Peter Schiff: We’re on a Fed-Induced Sugar High

Sometimes you need to look back at where we come from to understand where you’re going. Peter Schiff does just that in his May 27 podcast. He analyzes the stock market surge of last year and concludes the mainstream might be a little over-optimistic on where we’re heading. The recent surge in stocks isn’t based on economic reality. The economic reality is we’re an insolvent zombie nation. We’re just on a giant Fed-induced sugar high.

The US stock market came out of the Memorial Day weekend with back-to-back big gains, with the Dow closing over 500 points up both Tuesday and Wednesday.

Stocks are rallying on the expectation of a relatively quick economic recovery as states lift coronavirus restrictions. Markets are also already pricing in a coronavirus vaccine. Peter said the market is rallying on “hope and hype.”

As we look at this rally, it’s important to look back at where we came from. Last year was a great year for stocks. Why?

Remember the stock market tanked the fall of 2018. US stocks had the worst December since the Great Depression. Then the Federal Reserve rode to the rescue with the Powell Pause. Back in June 2019, Peter pointed out that when you look at the stock market gains to that point, you had to put them into context.

The only reason that the market has done so well this year is because it got destroyed in the fourth quarter of last year. Remember, we had the worst December since the Great Depression as well.”

The Fed followed up the Powell Pause with three rate cuts in 2019 (August, September and December). It also ended its balance sheet reduction program and launched a new round of quantitative easing, even though it refused to call it that. The market loved these moves by the central bank because they were spun as “preemptive.”

Not only were investors happy about the fact that there was no recession anywhere in sight, which would be great for corporate earnings, but now they knew that Donald Trump would get reelected so they wouldn’t have to worry about higher taxes on corporations, higher income taxes, or cap gains taxes; they could get more deregulation. And so investors were happy about that.”

Another reason for the 2019 rally was the trade deal with China. Trump kept goosing the market by talking about the great trade deal he was going to deliver. Instead, we got the Phase 1 Trade Deal. It was spun as just the opening act. At the time, Peter was saying Phase 1 was all we would get and there wasn’t going to be anything else.

So, you had the trade deal with China, you had the reversal in Fed policy, you had the fact that there was no recession anywhere in sight, and you had Trump being a shoo-in to get reelected – all of that was powering the market in 2019.

Here we are today. Everything has unraveled except the loose monetary policy.

Look at the stock market. We didn’t get anything. The only thing the market got was more easing. And of course, the market didn’t even expect that, because the market didn’t think the economy needed it, because the market was convinced there would be no recession. Well, not only was the market wrong; we have the worst recession ever. … The market was priced for no recession at all, and we didn’t just get a recession, we got the mother of reccessions. So, how much more wrong could the market have been?”

The trade deal is gone. The US and China aren’t negotiating. In fact, tensions with China are rising. The COVID-19 pandemic trumped the Trump trade deal.

On top of all that, the odds of Trump winning the 2020 election have diminished and there is a chance the Democrats could take the Senate.

With all of this – the markets are barely down. The major markets have regained much of the 2019 rally and the NASDAQ has actually added to it. How do you explain this?

The only reason that the market has gone up is because the Fed has been more aggressive than anybody believed. The Fed has printed more money than anybody thought possible. The monetary and fiscal stimulus is so huge that it trumped everything else. And that’s it. That’s the only reason the market is rallying.”

What the central bank and government are doing is not a good thing. The fiscal and monetary stimulus is worse than the recession in the long term.

Whatever happened to the economy because of the virus, what’s going to happen to the economy because of what the government has done to supposedly cure us from the disease, is going to be much worse. … The bottom line is all we’ve got in the market is the Fed. It’s 100% a Fed-induced sugar high.”

The stock market rally is convincing everybody that the worst is over. But people still don’t understand the position that the economy was in before the pandemic.

They think we can go back to where we were. We can’t. Because all we had was a bubble. The bubble has popped and it’s not going to be reflated.”

Peter said we will likely get an economic bounce in the third quarter. The economy will rebound to some degree once things open up. But he said he thinks it will crash again. People need to look at the actual numbers. Look at the debt – both government and corporate. Look at the number of insolvent companies. When you do the math, you find that the US is an insolvent zombie nation.