Peter Schiff: US Treasuries Are Junk Bonds
July was a month for the record books.
The Nasdaq and the S&P 500 had their highest monthly closes ever. Meanwhile, gold broke its all-time price record and is knocking on the door of $2,000 an ounce.
On the flip side of stocks, gold and silver going up, the dollar going down. In fact, Peter said that’s a better way to look at it.
It’s not gold that just set an all-time record high. It is the dollar that just set an all-time record low. You get less gold for your dollar than you’ve ever got before.”
Peter pointed out that the US dollar has lost better than 99% of its original value since the founding of the country, mostly thanks to the Federal Reserve. The price of gold in dollars was relatively stable before the central bank came along.
It’s been collapsing more recently, particularly ever since we went off the gold standard in 1971, and I think it’s about to collapse completely in the coming years, if we even have years. It may even be months. I mean, who knows at this point? I think we literally are living on borrowed time. This is a game of musical chairs and the music could stop at any minute. And if you are not in a chair, meaning out of US dollars, then you are out of this game for good.”
July saw the biggest drop in the dollar index since 2010. Most people don’t seem too concerned, perhaps because it is an “orderly” decline. Peter said they are only going to worry when it becomes a “disorderly crash” and it starts disrupting other markets.
Meanwhile, both 10-year and 30-year US Treasuries closed the month at their lowest yields in history. This comes at a time when the US government has run up the biggest debt in US history. The June budget deficit was bigger than all but five of the biggest yearly deficits. So, even as Uncle Sam is borrowing at this historic rate, he can borrow at the lowest interest rate ever. Peter asked a poignant question: does that sound normal? Does that sound like the way it should be in a free market?
Of course not. When you have a lot of debt, you should be paying more to borrow. You are a greater credit risk the more debt you have. Yet, the US government is being rewarded with the lowest interest rates ever despite it being the worst credit risk ever as judged by the sheer amount of the debt that it has.”
Fitch Ratings downgraded its outlook on the US government’s creditworthiness from stable to negative, citing a “deterioration in the US public finances and the absence of a credible fiscal consolidation plan.”
“High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus,” Fitch said. “They have started to erode the traditional credit strengths of the US.”
But the agency stopped short of actually dropping the country’s credit rating, leaving it at AAA.
Peter said US Treasuries should actually be junk bonds.
Not only should they not be rated AAA; they shouldn’t be rated at all.”
Peter noted the disparity of a dropping credit outlook even as yields sit at record lows.
Which means investors, in theory, have the most amount of confidence ever in the creditworthiness of the United States, that they’re willing to loan the United States money for 10 to 30 years at the lowest rates in history, and that’s the same day when Fitch comes out and says, ‘Oh no, we’re going to lower our outlook because we now think the US government is in danger of not being able to fully repay its obligations.”
This also undermines Treasuries’ perception as a safe haven. Peter said the real safe haven is gold.
And that’s what the smart money is buying.”