Peter Schiff: They Can’t See the Bubble for the Pin

Government officials and central bankers are in full-blown panic mode.

Stocks crashed again Monday. The Dow Jones was down over 2,000 points, a 7.8% drop. It was the 11th biggest percentage drop in history. The S&P 500 and Nasdaq were also down over 7%.

This time oil was the apparent catalyst for the selloff as Saudi Arabia and Russia launched a full-blown price war. But as always, the apparent cause and the underlying cause are two different things.

The powers that be are throwing everything at the economy but the kitchen sink in an attempt to keep the air in the bubble. The Federal Reserve cut interest rates by 50 basis points last week to inject a massive dose of monetary stimulus into the economy. Now President Trump is promising a massive dose of fiscal stimulus.

Trump said he would take “major steps” to support the economy in the light of coronavirus and plunging oil prices. Specifically, the president floated payroll tax relief. “We are to be meeting with House Republicans, Mitch McConnell, and discussing a possible payroll tax cut or relief, substantial relief, very substantial relief,” Trump said at a press conference.

Last Friday, the president signed an $8.3 billion spending package to fund coronavirus research and support states battling the illness.

As expected, the mere hope of stimulus buoyed the markets. Stock futures were pointing to a big rise in the market Tuesday morning and the price of gold dropped.

The question is will it be enough to keep the air in the stock market bubble. Because make no mistake; that’s what this is is all about.

As you would expect, US oil company stocks were hit particularly hard by the plunge in oil prices and the ensuing stock market rout on Monday. The huge losses across the broader market are a little more difficult to wrap your head around. Falling oil prices aren’t bad for everybody, as Peter Schiff pointed out in his podcast. A lot of companies benefit from lower oil prices. Oil importing nations benefit as well. But those markets got hammered too.

All the world stock markets went down, so it’s not about oil prices coming down. That is part of the symptom. It is the debt bubble.”

Peter said when it comes to the mainstream coverage of what’s going on, most of the so-called experts can’t see the bubble for the pin.

All they’re doing is focusing on the coronavirus. It’s immaterial. It means nothing at this point.”

Peter is not saying the health aspects of the virus don’t matter. He’s talking about the financial aspect and the economy.

At this point, it doesn’t matter what happens to that pin. The bubble has been pricked. If it wasn’t the coronavirus, it would have been something else.”

American oil companies are loaded up with debt, but they aren’t alone. Everybody is levered up, thanks to the Fed. Business debt skyrocketed to a record $16 trillion in 2019. That represents a 5.1% year-on-year, much faster than economic growth. As a result, debt levels have also reached historic highs in terms of percentage of GDP. According to a Federal Reserve report, debt growth has outpaced economic output “through most of the current expansion.” In fact, the Fed has warned that the high levels of business debt could become problematic in an economic recession. Peter reiterated this point.

Because we have so much leverage, we can’t survive an economic downturn when you have a disruption of your cash flow.”

This is why the crash in oil prices is so concerning for the US energy sector. Cheap money has allowed the US shale oil industry to prosper even though its production costs are higher. That has allowed the US to undercut OPEC and Russia’s market share.

So, because of the credit bubble, Americans have been able to drill for oil and grab market share. But if they hadn’t been able to borrow all that money on the cheap, they never would have been able to finance all this drilling.”

Is it any surprise that the Russians and Saudis are taking an opportunity to drive a stake in the American shale oil industry? The bottom line is if the price of oil remains depressed, American companies will go bankrupt. They can’t pay their debts.

This is a microcosm of the bubble economy. Easy money and piles of debt have created a house of cards that is in danger of coming down.

Peter said this is just like 2008.

It’s getting started the way 2008 got started. This is a credit bubble that is popping. In 2008, it started with subprime, but it didn’t end with subprime. But if you remember, at the beginning, everybody said it was contained. They just thought it was all about subprime. They didn’t see the bigger credit bubble. Now it’s the coronavirus. The coronavirus is subprime. Or maybe the oil market and the oil debt is subprime. Whatever it is, the pin has pricked this bubble. But what is very similar between the environment today and the environment in 2008 is everybody is minimizing the effects. And nobody can see how bad this is going to be.”

Anybody who thinks the recession is going to be mild and short-lived is missing the big picture. This economy was doomed from the beginning and the next recession was destined to be worse than 2008.

That’s because to get out of that recession, we made a deal with the devil, the devil being the Fed. They helped postpone the pain. Well, now the markets are basically coming to collect for the devil. Because we just delayed the day of reckoning and now we’re going to have to deal with it.