Peter Schiff: Twin Deficits May Doom the Stock Market Boom (Video)
Stock market mania continues unabated. But in the latest episode of the Schiff Report, Peter Schiff warns that twin deficits may soon doom the stock market boom.
If we have a return of the twin deficits as a problem in 2018 – I’m talking about the budget deficit and the trade deficit – twin deficits. You know the last time that was a big problem? It was in 1987. What happened in 1987? We got a stock market crash. I know that was just over 20 years ago, but what was happening then reminds me a lot of what’s happening now. We had the stock market roaring. Everybody was confident. But people were overlooking these gigantic problems until they couldn’t overlook them anymore and then it ended in a spectacular crash.”
The US trade deficit widened 3.2% to $50.5 billion in November. It was the largest trade deficit in almost 6 years. If you take oil out of the equation, the trade deficit hit an all-time high. If oil prices keep rising and the dollar keeps falling, it will put even more pressure on the US trade deficit.
In theory, a weakening dollar should help the trade deficit because it makes US products more competitive. As foreign products become more expensive, consumers can just substitute domestic alternatives. But as Peter pointed out, it doesn’t work that way in practice. Americans don’t have that ability to substitute. There are no domestic alternatives to many of the products they import because America doesn’t make them anymore. So, if the dollar goes down, it simply forces Americans to pay higher prices for imported products.
On the flip side of the equation, the weakening dollar doesn’t help exports either. You have to produce something before you can export it.
So, if we’re not producing the goods foreigners want to buy, the fact that the dollar is cheaper doesn’t help our exports. So, this is going to compound the problem for the trade deficit.”
Peter turned to the tax cut plan. The GOP admits it will add about $1.5 trillion to the deficit. But Peter reiterated what he said last month – the deficit will likely grow even bigger as people reorganize their affairs to take advantage of loopholes built into the plan.
It’s not that tax cuts are a bad thing. But there needs to be some accompanying government relief. We’re not getting that. In fact, the government is spending like a drunken sailor. In the long-term, we will have to pay for all of this government, most likely through money printing and inflation.
That means a further weakening dollar.
Peter said that the weakening dollar may well push Treasury yields higher. That means higher interest rates. And of course, the Fed is trying to help things along by raising rates and quantitative tightening. Rising interest rates could be an even bigger factor than they were in 1987 – not because rates will go as high, but because of the percentage change from where we’re starting.
Think of where we’re starting from. And of course, the entire premise that’s underlying today’s stock market values is based on how low interest rates are and how low everybody believes interest rates are going to stay. Well, if interest rates go up, that bubble gets pricked. And a weak dollar and a higher trade deficit and higher budget deficits could do a lot to provide that pin.”
Peter said the dollar crisis ahead will be worse than the financial crisis we left behind because the Federal Reserve has managed to reflate the bubbles that burst in 2007-2008 in a spectacular way.
We have bigger problems. We have had lower rates for longer. The bubbles are bigger. There’s a lot more air that has to come out. And all of the people who didn’t see the crisis coming in ‘o6 and ’07 that I just mentioned … they’re all on there again talking about how great everything is, how there are no problems anywhere on the horizon, it’s clear sailing forever – now they’re on again singing the same old song.”
Peter reiterated that the next crash isn’t going to set off a garden-variety financial crisis. It’s going to be a currency crisis.
It’s going to have a much more profound impact on the standard of living of the average American and on the real value of investor portfolios. So, while people are all excited about the gains in the US stock market, just think back to how excited you were in 199o-2000 or 1996-1997 if you were invested in US stocks and think about what happened. The last two times Americans were this excited, or almost this excited, the stock market got cut in half. The difference is, this time the Fed may not be there to be able to resurrect another bull market. They may be out of bubbles to blow, and we’re finally going to overdose on stimulus.”
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