in the basement the kids made a long time ago.