Was Monday’s Big Selloff a Plea for More Stimulus?
Monday (Sept. 21) looked a lot like March with everything selling off as the dollar rallied. There was a sudden burst of risk-off sentiment due to worries that a spike in coronavirus cases could lead to new economic lockdowns coupled with significant political uncertainty after the death of Supreme Court Justice Ruth Bader Ginsburg. Peter Schiff talked about the big selloff in his podcast, and he thinks there a deeper underlying reason for the sudden volatility. Markets are worried that the Fed and the US government aren’t stimulating enough.
The Dow was down over 940 points at its interday low. It rallied into the close bust still closed down 509 points. The S&P 500 closed down just over 1%. The NASDAQ was the strongest of the indexes, but still closed off 14 points. The Russell 2000 was the weakest, down 3.3%.
Meanwhile, gold and silver also got hammered. Gold fell below $1,900 for a time, but rallied back to close above that key support level.
Most of the commentary during Monday’s slide revolved around COVID-19 fears and problems in the European banking system, but Peter said he thinks there was a more fundamental reason for the big selloff.
That is the idea that the Federal Reserve is not loose enough. The Fed’s monetary policy is not dovish enough.”
Even though at the September FOMC meeting, the Fed indicated it plans to hold interest rates at zero at least through 2023 and it plans to continue quantitative easing at current levels, the markets said, “That’s not enough.”
The markets need more. This bubble is so much bigger than the one that we had back then (2008) that it requires far more air coming from the Fed to keep it from deflating. So, we need more. The Fed needs to talk about negative interest rates. The Fed needs to commit to bigger quantitative easing.”
Of course, in effect, the central bank is calling for more QE as Jerome Powell eggs on Congress to pass additional fiscal stimulus.
Any additional fiscal stimulus automatically requires more monetary stimulus, because where is the government going to get the money for the fiscal stimulus? It’s going to get it from the Fed. That’s what supposedly makes it a stimulus is that the government is going to run larger deficits. It’s going to spend money it doesn’t have.”
But there is concern that if Congress and the White House can’t get some type of fiscal stimulus package passed, the Fed won’t just provide more monetary stimulus on its own.
All that monetary stimulus is going to do, absent the fiscal stimulus, is pump up the asset markets – the stock market, the real estate market, or bond market. It’s not going to do anything for the real economy. I think the Fed believes that what will help the real economy is the fiscal stimulus. Now, the Fed is wrong. That’s not going to help the real economy either.”
With all of the political turmoil, ratcheted up by the death of Ruth Bader Ginsburg, the possibility of getting a fiscal stimulus deal done appears less likely.
Peter said he thinks the stock market will continue to be shaky and the sell-off could even gain momentum unless we get a concrete commitment to more monetary stimulus from the Fed, which may require something coming from Congress in terms of fiscal stimulus.
Which again, doesn’t stimulate the economy. But it will stimulate the markets. It will provide the addicts on Wall Street the drug they need in order to bid stock prices higher.”
But Peter said he thinks even if Congress can’t get a stimulus deal done, the Fed will ultimately act on its own.
Because the Fed will see the weakness in the market as a sign that the economy is going to weaken because it realizes that it is the wealth effect that is powering whatever recovery it thinks is in progress. And so if that is in jeopardy, I think the Fed will act unilaterally.”
In this podcast, Peter also broke down the politics behind the looming Supreme Court fight.