October 5, 2022

Peter Schiff: Markets Still Working on False Confidence in the Fed

“Investors still don’t understand that regardless of how hard the Fed battles, it is going to lose. “

The four-week win streak in stocks came to an end last week with all of the major indexes down significantly on Friday.

As Peter explained in his podcast, it appears the financial markets are coming to terms with all the fact the Powell Revolves may not come as quickly as expected. That means interest rates may increase as the inflation fight continues. But Peter says the financial markets still don’t get the big image. The Fed can’t earn this inflation fight with out wrecking the bubble economic climate.

Peter said the wild ride on the so-called meme-stocks such as Bed Shower and Beyond typifies “ the casino-like mentality” the Fed has created.

“ You have so many people mindlessly piling into trades just chasing momentum. ”

Bed Bath and Beyond is on the brink of bankruptcy. The company’s provides are trading around fifty cents on the dollar.

“ If the bondholders don’t expect to obtain money back, there’s no chance how the common stockholders are going to obtain theirs back. So , those who are paying $30 a talk about for Bed Bath plus Beyond have no idea what they’re doing. The only people who had a clue were the people who were selling the stock on the way up. ”

Peter said that it is hard to think of a company within a worse position to weather conditions the current economic storm. Bed Bath and Beyond is really a brick-and-mortar company heavily tied to housing and discretionary spending.

“ Consumers are getting killed along with inflation. They’re paying a lot more for food. They’re paying more for energy, regarding rent. They don’t have money to splurge on a few fancy bath products or stuff from their kitchen. … Why this is the stock that individuals chose to buy makes simply no sense. They’re only buying it because it’s going up, and it’s only going up because other fools are purchasing it who don’t understand the fundamentals of the company. They just think they’re going to make money because the price is going to go up. It’s the greater fool theory. And unfortunately, that’s how most people are investing. They’re fools. They just haven’t figured it out yet. Yet so many fools are in for any rude awakening when the songs finally stops on these types of trades. ”

Peter mentioned that more broadly, the momentum stocks got pummelled the most last week. They were the stocks that went up the most in the recent keep market rally. He mentioned the reason these stocks declined so much is because the markets are usually coming to terms with the fact that the Powell Pivot may not take place as soon as they thought. The expectation for an finish to rate hikes is being pushed back. This is harmful to growth stocks for two reasons.

  1. This means higher interest rates. That is a huge negative for growth shares because it discounts their upcoming earnings by a higher rate of interest.
  2. If the Fed is going to have to stay higher for longer, that means the economic climate will be weaker for longer. That will weigh down earnings.

“ We’re starting to see the shift coming back to value plus dividend-paying stocks and away from momentum growth-type stocks. And am believe this is going to gain steam. I’ve always thought that what we were experiencing was a bear market rally, the sucker rally, a correction. And I think that correction is finished and the primary trend provides resumed. ”

The notion that the Given pivot will be delayed as well as the central bank is going to keep pushing rates higher is being felt even more strongly in the bond market. Yields continue to spike.

Oddly, the 2-year is the higher point on the yield curve.

“ What that indicates to me is that markets do think that the recession, which if it’s not already here will certainly arrive sooner than most people thought, and therefore the Fed will start trimming rates earlier over this particular 5-year time horizon, therefore investors expect rates three or four years from now to be lower than where they are right now. ”

Peter said that the markets still have a lot of false confidence within the Fed’s ability to bring pumpiing down to 2% and keep it there for most of the following 30 years.

“ Now, talk about living in a fantasy land. There is absolutely no way the Fed will even come close to attaining that for 30 years. They may not even going to achieve this for three years. Yet, traders are still operating under the delusion that the Federal Reserve can perform what it claims it’s going to do. But because the Fed nevertheless has that credibility, also because the Fed is still talking tough about its resolve to fight inflation, occur to be seeing this reaction within the bond markets. ”

The understanding of a more hawkish Given is also driving the buck higher. Some economic information that wasn’t as fragile as expected also buoyed the particular greenback.

“ We didn’t really get any strong information. We just got data that wasn’t as weak as people had anticipated. That, together with the Fed a few minutes and all this hawkish talk by a lot of FOMC people. But again, it’s all speak. And of course, that’s exactly what a person would expect when you have no stick. You have to scream as loud as you can and pretend that you’ve one. And that’s exactly what these FOMC guys are doing. ”

All this is having the opposite effect on  gold . Precious metal was down about fifty dollars last week. Peter noted it wasn’t down nearly just as much as other foreign currencies and called that a positive sign.

But why is this particular happening?

“ Because investors are usually confident that the Fed will fight harder to win the war against pumpiing. Investors still don’t understand it does not matter how hard the Fed arguements, it is going to lose. Because it still cannot really fight hard enough to win. Yes, the Given is going to pretend that they’re prepared to put the economy into recession. But that’s only because they believe any recession will be mild and short-lived. They are not prepared for the type of despression symptoms that would actually result from a fantastic fight against inflation. In fact , it’s not just a depression. It’s a much more severe financial crisis than the one particular we had in 2008. And when the Federal Reserve was not willing to allow the 2008 problems to run its course, precisely why would it be willing to permit this worse crisis to run its course? ”

Instead of taking hard medicine in 2008, the Fed blew more air into the bubble. We have now a much more dysfunctional economy. There is certainly more malinvestment. More financial debt. More misallocation of assets.

“ If the Fed wouldn’t allow the economy to swallow the bitter-tasting medicine back then, exactly why would they force-feed even worse-tasting medicine now? ”

On this podcast, Peter talks about exactly how not as weak economic information is the new strong and the continuing woes in the housing market.

The Unstoppable Force of Truth within the Information War

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