Peter Schiff: Investors Are in for a Painful Awakening

Last Tuesday, the S&P 500 made a record high as markets anticipated another Fed rate cut. Some analysts say the big risk is that we’re seeing a boost in asset prices but no real uptick in the actual economy. Peter Schiff appeared on RT Boom Bust to talk about it. He said investors buying onto all of this Wall Street hype are in for a painful awakening.

The conversation started with a focus on the so-called “phase-one trade deal.” Optimism about a trade agreement has been a significant factor in pushing stock markets up. But there is growing doubt about whether a deal will get done. That raises a big question: if phase-one is this hard to nail down, how bad will phase-two be?

Peter cast doubts on whether there will even be a phase two.

I think phase-one is simply a way for Trump to save face and to surrender in the trade war but still claim victory.”

Meanwhile, at the time of the interview, the Fed was prepping for a third rate cut of the year even as stock prices were hovering near 15-month highs. Peter said the Fed is walking a tightrope by claiming the cuts are just some sort of mid-cycle correction. And as he pointed out, just one year ago, the central bank was raising rates and it forecast it would continue raising rates through 2019.

It’s not just that they’re cutting rates. They’re back to quantitative easing. They have called off quantitative tightening. They’ve reversed course. They’re doing quantitative easing, except they’re not admitting that’s what they’re doing because they’re embarrassed to have to acknowledge this. But if you actually look at how fast the Fed’s balance sheet is growing now, it’s actually growing faster when they’re ‘not doing QE’ than when they were.”

The Fed is currently doing about $60 billion a month in bond purchases and it’s injecting $130 billion a night in repo operations. Why is the Fed injecting so much liquidity into the system when they claim nothing is wrong?

Just ignore what they say and look at what they do. Look, they are trying desperately to keep the air from coming out of this bubble. But it’s not going to work. The bubble has already popped. The only question is how fast is the air going to come out and when is the market going to figure out that the game is over?”

Peter said all stocks are tremendously overvalued right now because of the Fed and the monetary policy that it has pursued. What the Fed is trying to do is keep those asset prices from coming back down to earth.

Peter mentioned the fact that Trump tweeted out that the US should follow Europe and Japan down the path to negative rates. Peter said Trump is ignoring the people who would be stuck with the bill.

It’s the savers that should be getting paid by the borrowers who are borrowing money. It’s the citizens who are going to end up losing because they are financing these loans. But all of this is producing malinvestment. It’s helping to expand government at the expense of the real economy.”

One of the RT hosts played devil’s advocate and suggested that the Fed rate cut might be prudent given the trade deal might not go through.

Look, the one thing the rate cut is not is prudent. It’s a desperate attempt, again, to keep the air from coming out of the bubble, to maintain false consumer confidence. You know, consumers are confident despite the fact that the economy is a disaster. They don’t have any money. They have lousy jobs. They have no savings. They’re loaded up with debt. But as long as they can keep on borrowing money to buy stuff they can’t afford with money they don’t have, for some reason they remain optimistic. And you have all of this hype coming out of Wall Street, coming out of the media to try to encourage all of this false optimism. The Fed plays into that. The Fed keeps talking about how the economy is in a great place even as they’ve got it on life support. So eventually, the consumer is going to figure out just how bad the economy is. Unfortunately, it’s going to be too late for him to do anything about it and he’s going to be blindsided. But I think it’s the investors who are in for an even more painful awakening.”