Peter Schiff And The Untapering "Waiting for Godot" Era

Tyler Durden's picture

Submitted by Peter Schiff of Euro Pacific Capital,

Tapering the Taper Talk

As usual the Federal Reserve media reaction machine has fallen for a poorly executed head fake. It has been fooled by this move many times in the past and for its efforts it has tackled nothing but air.  Yet right on cue, it took the bait once more. Somehow the takeaway from Wednesday's release of the June Fed statement and the Bernanke press conference is that the Central bank is likely to begin scaling back, or "tapering," it's $85 billion per month quantitative easing program sometime later this year, and that the program may be completely wound down by the middle of next year. 

Although this scenario is about as likely as an NSA-sponsored ticker tape parade for whistle blower Edward Snowden, all of the market segments reacted as if it were a fait accompli. The stock market, convinced that it will lose the support of ultra-low, long-term interest rates, and the added consumer spending that results from a nascent housing bubble, sold off in triple digits. The bond market, sensing that its biggest and busiest customer will be exiting the market, followed a similarly negative trajectory. The sell -off in government and corporate debt pushed yields up to 21 month highs. In foreign exchange markets the dollar rallied off its four-month lows based on the belief that Fed tightening will support the currency.  And lastly, the gold market, sensing that an end of quantitative easing would eliminate the inflationary fears that have partially fueled gold's spectacular rise, sold off nearly five percent to a new two and a half year low. 

All of this came as a result of Bernanke's mild commitments to begin easing back on permanent QE sometime later this year if the economy continued to improve the way he expected. The Chairman did not really elaborate of what types of improvements he had seen, or how much farther those unidentified trends would need to go before he would finally pull the trigger. He was however careful to point out that any policy shift, be it for less or more quantitative easing, would not be dependent on incoming data, but on the Fed's interpretation of that data. By stressing repeatedly that its data goalposts were "thresholds rather than triggers" the Fed gained further latitude to pursue any stance it chooses regardless of the data.  

Yet the mere mention that tapering was even possible, combined with the Chairman's fairly sunny disposition (perhaps caused by the realization that the real mess will likely be his successor's problem to clean up) was enough to convince the market that the post-QE world was at hand. This conclusion is wrong.               

Although many haven't yet realized it, the financial markets are stuck in a "Waiting for Godot" era in which the change in policy that all are straining to see, will never in fact arrive. Most fail to grasp the degree to which the "recovery" will stall without the $85 billion per month that the Fed is currently pumping into the economy. 

What exactly has convinced the Fed that the economy is improving? From what I can tell, the evidence centered on the rise in stock and real estate prices, and the confidence and spending that follow. But inflated asset prices are completely dependent on QE and are likely to reverse course even before it is removed.  And while it is painfully clear that expectations about QE continuance have made a far bigger impact on the stock, bond, and real estate markets than any other economic data points, many must be assuming that this dependency will soon end. 

Those who hold this belief have naively described QE as the economy's "training wheels," (in reality the program is currently our only wheels.) They are convinced that the kindling of QE will inevitably ignite a fire in the larger economy. But the big lumber is still too dampened by debt, government spending, regulation, and high asset prices to catch fire.  So all we have gotten is smoke. A few mirrors supplied by the Fed merely completed the illusion. The larger problem of course, is that even though the stimulus are the only wheels, the Fed must remove them anyway as we are cycling toward the edge of a cliff.  

Although Bernanke dodged the question in his press conference, the Fed has broken the normal market for mortgage backed debt. While it's true that the Fed only owns 14% of all outstanding MBS (the "small fraction" he referred to in the press conference) it is by far the largest purchaser of newly issued mortgage debt. What would happen to the market if the Fed were to stop  buying? There are no longer enough private buyers to soak up the issuance. Those who do remain would certainly expect higher yields if the option of selling to the Fed was of table. Put bluntly, the Fed is the market right now and has been for years. 

A clear-eyed look at the likely consequences of a pull-back in QE should cause an abandonment of the optimistic assumptions behind the Fed's forecast. Interest rates are already rising rapidly based simply on the expectation of tapering.  Image how high they would soar if the Fed actually tried to sell some of the mortgages it already owns.  But the fact is, the mere anticipation of such an event has already sent mortgage rates north of 4%, and without more QE from the Fed in the could soon exceed 5%. Such an increase would deliver a devastating blow to the housing market.  More foreclosure will hit just as higher home prices and mortgage rates price legitimate buyers out of the market. Housing prices will fall to new post bubble lows, sinking the phony recovery in the process.  The wealth effect will work in reverse, spending and confidence will fall, unemployment will rise, and we will be back in recession even before the Fed begins to taper. 

In fact, the back-up in mortgage rates seen over the last month has already produced pain in the financial world, with banks reporting a rapid collapse in refinancing applications.  With personal income and wage growth essentially stagnant, individual buyers are extremely dependent on the affordability that ultra-low rates provide. A 50% increase in mortgage rates (an increase from 3.25% to 5%) would price a great many buyers out of the market. Higher rates would also cool much of the housing demand that has been coming from the private equity funds that have been a huge factor in pushing up real estate prices in recent years. Falling home prices would likely trigger a new wave of defaults and housing related bankruptcies that had plunged the economy into recession five years ago.      

A similar dynamic would occur in the market for U.S. Treasury debt. Despite Bernanke's assurances that the Fed is not monetizing the government's debt, the central bank has been buying nearly 70% of the new issuance in recent years. Already rates on 10 year treasury debt have crept up by more than 50% in less than two months, to over 2.4%. Any actual decrease or cessation in buying (let alone the selling that would be needed to unwind the Fed's multi-trillion dollar balance sheet) would place the Treasury market under extreme pressure. Since low rates are the life blood of our borrow and spend economy, it is highly likely that higher rates will lead directly to lower stock prices, lower GDP growth, and higher unemployment.   Since rising asset prices, and the confidence and spending they produce, are the basis for Bernanke's rosy forecast, new lows in house prices and a bear market in stocks will quickly reverse those forecasts. 

Higher interest rates and a slowing economy will be a a disaster for Federal budget deficits. An increase in unemployment and a decrease in tax will hit just as  rising rates make it more expensive for the Fed to finance new and maturing  debt.  Also the profit checks Fannie and Freddie have been paying the Treasury will turn into bills for losses, as a new wave of foreclosures comes crashing down.  

It's fascinating how the goal posts have moved quickly on the Fed's playing field. Months ago the conversation focused on the "exit strategy" it would use to unwind the trillions of bonds and mortgages that it had accumulated over the last few years. Despite apparent improvements in the economy, those discussions have given way to the more modest expectations for the "tapering" of QE. I believe that we should really be expecting a "tapering" of the tapering conversations.  

I expect that the Fed will continue to pantomime that an Exit Strategy is preparing for a grand entrance, even as their time line and decision criteria become ever more ambiguous. The Fed's next big announcement will likely be to increase, not diminish QE. After all, Bernanke made clear in his press conference that if the economy does not perform up to his expectations, he will simply do more of what has already failed.  

Of course, when the Fed is forced to make this concession, it should be obvious to a critical mass that the recovery is a sham. Investors will realize that yeas of QE have only exacerbated the problems it was meant to solve. When the grim reality of QE infinity sets in, the dollar will tank, gold will soar, and the real crash will finally be upon us. Buckle up.

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JR's picture

The Fed under the most radical leadership in history thought it could play the market for a fool. But the market is not a person; it is the sum total of individuals looking out for their own well being and  for their own futures; in short, it is no fool.

And now for those fellow travelers on the flight called Bernanke the landing lights have been turned off and it’s all darkness because in the end the market will be served.

Wall Street and its government-connected crony capitalists haven’t been able to make money unless Bernanke gave it to them. You don’t have these economic lows and a stock market with record highs unless you’re cheating – unless you are spiking the punch bowl with liquor’s that’s not paid for.  Bernanke is slipping out before the party’s over, and the party goers are going to be stuck for the bill and the bill is so big it will bankrupt them.

All these investors know they are on borrowed time and are ready to head for the exits at just a hint of Bernanke’s bailout because they know that he wants a successor to take part of the blame when the flight crashes. The problem is the landing field is bathed in darkness.

toady's picture

It will be interesting to see what the bernank does in retirement. Does he have a survival retreat by Jackson Hole? Or a private island with an arms cache?

Or will he double down and get an office on wall street so he can jump when the time comes?

noless's picture

The bernank owns property on st croix apparently, lost the article, but yeah, somehow i don't see that going too well for him...

rustymason's picture

A couple of the local Cruzans should be happy to talk to the Bernank. They love his type down there.

10mm's picture

Really,whos going to get him.General Public,bahhhhh bahhhhh bahhhhh.

Spitzer's picture

I was the first caller on Pete's radio show today. Wasn't a very good call. We were stepping on eachother.

I usually try and walk him into freegold

new game's picture

funny how every doomer comes out of the woodwork when things get shitty.

hey skiffy? hows that 1800/oz gold doing? great advice. fuck these fuckers.

did skiffy say keep your powder dry-fuck no. Marc said gold could correct.

he is the only one that nailed it of all the doomers, all else sold a book.

fuck you skiffy- gold cost average all the way to where...

waiting patiently for the bottom of 1k/oz-coming soon as the flight to cash continues.

call it watever you want, but cash is still king in the world i must participate in...

Spitzer's picture

Nobody knows how fucking stupid the majority of people will be.

But Schiff knows how it all will end.

The guys who held cash and not gold in the Asian financial crisis got their heads knocked off.

giggler123's picture

Very true, those gold bugs of the ilk of James Turk, Max Keiser and a kin have all been out shouting up 2.5K, 3K/oz when in reality those who bought at even 1600 when told it was cheap have in effect lost money.  If this was any other investment you'd of cut your losses but of course there is the chance it's different this time ;)  It's like the boy who cried wolf; at some point you gonna be right calling a rise in some commodity, then they'll screem blue murder they told you so, blah, blah, blah...  Buy anything when you are happy to take the loss if any, don't let these fools talk you into something you'll regret.  Marc had it right, sure did by telling people they should listen to the people who say don't buy and ask why, not the records that play always saying the samething...

BigJim's picture

Yeah, you'll be looking real smart with all that cash in hand if gold doesn't get down to $1000 before it starts heading inexorably north... at which point, all those people who bought (even at $1800) will be watching you desperately waving your FRNs and shouting 'Come back! Come back!'

Silver Bug's picture

The system Bernanke has create is completely unsustainable. It will collapse.

BorisTheBlade's picture

Bernanke inherited Greenspan's mess and took it to a whole new level, it would take Hercules to clean up these Augean stables of monetary madness.

ejmoosa's picture

I disagree.  It would just take a man with solid financial principles and the ability to say one word: 



TheSilverJournal's picture

The ponzi dependent central planners won't put someone in charge of the monetary ponzi that's unwilling to defend it at all costs.

not applicable's picture

I'm not so sure the market is a collection of individuals. I think it's largely institutional...and I think that algorithmic trading by super computers account for the majority of "volume".  Meanwhile, the precious metals markets are driven by 4 major banks with the help of the CFTC (who hiked margin requirments when metals rose but let the spot price plumet on sell offs.) I can not identiy a single asset class whose price reflects reality.

MrPoopypants's picture

"The Market" is bigger than the exchanges and the games they play.

fonzannoon's picture

I think this makes sense except that the fed will announce the increase in QE. That announcement would cause mass panic. From here on out everything happens behind the curtain.

TheSilverJournal's picture

Why is the word "malinvestment" so hard to understand by so many?

kaiserhoff's picture

Good question.  Perhaps because they have no savings, and/or their planning horizon rarely extends past the weekend?

noless's picture

Saw a headline on marketwatch while i was passing through, some greyhair proclaiming that "young adults aren't ready to save," the topic was on raising social security tax; bitch, i have been wiped out twice since i turned 18 due to job loss and general economic uncertainty, fucking spare me your shit. Didn't read the article, headline was enough.

A statement like that is essentially "gimme yo money, cause you know you won't be needing it".

Bobbyrib's picture

"A statement like that is essentially "gimme yo money, cause you know retirees need it".


Take a look at the retirement savings by Baby Boomers and the Social Security IOU's. They will be desperate for money and working "saps" (saps because they will be the ones to pay the raise in the Social Security tax rate [just like the '80's.]) will provide it.

AGuy's picture

FWIW: That article ticked me off too. My guess is that she is close to retirement and wants others to pay for it since "she" didn't save enough. I have a simple idea: Indeed, raise taxes for SS, but just make those already collecting SS pay the tax increase. Seems fair enough. They want it a tax increase, they pay for it!


They trynna catch me ridin dirty's picture

Because people are idiots.  That's why.

Remember Grover Norquist and his Taxpayer Protection Pledge?  There was a column in the Huffington Post--you know, what all the 'educated' and 'hip' young people read--about Norquist's correct statement that government spending does not produce real jobs.  The HuffPo columnist said, and I quote: "When government builds a school, it takes people to build it, and those are real jobs that are created.  So I think Grover realizes he's lost that argument."

These are the sort of 'intellectuals' we have in the media telling the idiot public how an economy works.  Try to wrap your mind around that for a moment.

Almost Solvent's picture

Not that I disagree with you, but in a perverse sense HuffPo is correct - Main St. is dead and without free money from the Fed this shit would make the "great" depression look like a fucking walk in the park. The "jobs" right now are coming from BennieBux. 


We need to clear out the deadwood and let Main St. have real growth not based on BennieBux.

Kirk2NCC1701's picture

I think we all know where Peter Schiff, ZH and most of us ZH readers and bloggers stand on the Fed, Obama et al, DC, etc. but...

inasmuch as I agree in broad strokes, "You're only as good as your performance last season/year" the saying goes.

So... when do we get some new material?  Something we don't already know?  Something ACTIONABLE for even the next 6 months -- besides financial "Motherhood & Apple Pie for Libertarians"?  More 'meat', less fluff.  Please.  Pretty please.   Otherwise we just have a financial version of The View, if we don't have something "actionable", and the 'Broken Clock Challenge'. 

The rabid fans can junk me if they like, but it's fair question for those of us who are getting bored with "vanilla".

fonzannoon's picture

What new material do you want?

Do you want him to pitch facebook like Biderman?

Non agency mbs like Kyle Bass?

Bonds like Bill Gross?

What do you want to hear, other than be happy you still have some time to get your shit together, which you seem intent on not listening to.

Kirk2NCC1701's picture

Fair enough Fonzie.  Given that I have momentarily forgotten that we are dealing with manipulated and broken markets -- duh, not another 'senior' moment! -- I guess I am/was looking for looking for a "kind of specific" prediction for which Sectors will still perform in the next 1-3 quarters.

I recall from a few years ago that a Smith Blarney broker showed me a color-coded grid of year-end performance of about 10 or 15 sectors, that covered a 10 year period, and ranked (top to bottom) on this grid for performance.

What I have yet to see anyone do, is to at least predict which sectors will be the Top 3 in the coming year.  Surely a pro can pick "win, place & show" better than the rest, you'd think.  Instead, they all give fuzzy, slippery answers.  They typically start off with something like "In the long run...", at which point I tune out.  But maybe my portfolio does not have enough zeros to get the hotshots who do make these predictions and have a high "ERA" score.

I've rolled my 401k over into an IRA, and have all of it in T-Bills, as I'm that nervous and disenchanted.  Have had my share of boating mishaps too.  ;-)


fonzannoon's picture

Michael Burry's clients were ready to fire him before they hit it big.

It's going to be a lack of patience that takes down a lot of people. This might take a while Kirk.

FEDbuster's picture

I would pick up some physical silver here at $20.  It won't go to zero, I would be really surprised if it goes much lower.  I like domestic oil and gas MLPs, too.  Great distributions 8%+ with a diversified basket of them.  Buy some long term storage food, too.  You can always eat it, and it will come in handy in the event of any type of collapse (electric grid, economic, etc...)  My advice, worth what you paid for it.

Treason Season's picture

"...When the grim reality of QE infinity sets in, the dollar will tank, gold will soar, and the real crash will finally be upon us... ."

Doesn't sound fuzzy to me.

buzzsaw99's picture

Here's a hot tip: Lever up and buy a nazcrack etf. Symbol QQQ.

Cugel's picture

Read the Bill Gross posts for actoinable. He top called the bond market for you just a while back

fonzannoon's picture

I saw Bill Gross on fed day telling me to buy bonds.

JR's picture

Kirk, Jim Quinn nailed the future two days ago -- on ZH. America can only win back her prosperity and investor opportunities when the false picture the other side has painted is exposed, when Americans can challenge the current system with the truth, when the producers who built this nation can check the oligarchs' unlimited financial power by ending the Fed support that gives them the leverage to achieve an uneven playing field and cheaper and cheaper labor in America while leveling her manufacturing base into a worldwide monopoly -- the dream of JD Rockefeller.

Here's Quinn:

“Over the course of decades we have allowed ourselves to be corrupted by the love of material possessions, the lure of a debt based faux wealth, the money for nothing entitlement promises of dishonorable politicians, the evil of currency debasement, the effectiveness of mass media propaganda, and the belief that we could sacrifice freedom and liberty for promises of safety and security made by a cabal of powerful rich men. Power has been concentrated into the hands of the few, who operate in secrecy and despise the people. They don’t want transparency or open debate. Freedom of speech is nothing but a thorn in their side. They believe they are smarter than the serfs and have no morality when it comes to committing illegal acts and disregarding the Constitution. They are not acting in the public interest. Their abuse of power and looting of the national wealth have put us on a path towards a bloody revolution. This is not a time for conformity, obedience or submission. It’s time to stand up and expose the evil doers. It’s time to rally around those who care about this country. Who are the real traitors? You know the answer. What are you going to do about it?

“’The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are being looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care? When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media? Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.’” – Ron Paul

In America, as in Switzerland, the militia is the people. Freedom in America was won with the gun; it looks if she is to keep it, she will have to keep it with the gun.

Kirk2NCC1701's picture

+1     I like your response.  Thx.

underman's picture

I personally feel that it'll take a few hundred thousand starving warriors with nothing left to lose to put up this fight.  Much more pain to endure until we discover just who these warriors are.  

It's not about being prepped - as in cabin in the mountains & armed to the teeth - to survive the end game.  Not about sitting on a pile of gold.  And bartering.  Because then what?  You just wait for things to happen and sure, you live longer.   Putting together a Plan B for when TSHF is not nearly enough.  Anyone can do this.  It's not heroic, it's looking out for #1.

It's taking action before the country is reduced to shambles that I think people fail to grasp.  We need to dig deeper.  Primal scream deep.  Balls.  Heroes.  

Bobbyrib's picture

The chocolate flavor is feces..enjoy.

ebworthen's picture


In these markets?

Prescription:  Weekend in Vegas putting bets on 00 at the Roulette table and double 6's on the Craps table.

Oh, and buy AAPL and FB.

TheMeatTrapper's picture

So... when do we get some new material?  Something we don't already know?  Something ACTIONABLE for even the next 6 months -- besides financial "Motherhood & Apple Pie for Libertarians"?  More 'meat', less fluff.  Please.  Pretty please.  

At the risk of shameless self promotion, I believe the goal of this site is to inform us as to what is coming and why. It is up to us to TAKE ACTION and prepare for it. I certainly do not have all the answers, but I do know what works for me. I'm an IT consultant with a six figure salary. I trap my meat. I sell furs. I haven't bought red meat in two years. I trap fish, turtles, squirrels, birds and I smother them in gravy and eat them. 

Food is essential to life. Anyone can grow food and anyone can catch food, as it flies, walks, crawls and swims right by them every day. I don't care if you live in the city, in suburbia or in the backwoods. There is food to be had. 

I catch organic, steroid free, antibiotic free meat behind strip malls and gas stations in a city of a million people while 50 yards away people are standing in line to pay $3 a pound for pink slime laced, outdated "hamburger" that's already turning blue.

I realize that's not the actionable information you are looking for, but it's what I can do now, today, to protect my family from the predation of banksters from another planet. 

Learn to Trap Now!

not applicable's picture

Yeah, it's a fair question Kirk2NCC1701.

But I don't think there is an actionable answer. Nothing makes sense, markets are effectively high jacked and alternatives to fiat currency are vilanized....I guess try to own some land that you can grow stuff on...maybe get some bullion in your pocket (great buying opp now) and maybe find some shares that will actually pay some dividends (even if the dividends are paid in reserve notes).

NEXT 6 MONTHS: I'm holding ticker GAUCX. Great, consistent reliable dividends. Not very volatile (relatively speaking).

kaiserhoff's picture

Schiff makes several good points.  He usually does.  But Ben has room to ease off a little.

The Euro is at long last kapute, and Japan is nearing a tail spin.  The dollar will remain strong even though it doesn't deserve to. 

Ben is a traitor and a fool, and one lucky son of a bitch.


TheSilverJournal's picture

It's a world fiat monetary ponzi and if Europe or Japan, or Great Britain, Italy, or France, for that matter, go kaput, then the entire ponzi will implode. They will all go down together.

kaiserhoff's picture

Eventually yes, and if we had rule of law they would certainly all sink together. 

I think they will find it expedient to cancel all derivative contracts - there go Kyle Basses alleged billions of profits - to give themselves a few more months before the end.  Extend and pretend.  It's all they have.

Look at it this way.  On our worst day, are the States as cluster fucked as Japan?

TheSilverJournal's picture

The US is worse off than Japan. Look at the trade deficit. And don't forget about the unfunded and contingent liabilities.

Besides, Japan still has one move left...stop buying US Treasuries. The US has played its last card and the next addition to QE will start the crackup boom.

AGuy's picture

I believe Japan is now running a trade deficit. Japans bigest trading partner was China before the dispute over the islands. Since then sales has plummets double digits and because of Nuke meltdown, Japan is importing more energy. The Demographics in Japan are the worse since the majority of its population is now reaching retirement age. Japan has no Immigration to replace retiring workers with younger workers.

Recall Japan has been doing QE for twenty years. the US is a newcomer, only doing QE for the past 4 years. The US sucks, but Japan is in the crapper for sure, and there is no way Japan is going to dig itself out.


hootowl's picture

I agree.  If ALL the debts, contingent liabilities, unfunded liabilities, projected deficits, political promises, bonds, and derivitive gambles,  were listed on the books, the whole world couldn't deal with the mess.  It is over.

Food, shelter, ammo, PMs.


hootowl's picture


Let me help you a little here......"WE" will all go down together.  Remember we are all currently in a race to the bottom, as we speak.

hootowl's picture

Ben has an open-ended one-way ticket to Tel Aviv tucked into his wallet.......From where he will never be extradited.

sbenard's picture

Where's Bubbles Bernanke when we need him? Who does he think he is, letting us down like this! Well of all the NERVE!

Why, if he lets up with the money printing, we might actually have to WORK for a living! We might have to actually PRODUCE something! We might have to do R&D! We might have to become more PRODUCTIVE or something! We might have to SELL something! I didn't retire to couch-potatoship for nothing! He needs to follow Schumer's advise and "get to work" so WE don't HAVE to!

Doesn't he know we have a RIGHT to free money? Doesn't have know it's our ENTITLEMENT? Doesn't he know we can't SURVIVE without endless free money?

Did Bubbles fall asleep in his helicopter or something? How DARE he! He should be ASHAMED of himself! Ugh! I'm so disgusted I can't think straight!