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Peter Schiff: The Fed Has Created A "Bad Is Good" Economy
Submitted by Peter Schiff via Euro Pacific Capital,
The popular belief that the U.S. economy has been steadily recovering has endured months of disappointing data without losing much of its appeal. A deep bench of excuses, ranging from the weather to the Chinese economy, has been called on to justify why the economy hasn't built up any noticeable steam, and why the Fed has failed to move rates off zero, where they have been for seven years. But the downright dismal September jobs report that was released last Friday may prove to be the flashing red beacon that even the most skilled apologists can't explain away. The report should make it abundantly clear that we are far closer to recession than recovery. But old notions die hard and, shockingly, most economists still believe that we have hit a temporary speed bump not a brick wall. But at some point healthy hope turns into dangerous delusion. We may have just turned that corner.
The report was horrific any way you slice it. The consensus of economists had expected to see 203,000 new jobs in September, not a particularly impressive number, but at least it would have been an improvement from the 173,000 new jobs that were added in August. Not only did September miss substantially, at just 142,000 jobs, but August was revised down to 136,000 (Bureau of Labor Statistics) (there were economists who had even expected August to be revised up to as high 247,000). This means that the last three months have averaged just 167,000 jobs, a level that is not even close to where we should have been in a real recovery. But it gets worse from there.
The labor force participation rate got even lower still, dropping from 62.6% of working age adults, to just 62.4%, a near-40 year low. In September, another 579,000 potential workers gave up looking for jobs altogether and simply left the labor force. This figure dwarfs the 142,000 people that actually found jobs. Those lucky enough to still be working saw no increase in their hourly wages (the consensus had expected a .2% increase) and their average workweek ticked down from 34.6 hours to 34.5. In short, in September, fewer Americans worked, and those who did had fewer hours and lower pay. This is not supposed to be what a recovery looks like.
Even after the Fed surprised markets back in September by failing to raise interest rates for the first time in nine years, most economists still strongly believed that the Fed was on track to do so this year. Just prior to Friday's jobs report, a full 94% of economists in a Reuters survey saw a hike coming this year. No word yet on how much these expectations may have changed since Friday's jobs report, but my guess is that they won't fall nearly as much as they should. Many a happy economist took to the airwaves last week to explain that two more jobs reports will be issued before the Fed's December meeting. They insisted that those reports could provide the impetus that the Fed needs to finally pull the trigger.
But Janet Yellen said months ago that she would need to see "further improvements" in the labor market before she felt fully comfortable in raising rates. Since she made that statement, not only has the labor market not improved, it has actually retrogressed considerably. The fact that the headline unemployment rate has remained at a very low 5.1% is immaterial, as that rate has been low for some time without prompting any rate hikes. Yellen has already conceded that the official unemployment rate is not the benchmark she is using to assess the strength of the labor market. Instead, she is focused on labor force participation, wages, and the proliferation of involuntary part-time work. On these scores we continue to move further away from any potential rate hike.
But rather than questioning the Fed's credibility in missing another forecast, most economists are lauding it for supposedly seeing weakness that others missed, which allowed it to wisely do nothing in September. But I see this simply as a continuation of the Fed's long-standing playbook: Talk the economy up through optimistic statements while continually holding off an actual rate hike that the Fed is concerned could undermine an economy teetering on the brink of recession. I did not expect the Fed to raise rates in September, and I don't expect them to do so in December either, or at all in 2016, for that matter. I expect the Fed shares this view but they know any public utterance could be disastrous. Despite the fact that I was one of the few economists to declare no hikes in 2015, the media has continued to ignore and ridicule my forecasts.
Dazzled by the Fed's many statements of gaining economic strength, Wall Street has, by contrast, been completely blind to the many, many signs of gathering weakness. In September, factory orders were down year-over-year for the 10th month in a row, according to the Census Bureau's August Factory Orders report. As far as I know, this has never happened outside of a recession. But good luck finding anyone on Wall Street who shares my opinion that these figures suggest that a recession is already underway. My position is buttressed by the steady torrent of disappointing production numbers contained in the regional Fed surveys. But since manufacturing is no longer considered an important sector for the American economy, those once important surveys are no longer even mentioned in main-stream press.
In addition, the Atlanta Fed's "GDPNow" statistics, which attempt to offer a real time glimpse at economic conditions, gets similarly short shrift in the media. That number currently stands at just .9% annualized growth. However, consensus on Wall Street for Q3 GDP remains at 2.4%. Those forecasts should have been slashed months ago. But they have not. Based on the reports that I am seeing, I believe that there is a good chance that the barely positive growth rate that the Atlanta Fed is seeing for Q3, could turn negative. After all, jobs reports have been revised down in six of the last eight months (BLS). What makes economists think that this trend will suddenly reverse? It is, therefore, more likely that the awful employment picture for September will even get worse. A negative GDP print in the third and fourth quarters of this year, which would qualify as a recession, is a possibility that Wall Street has not even considered, let alone prepared.
If weakening conditions prevent the Fed from pulling the rate hike trigger by December, can we really expect it to do it in the election year of 2016? With the economy already on thin ice, a rising rate environment may likely push the economy into recession if it somehow isn't already there. This will play directly into the hands of the Republicans who will be able to hammer the outgoing Obama Administration's economic legacy, thereby handing the election to the GOP. Does anyone really expect the left-leaning Federal Reserve led by Janet Yellen to do that? Given that, we may not see a rate increase until 2017, even if conditions improve, which is a dubious proposition. Predictably, Goldman Sachs' chief economist Jan Hatzius came out with a statement today predicting the first move may not come until 2017. Look for many other influential economists to follow suit.
My view is that it is far more likely that we will see a fresh round of Quantitative Easing before we see a rate hike. As far as I know, however, I am still one of the only economists making this "outrageous" forecast.
The biggest practical implications of all this is that the commodity and foreign currency markets, which have been so thoroughly decimated by expectations of imminent rate hikes in the U.S., should reverse course. In the past, the dollar has generally risen on the anticipation of rate hikes and has sold off when the Fed actually delivered on those expectations. This is the classic "buy the rumor, sell the fact" trade. But what will happen when the Fed fails to deliver? Then all we have is false rumor and no fact. In such a scenario, reversals in the "bid up" dollar and in "beaten down" commodities like gold, silver, copper, and oil, could be dramatic. This could be especially true when you consider all the global economic problems that would be solved by a weaker dollar. Already we are seeing the markets drifting in that direction. Today silver hit a three-month high, and other commodities are finally getting up off the mat. It's been a long time coming, and I expect that it's a pattern that will take hold for a long time to come.
When the jobs report was released last Friday, markets reacted initially with a sharp 200-point sell off. For a while, traders seemed to forget that it's not the economy that has driven the markets but Fed stimulus. They thought bad news was actually bad news. But that "perverse" sentiment didn't last. Once it became clearer (to some) that rate hikes this year were less likely, the markets reversed course and completed a 450-point reversal to the upside. The Fed has created a phony "bad is good economy" and we are not about to snap out of it any time soon.
I expect that once the threat of rate hikes is finally and officially taken off the table, the Wall Street rally will continue. But those gains will be attenuated by a weaker dollar and depressed earnings by domestically focused companies. In that case, it may be better to search for stocks outside the dollar and for the potential benefit of rising share prices and a rising currency. Given how far those assets have been beaten down (see my commentary of July 6th), the opportunities may be worthwhile.
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Whatever is bad for 90% of the population is good for the top 10%, and really, really great for the 1%! Moar!
When do we get out the hanging rope and the guillotines? Way past time for the Elites to die!
ZIRP until Summer 2016, then NIRP and QE4, and a lot of Po-Po's and paramilitary deployed.
of course we are seeing a 'bad is good' economy. Bad news means moar free money, which means the casino is juiced. and i disagree with peter on the rate hike, at least in the short term. I think we will see a couple small rate hikes, just so the fed can look like its doing something, before QE4. Not that it think it will actually do anything, I just think they will give themselves room to lower rates a time or two before they initiate QE again
I disagree. The global debt has grown so large that even a .25% increase would have serious repercussions. The dollar would increase in value making it even more difficult for EM's to pay the interest on their dollar denominated debt. Corporations who borrowed billions to buy back their stock would see their EPS severely damaged from the increase in debt service costs. Oh, and let's not forget the federal government with $18 trillion in debt. In the past few years Treasury has been rolling over debt to the short end of the curve so a .25% increase would very quickly add $45 billion a year in debt service cost. Bottom line is no one can afford an even modest increase in rates. And they call this a recovery? Hate to see what the next recession is going to look like.
Your first sentence is just plain wrong. The top ten percent include your mom and pop entrepreneurs., who are the backbone of America and are being destroyed. The top 1% include the guy that started a construction company and made it through hard work, perseverance, and luck in spite of the obstacles.
It's the .001% that are raking it in and laughing at us for all our hard work. If you are going to speak, speak with some knowledge of percentages and which class they represent.
That construction guy probably took his savings and put in S&P and looks pretty good right now, thanks to free money and cheap abundant credit. Doubt he is complaining yet.
Mortgages and commercial leases all at < 4% made his business grow faster than it should have too.
Seriously. Hating people who work hard to earn a living for themselves and their families will not make anyone a better person. Many on ZH disagree.
Amazing what a little free money from the FRB can do.
When will the Fed start monetising gold & silver?
I am a Peter Schiff fan, but "xx% of economists surveyed" should be avoided on ZH.
Has created?
Many of Schiff's predictions have been accurate. But he fails to understand that the Federal Reserve has a put on the stock market. They won't let it crash and will take drastic measures like buying stocks to prop up the market.
The Fed's Plunge Protection Team is very real and buying stocks through their primary dealer banks. Schiff doesent understand that the Fed is unaudited, so there is nothing to stop them from artificially propping up the stock market like they do the bond market.
There was no way that +500 point reversal in the stock market last Friday was legitimate buying. The Fed's PPT was behind it.
Audit the Fed !!!
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
--- Arthur Schopenhauer
I call it digital liquidity... There is just something so wrong about it. The question is, is it right to do this?
I disagree, I think Schiff does understand that. His problem is that he trashes the validity of government statistics while simultaneously using them to make short-term forecasts (i.e. this will be a terrible holiday season.) He's right about the long-term problems in the economy, but he's not the best trader out there.
I get it now. There is no market.
Great point. I have no doubt that many of Peter's predictions will happen, but he cannot predict any specific dates because the beast is still being fed by central banks.
I disagree, I think he DOES understand all that - read the article! He was lambasted for saying that there would be no rate hike this for a start.
DavidC
Schiff on the surface, first couple of listens makes some sense. When you listen to him longer, he is a Hobbesian and jaw jacks about Adam Smith, and won't acknowledge JP Morgan and Rockefeller got a start from the Rothschilds. JP Morgan only owned 17% of his bank when he died, Rothschild owned the rest.
One day dollar should be strong, next day it should be weak make up your mind Peter.
Schiffs are shareholders for numerous Federal Reserve banks per Eustace Mullin's World Order.
Never bet against king dollar Schiff.
Your avatar is disgusting
Looks more like an abbatoir.
Hey Pete, don't get too worked up about the MSM. Just like a prostitute gets paid to provide pretend lovemaking, the MSM writers get paid to provide pretend journalism. Pretty sure few of them believe any of the drivel they are required to provide, just doin' it for the pay. These days, more than ever, it really is up to the viewer/reader to sift through the mendacious crap for a few nuggets of truth.
Used to be that you could sacrifice your job for your honor and get a new job. No moar. An immoral society begat by an evil overlord. We're a post-apocalyptic society wihout the apocalypse part.
Schiff makes some logical arguments, however logic, technicals and fundamentals rarely apply any longer.
I thought Fed would do a one and done 4eva with a .25%. I was wrong about the one. They're done.
I'm in the King Dollar camp for the foreseeable future, and there are plenty of logical reasons to believe it'll be so.
Economic conditions globally likely to continue to deterioate. No telling where shit will be twelve months from now.
2017 is a lifetime away.
Hold on kids.....
Vincent says" Schiff makes some logical arguments, however logic, technicals and fundamentals rarely apply any longer.
Coast says: I agree. Schiff is pretty smart and means well but I have seen posts here on zerohedge that are even smarter. Schiff lives in a logical world, and nothing is logical anymore.... Altho, he is austrian economics and I respect that. I do not invest, but I also agree holding to the dollar for a short time might be ok...Problem with that is, you dont know the day it dies. My guess is, I dont know. It could be tomorrow or next year. I assume it wont be for at least a few months tho. Its not a bad gamble, but its still a gamble.
Actually, I think most all investments will remain where they are, TPTB have them here for awhile to accomplish a mission...Same with precious metals and oil. They plan what the numbers will be, according to their agenda. I think every thing will stay about the same until they figure out their next move,...Russians going into Syria and winning in Ukraine really messed with them I think.
so simple kidies, da money is NOT trickling down via wage increases to keep up with the cost of living items. therefore income to buy china type shit is vaporizing and slowing growth. but zirp has extended and pretended growth to this point where growth is flat and declining. not to mention too many sheeple willing to work for less as no alternative AND many said fuckit and quit looking for a job next to a mex picking apples...
The jobs number is completely fake. Adjusted based on an adjusted survey, adjusted for the birth of nonexistent companies and adjusted for the death of nonexistent business. Adjusted for seasons and readjusted if the seasons don't turn out the way they thought. Then after a few years the numbers are readjusted based on adjusted retail sales to a number nobody cares about because the market only cares about the current number compared to the last number.
If you say 100k jobs were created or 300k, it doesn't matter. Both numbers are just as fake.
Why not just make it fucking simple. At the end of the year you report how many W2s and 1099s were filed and remove jobs with duplicate SS numbers. You can also report how many illegals are working by checking the numbers that aren't actually assigned to anyone.
Could it be that actual tax filings would paint a very different picture from the reported employment narrative.
This bullshit of caring about monthly reports, and in the case of oil biweekly reports, is asinine. The HFT rollers are the only ones that care. It grants them their opportunity to skim.
Real commerce doesn't work on a biweekly schedule. Did you know it takes almost 3 months to finish an injection mold for a $49 piece of protective equipment. That the design process takes almost a year. How stupid would it be to trade a stock based on how much steel was cut out of block on any given day?
Oh fuck, only 128 grams was cut last hour, but the hour before 600 grams was cut. SELL THE STOCK, PRODUCTION IS FLATLINING.
I HATE THIS BUSINESS OF PLACING BULLSHIT BEFORE REALITY.
Austrian econ > neoclassical wall street sell-side crap
"They won't let it crash and will take drastic measures like buying stocks to prop up the market."
The Fed would destroy the dollar to make sure the boys on Wall Street Keep replacing their Ferrari and Maserati yearly. Wall Street boys need their toys.
My question is, how long can buybacks keep going before the investors get worried about fundamentals?
Some pretty intelligent folks are advising me to watch Corporate earnings. The buyback thing and layoffs have expiration dates, and Fed policy will most certainly consider The Corporation.
There is precedent
i like schiff, but economists are not traders. HIs returns on his funds are woefull and negative.
SPECULATION is NOT INVESTMENT
Schiff talks about investmentss and economics.
Speculation is the art of making money in finaicial markets
Investments is the art of loosing money in markets, but feeling good about it because there was a reason for the trade..
When you know there is going to be endless QE and low rates and bailouts the stable economy looks boring and problamatic. This casino system is FUN. This system looks like a total scam ever since 2008. The big question is how long they can keep this up ?? I really think something bad really happens in the end.
I find it amazing that so many anti-financial-status-quo writers have had the energy to persist all these years.
I mean , if I get tired of reading all their articles since 2007, think how tired they must be from writing them.
Gotta admire them all the same.
Oh .. & the good ZH comments ( and sarcasm/comedy ) still make it all worth it .
;-)
I admit I was one of the ones predicting they would raise rates in September. It is obvious that they already missed their window, and what harm could a .25% rate hike do that wouldn't be overcome by a boost to their credibility?
Well, I misunderestimated them. What they have done has so obviously not worked that you have to wonder why they think they look better by deciding to do nothing (again) than by doing something to try a different tack.
Oh well. I have wised up. They have obviously gone full Keynesian retard. We will see more QE/NIRP, then Helicopter Money, and then Hyperinflation. We know what, we just don't know when.
Cash is King
The whole situation surrounding FRIDAY and MONDAY preceeded by the FOMC decision was the equivalent of the FED making a STATE OF THE UNION ADDRESS :
The "job growth" figures for September and revision for August undeniably show that ZIRP and QE has not and will not work for the working class and once-existing middle class. It announced that not only is current job growth poor, but that Americans have been misled about past job growth. It announced that the scared-to-death FED will not and cannot raise rates despite the fact that it unmistakenly has and will continue to cause and excelerate income inequality surrounding the rise of the .01-1%/ Wall Street/mega corps, etc. The NFP figures presented the FED with the exceedingly clear results of its failed policies - as clear as can possibly be shown - particularly with the raft of announced layoffs that have not even taken place yet.
BUT THE FED EXISTS TO SERVE THE FINANCIAL INDUSTRY AND STOCK MARKET. At the same time it was announced that the typical American is fucked, they set in place the method to continue to ensure that the oligarchy-types see their fortunes rise. They cannot dispute that their monetary policy is basically the only form of governance in the absence of fiscal policy due to gridlock. They have acknowledged their (contribution) to the financial crisis and yet have remained 100% in servitude to the architects of it. They have set in place the environment for Wall Street and its maggots to digest this awful news and then celebrate its true meaning as yet another victory cemented by the FED.
Their STATE OF THE UNION message is quite clear: That the typical American is of no importance to our policy making. That typical working class Americans are of no more importance to us than the Yemen wedding party that was blown out of existence by the US-supported Saudi Arabia. What is vital to us is that the oligarchy be preserved despite the fact that it involves the continual rewarding of those that almost destroyed the economy and ensured the second class status of so many.
I don't see commodities climbing much and the IMF reduced its growth forecast for the world.Everything is slowing globally not just in Europe and the U.S. I see stagnation.Reason number, one-put up a chart of Dr. Copper.Could there be an oversold rally?Sure.but I'd hate trying to catch a falling knife in that chart.Also,the Chinese currently at 7% growth is a big lie.
http://www.peakprosperity.com/blog/94160/heres-why-markets-suddenly-beco...