Peter Schiff Warns "The Fed Is Spooking The Markets, Not China"

Tyler Durden's picture

Submitted by Peter Schiff via Euro Pacific Capital,

Fasten your seat belts, this ride is getting interesting. Last week the Dow Jones Industrial Average was down more than 1,000 points, notching its worst weekly performance in four years. The sell-off took the Dow Jones down more than 10% from its peak valuations, thereby constituting the first official correction in four years. One third of all S&P 500 companies are already in bear market territory, having declined more than 20% from their peaks. Scarier still, the selling intensified as the week drew to a close, with the Dow losing 530 points on Friday, after falling 350 points on Thursday. The new week is even worse, with the Dow dropping almost 1,100 points near the open today before cutting its losses significantly. However, no one should expect that this selling is over. The correction may soon morph into a full-fledged bear market if the Fed makes good on its supposed intentions to raise interest rates this year. Have no illusions, while most market observers are quick to blame the sell-off on China, this market was given life by the Fed, and the Fed is the only force that will keep it alive.

 
The Dow has now blown through the lows from October 2014, when fears over life without quantitative easing and zero percent interest rates had caused the markets to pull back about 5%. Back then when market fear began spreading, St. Louis Fed President James Bullard publically issued a few choice words which reassured the markets that the Fed stood ready to reignite the QE engines if the economy really needed a fresh dose of stimulus. By the end of the year the Dow had rallied 10%.
 
Amid last week's carnage, Mr. Bullard was at it once again. But instead of throwing the market a much needed life preserver, he threw it an unwanted anchor. He offered that the economy was still strong enough to warrant a rate increase in September. He was careful to say, however, that the Fed is still "data dependent" and will therefore base its decision on information that will come out over the next three weeks. So after nearly seven years of zero percent interest rates, the most momentous decision the Fed has made since the Great Recession will be dictated by a few weekly data points that have yet to emerge. Haven't seven years of data provided them enough information already? What's next? Will they have to check the five-day forecast to insure that there will be no rain before they pull the trigger?
 
As I have been saying for years, the Fed has always known that the fragile economy created through stimulus might prove unable to survive even the most marginal of rate increases. But in order to instill confidence in the markets, it has pretended that it could. Wall Street has largely played along in the charade, insisting that rate increases were justified by an apparently strengthening economy and needed to restore normalcy to the financial markets.
 
But the recovery Wall Street had anticipated never arrived, and traders who had earlier demanded that the Fed get on with the show, have now panicked that the rate hikes are about to occur in the face of a weakening economy. As a result, we are seeing a redux of the 2013 "taper tantrum" when stocks sold off when the Fed announced that it would be winding down its QE purchases of bonds.
 
The question now is how much further the markets will have to fall before the Fed comes to the rescue by calling off any threatened rate increase? What else could pull the markets out of the current nose dive?
 
Think about where we are. Stock valuations are extremely high and earnings are falling and the economy is clearly decelerating. The steady march upward in stock prices has been enabled by a wave of cheap financing and share buybacks. There are very few reasons to currently suspect that earnings, profits, and share prices will suddenly improve organically. This market is just about the Fed. After one of the longest uninterrupted bull runs in history, bearish investors have learned the hard way that they can't fight the Fed. So why should they now expect to win when the Fed is posturing that its about to embark on a tightening cycle? 
 
If the Fed were to do what it pretends it wants to do (embark on a tightening campaign that brings rates to about 2.0% in 18 months), and in the process ignore the carnage on Wall Street, I believe we would see a consistent sell off in which most of the gains made since 2009 would be surrendered. After all, how much of those gains came from bona fide improvements in the economy? It was all about the twin props of Quantitative Easing and zero percent interest rates. The Fed has already removed one of the props, and it's no accident that the markets have gained no ground whatsoever in the eight months since the QE program was officially wound down.
 
As the market considers a world without the second prop, a free fall could ensue. Now that we have broken through the October 2014 lows, there is very little technical support that should come in to play. A free fall in stocks could be an existential threat to an already weak economy.  It should be clear the Janet Yellen-controlled Fed would not want to risk such a scenario. This is why I believe that if the sharp sell off in stocks continues, we will get a clear signal that rate hikes are off the table.
 
Of course, even if it does throw us that bone, the Fed will pretend that the weakness was unexpected and that it does not come from within (but is caused by external forces coming from China and Europe). Using that excuse, it will attempt to prolong the bluff that its delay is just temporary. For now at least Wall Street is happy to play along with the blame China game. This ignores the fact that China has had much bigger sell offs in recent weeks that did not lead to follow-on losses on Wall Street. I think the problems in China are the same problems confronting other emerging economies, namely the fear of a Fed tightening cycle that would weaken U.S. demand, depress commodity prices while simultaneously sucking investment capital into the United States, and away from the emerging markets, as a result of higher domestic interest rates and the strengthening dollar. 
 
But if a temporary halt in rate hike rhetoric is not enough to stem the tide, a more definitive repudiation may be needed. Such an admission should finally open some eyes on Wall Street about the true nature of the economy and the unjustified strength of the U.S. dollar. That already may be happening. The dollar index closed at 95 on Friday...down from a high of 98 two weeks prior. On Monday, the index blew through the 93.50 support level and dropped more than 3% in just one day, down to intraday low of 92.6. Who knows where it stops now?
 
Gold is rallying in the face of the crisis and has moved quickly back to $1,160, up around $80 in just two weeks. The bounce in gold must be causing extreme angst on Wall Street. Just two weeks ago, amid widening conviction that gold would fall below $1,000, it was revealed that hedge funds, for the first time, held net short positions on gold. Those trades are not working out. With the major currencies and gold now strengthening against the dollar, the greenback has had some success against far lesser rivals like the Thai baht and the Kazakhstan tenge. But these victories against currencies largely tied to commodities may be the last fights the dollar wins for a while, especially if Janet Yellen finally comes clean about the Fed's inherent dovishness. Those currencies now falling the farthest may be the biggest gainers if the Fed shelves rate increases.
 
Some still cling to the belief that the Fed will deliver one or two token 25 basis point rate increase before year end. But this could expose the Fed to a bigger catastrophe than doing nothing at all. If it actually raises rates, and the crisis on Wall Street intensifies, further weakening an already slowing economy, the Fed would have to quickly reverse course and cut back to zero. This would put the Fed's cluelessness and impotency into very sharp focus. From its perspective anything is better than that. If it does nothing, and the economy continues to slow, ultimately "requiring" additional stimulus, it will at least appear that its caution was justified.
 
Unfortunately for the Fed, it won't be able to get away with doing nothing for too much longer. Events may soon force it to show its hand. Then perhaps some may notice that the Fed is holding absolutely nothing and has been bluffing the entire time.

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BrocilyBeef's picture

and the Fed is the only farce that will keep it alive.

Hype Alert's picture

The FED has over 4 Trillion dollars invested in this experiment, let's see if they let it go poof.

wee-weed up's picture

OMG... Yellen is nekid!

My eyes! My eyes!

TongueStun's picture
TongueStun (not verified) wee-weed up Aug 24, 2015 4:24 PM

95% of our countrymen (who know that the FED is a bank) think the FED is owned by 'tha gubmint' and trying to do what's best for America.

falak pema's picture

95% of the people at ZH think that the FED, being a PRIVATE bank owned by the scions of capitalism in all its glory, since 1913, is the seat of communist socialism. A state combine.

Now figure that out. JPM and Rothschilds made the greatest socialist experiment of all time when they created the FED behind Woodrow Wilson's back (now he was a true democrat and social minded)!

Whodhavthoghtdatpossible!

Since that day the USA is a communist combine and Keynes knew that from DAY 1. Keynes was the man who made the commie FED into FDR's bread and butter bank for government spend in Tenessee valley authority and crazy socialist things like that.

Now if only the US had had a truly private bank-- I mean a truly private "capitalistic" bank-- that listened to Von Mises. But they did until 1933, as upto then gold was standard gold, and that was way after it made the country bust!

Von Mises or no Von Mises, under 'no holds barred' capitalism and gold standard, the US went bust in 1929. And the FED was totally private and totally run by Mellon (another well known commie).

I guess the only true capitalists in the USA in those days were Saccho and Vanzetti and Al Capone!

I learn a lot when I come to the hedge about American socialism. Not so much about American capitalism; as we all know its NEVA existed since 1913 !

Now you have me really confused. the USSR was the most capitalist country in the world as Stalin was a one man show, a total entrepreneur who decided all on his own based on "free will"  and who had a true killer instinct like Donald Trump today!

crazytechnician's picture

That's certainly an interesting take.

I always thought Capitalism meant risk , the failure of the failed , and the success of the successful ,  instead we get all risk taken off of the table , bail-out's of the failed leading ultimately to even biggger failure , which eventually get's an even bigger bail out until the bail-out's no longer work. It's funny , these a$$holes preaching Inclusive Capitalism and calling themselfs Capitalists , at the same time bailing each other out , at zero risk , with OPM and using OPM to bail-in their failed crony capitalist pals , ... These people are NOT Capitalists , they are a bunch of theiving socialist commies , and they have now created the largest systemic risk in human history with their Anti-Capitalist actions.

falak pema's picture

SO we agree. the Soviets were true capitalists; cos if you failed you were goulaged good; if you succeeded you stayed in the politburo and Stalin was boss man and to knock him out you had to be very good. In fact nobody managed to knock him out, not even Hitler. And he really knew how to handle his enemies --with a pickaxe-- for Arch rival Trotsky.

A true capitalist, who succeeded beyond all others. All the way to the Reichstag!

Whew I feel SOOO RELIEVED, allus klaar!

MalteseFalcon's picture

Schiff is wrong. The Chinese kicked this all off. Today was a reaction to what the Chinese set off all over the world.  The FED stepped in, applied one of its limited number of band-aids, but then the bleeding resumed.  The bleeding will continue tomorrow.  The FED may or may not apply another one of its limited number of band-aids.

At some point, the patient is going to bleed out and the FED, like the rest of the USA. is simply going to stand by and bear witness.

The FED's first aid kit got used up fixing 2008.  Pay no attention to them.  Bernanke used it all up.

I don't blame China.  They are out of options as well.  We could have spent the last 6 years reforming the economy and we didn't.

Enjoy the denouement.

rushjob's picture

Curiously the USSR had highest economic growth in all of it's existence between 1917 and 1990 and closed most of the gap against GDP of USA between 1935 and 1995 (except for the WW2 years) under Stalin. Not all communists running USSR were the same and when I looked at the data and found out Stalin was economically the most successful leader.

http://sdelanounas.ru/images/img/s017.radikal.ru/i405_1111_26_9f6dec555d...

The gray area represents Stalin, chart is for GDP of USSR as percentage of GDP of USA.

Money Counterfeiter's picture
Money Counterfeiter (not verified) rushjob Aug 24, 2015 7:31 PM

Yea the USSR built conctrete slabs by the boat load.  Great way to boost GDP numbers.

Antifaschistische's picture

how much longer before we have an Emergency FOMC meeting, where they decide to let everyone know they were just bluffing about the suggested rate increases?

5, 4, 3, 2......

Hype Alert's picture

-1640 points (-9.4%) in 4 days on increasing volume and increasing losses.  Not orderly by any means.  I expect something will be done to break the snowballing effect or else they will get their 40% correction this week.

TuPhat's picture

Let it go poof?  4 Trillion dollars is nothing but poof.  Don't be fooled by the Hype, Hype Alert.

Hype Alert's picture

Well if 4 trillion is nothing but poof, then it's all poof, so why are you here?  I get that it's fiat, but if you think the FED can inject $4 trillion and then watch as it turns to ash and say "we told you they were overpriced" after they inflated it and not suffer severe consequences, you're just prattling.   They own the stock bubble.  They claimed it in March 2009 by stating they were going to inflate stock prices.

crazytechnician's picture

They created that 4 Trillion as entries on a computer screen that were then sent over to another computer screen.

Just don't be anywhere near them computers when they do not get their money paid back into those screens because they may implode.

Buck Johnson's picture

They are in a major catch 22, if they raise rates and the markets tank hard and continue to tank if they decided in a few days or a week to lower rates it shows tha the Fed is busted and has nothing and in so doing is a non-power.  If they don't raise rates the market will continue to the point that they will have to do QE which won't work this time or more QE.  Thats all that they have left.

 

Hype Alert's picture

They cornered themselves in March 2009, they just keep painting a smaller and smaller corner.  Bernanke was weak.  He showed that when he came on stage with BO and they were both without ties and sleeves rolled up like they had been working hard.  Just shows Bernanke was doing what he was told.

StateofFraud's picture

"Thats all that they have left."

They also, sadly, have war.

Edward Quince's picture

Fear not, everything is well in hand, reasonable, capable people are in charge.

Viffer's picture

... You do realize you are off by over 100 years.  The last time it was in well hands was prior to the to Federal Reserve Act in 1912 .... just saying ....

crazytechnician's picture

You gotta admit though the Fed system did work well until 2008 , no complaints until then. You cannot expect every financial system to be perfect forever without going into obsolescence.  Now we just need a new system...

FIAT CON's picture

I beg to differ after 71 things started failing.

DetectiveStern's picture

Even the mainstreamist of mainsteam papers is calling central banks bluff

 

"Potential disruption to the iron ore trade; the sudden exposure of the South African rand; the incompatibility of Xi Jinping’s anti-corruption drive with that Wild East entrepreneurial spirit which has powered decades of Chinese growth. Watching panic spread from Shanghai and Shenzhen to London and New York, western analysts grabbed for straws of understanding in unfamiliar fields, reflecting not only a professional need to look as if they know what’s going on, but a psychological yearning to impose order on a wild, mercurial swing in the mood. There may be no single reason why August 2015 proved the moment for the world’s investors to take collective fright about the People’s Republic. What there is however, lurking under all the anxiety, is a single question for governments everywhere. Namely, what’s left in the locker?....."

-The Guardian.

 

http://www.theguardian.com/commentisfree/2015/aug/24/the-guardian-view-o...

Perimetr's picture

Since when did QE stop?

Apparently Schiff hasn't heard of the BLICS (not BRICS) nations?

Tsar Pointless's picture

The Fed giveth, the Fed taketh away.

Chuck Knoblauch's picture

I attribute it to Chinese fear porn.

Bay of Pigs's picture

Crucify the bulls. Burn this shitshow down!

 

Budd aka Sidewinder's picture

Fuck the Soviets!!!!! They just didn't try hard enough

kchrisc's picture

Ironically, this weekend I learned all about how communism is, and the Soviet Union was, dominated by Zionist Jews.

More fodder for "nothing is what it seems or what we were told."

Zion is a scheme, not an ethnicity.

Victor E. Overbanks's picture
Victor E. Overbanks (not verified) kchrisc Aug 24, 2015 3:56 PM

Have you investigated "The Transfer Agreement" yet?

TuPhat's picture

I'm wondering how old you are Kchrisc?  That information was in the history books when I was in college (70s).  Haven't read a history book lately I suppose history has all been changed.

Tall Tom's picture

Now that is really funny. I was in college in the 1970s and that was NOT IN MY HISTORY TEXTS. (I got A's in History and considered them to be "Blow Off" courses. Easy shit.)

 

But then I am one to do a LOT OF READING...for fun.

 

And I ran across this UCLA Professor of History, Antony C. Sutton. I read his epic book, "The War on Gold." And so I started to research other works that the author had written. I read that he was a visiting scholar at the Hoover Research Institute at Stanford University. So he was not just some crackpot as he actually did VALID RESEARCH.

 

And I also read that Stanford dismissed him because he uncovered some inconvenent facts considering the Zionists, and the Bolsheviks, and Wall Street.

 

So your post smacks of dishonesty and I'd like references to ANY EDITION of a Lower Division University History Textbook, published in the 1970s, that referenced the Zionist involvement in the rise of the communist state in the former Soviet Union.

 

(We were all required to have that "Liberal Arts Hmanities crap" in order to get degreed. But we were not required to fill take the Upper Division coursework...and you know that.)

 

Unless they are in some obscure Graduate Text somewhere, unless you were a Graduate Student under the advisement of Antony C. Sutton, or others, that knew the truth but did not publicize it in order to maintain their TENURE and their ability to acquire GRANTS for research, you are not going to find them...especially in LOWER DIVISION History Texts published at the time.

 

I am aware of it BECAUSE I ENJOY LEARNING. I was NOT REQUIRED to study it for Physics or Math.

 

Major in History, TuPhat? Or was it philosophy as sophistry seems appealing to you?

 

Please continue to post so that I can continue to educate in response. You serve your masters well.

Implied Violins's picture

Actually Tom, there really was a popular book out at that time which did describe the entire FED ponzi scheme and how the world wars were banker wars, and how the USSR was created by them. It also talked at great length about the CFR and its role in creating world policy. The book was 'None Dare Call it Conspiracy', by Gary Allen and Larry Abraham, which sold over 4.5 million paperbacks in 1971. Interestingly, it never made the best-seller lists...conspiracy?! So, a 'hip' college prof could have made it required reading, as it was cheap and plentiful at the time.

bamawatson's picture

Violins, you are spot on corret. I gave that book to my political science professor. He held it up in front of the class and told them what a misguided fool i was

lasvegaspersona's picture

The idea that China's shift to a free(er) floating currency is responsible for what is happening is silly. Pegging to the dollar was a problem and they finally got rid of the problem. No one was complaining too loudly when they were buying our treasuries, were they.

CHC's picture
CHC (not verified) Aug 24, 2015 3:41 PM

Fuck the Federal Reserve and all it's inhabitants.  They're nothing but a shit load of psychopaths - every damn one of them. 

655321's picture

Safe bet to go opposite Mr. Schiff.

roadlust's picture

Exactly.  Mr. Schiff is a perpetual moron, but aside from that, interest rates have actually been going DOWN since the Fed minutes, clearly signaling that the majority of thinking human beings who make decisions with actual money, are betting that the Fed does NOT raise rates in Sept. 

If fact, the safe haven status of US bonds has gotten even more attractive to foriegners, driving rates even lower, because they will get the extra bonus of holding US Dollar denominated assets, and unfortunately for Mr. "Buy Gold!" Schiff, the dollar is still headed higher, while his gold, along with interest rates, and all other financial instruments and commodities, head lower in a deflationary cycle). 

The Fed may not have been able to fully "make up" for the catastrophic black hole Wall St left in America, but they never could.  Way too much money "vanished."  They temporarily saved the US stock markets (and world markets) from themselves, by inflating commodity prices (along with stock prices) and making people think their 401ks were safe, but that ability to inflate is coming to an end. 

Corporate America will actually have to make money the old fashioned way now, by actually making and selling stuff, and we all know the chances of that happening.  Thus, the SPY going down.  Which isn't going to hurt the Average American one bit.

Whalley World's picture

My guess is you have not seen "Peter Schiff Was Right"

 

https://www.youtube.com/watch?v=fVaSY0eetsA

 

 

lester1's picture

Looks like a new Peter Schiff Was Right video coming on YouTube !!

 

The guy predicted all of this !!

LongSilverJohn's picture

We are witnessing a transition from a once-somewhat-free market, to a government (or is it bank?) owned fascist state? The Fed's market prop department will keep printing and funneling money into the market until it owns a controlling stake in corporate America....

Buy Baby Buy! Then one morning we wake up and realize we are all working for companies owned by the government, comrade.

 

I AM SULLY's picture
I AM SULLY (not verified) LongSilverJohn Aug 24, 2015 4:07 PM

"Who are you, COMRADE QUESTION?" - Archer

655321's picture

The handful of people who own/control the banks control the governments, corporations, ect.....there, fixed it for you.

Sudden Debt's picture

So the dollar is still all powerfull. So it could be a powerplay against all those who want to turn away from the dollar.

China is bleeding, Arabia is bleeding, Russia is bleeding, the Brics are destroyed...

1 more week for september, looks like the prediction did come true, now who started the prediction in the first place...

I AM SULLY's picture
I AM SULLY (not verified) Sudden Debt Aug 24, 2015 4:08 PM

Are you saying this is all one giant anal reaming?

Consuelo's picture

When you read about an aircraft carrier task group headed for the Black sea or the South China sea, you'll know how serious the $DX 'problem' is.