Peter Schiff: "Mission Accomplished"

Tyler Durden's picture

By Peter Schiff of EuroPacific Capital

Mission Accomplished

On May 1, 2003 on the flight deck of the USS Abraham Lincoln then President George W. Bush, after becoming the first U.S. president to land on an aircraft carrier in a fixed wing aircraft (in a dashing olive drab flight suit), declared underneath an enormous "Mission Accomplished" banner that "major combat operations" in Iraq had been concluded, that regime change had been effected, and that America had prevailed in its mission to transform the Middle East. 13 years later, after years of additional combat operations in Iraq, and a Middle East that is spiraling out of control and increasingly disdainful of America's influence, we look back at the "Mission Accomplished" event as the epitome of false confidence and premature celebration.

 

The image of W on the flight deck comes to mind in much of the reaction to this week's decision by the Federal Reserve to raise interest rates for the first time in nearly a decade. While many in the media and on Wall Street talked of a "concluded experiment" and the "dawning of a new era," few realize that we are just as firmly caught in the thickets of failed policy as were Bush, Cheney, and Rumsfeld in the misunderstood quagmire of 2003 Iraq.
 
In its initial story of the day's events, The Washington Post (12/16/15) declared that by raising the Fed Funds rate to one quarter of a percent The Fed is "ending an era of easy money that helped save the nation from another Great Depression." Putting aside the fact that 25 basis points is still 175 points below the near 2.0% rate of core inflation that the government has reported over the past 12 months (and should therefore be considered undeniably easy), the more important question to ask is into what environment the Fed is apparently turning this page.
 
Historically, the Fed has begun its tightening cycles during the early stages of expansions, when the economy had enough forward momentum to absorb the headwinds of rate increases. But that is not at all the case this time around.
 
Prior to the recent Great Recession, there had been six recessions since 1969, and over those episodes, on average 13.3 months passed from the time the recession ended to when the Fed felt confident enough in the recovery to raise rates. (The lag time was just 3.5 months in the four recessions between 1971 and 1991). (The National Bureau of Economic Research, US Business Cycle Expansions and Contractions, 4/23/12) 
 
But after the recession of 2008 - 2009, the Fed waited a staggering 78 months to tighten the monetary levers. Those prior tightening cycles also occurred at times when GDP was much higher than it is today. Over the prior six occasions GDP, in the quarter when the Fed moved, averaged a robust 5.3%. While the current quarterly GDP is still unknown, the data suggests that we will get a figure between 1% and 2% annualized. (Bureau of Economic Analysis)
 
Another key difference is the level of unemployment at the time the hikes occurred. As they started tightening much earlier in the expansion cycles, unemployment at the times of those prior recoveries tended to be high but falling. The average unemployment rate at the time the six prior tightenings occurred was 7.5%. But that average rate had fallen to 5.1% (a level that most economists consider to be "full employment") an average of 42 months after the initial Fed tightening. In other words, those expansions were young enough and strong enough to absorb the rate hikes while still bringing down unemployment. (Bureau of Labor Statistics; Federal Reserve Bank of NY)
 
Our current unemployment rate has already fallen to 5.0% (mostly because workers have dropped out of the labor force). Few economists allow for the possibility that it could fall much lower. This is particularly true when you acknowledge the rapidly deteriorating economic conditions that we are seeing today.
 
As I stated in my most recent commentary, there is a growing troth of data that shows that the U.S. economy is rapidly losing momentum. Some data points, such as the inventory to sales ratio and the ISM manufacturing data suggest that a bona fide recession may be right around the corner (among them, this week's truly terrible manufacturing PMI and industrial production numbers, a very weak Philly Fed Outlook, the weakest service sector PMI of the year, a big drop in the Kansas City Fed Manufacturing Index, and the announcement that the Third Quarter current account deficit had "unexpectedly" increased 11.7% to post the widest gap since the fourth quarter of 2008, are just the latest such indicators).
 
Given that the U.S. economy has, on average, experienced a recession every six years, the 6.5-year longevity of the current "expansion" should be raising eyebrows, even if the data wasn't falling faster than a bowling ball with wings.
 
So what happens when the Fed postpones its first rate hike until the death throes of a tepid recovery rather than doing so at the beginning of a strong one? If unemployment starts ticking up during an election cycle, can anyone really expect the Fed to follow through with its projected additional rate hikes and allow a full-blown recession to take hold prior to voters casting their ballots? All of this strongly suggests that this week's rate hike was a "one-and-done" scenario that does nothing to extricate the Fed from the monetary trap it has created for itself.
 
Another big question is why the Fed decided to move in December, after doing nothing for so long. Clearly the markets were surprised and confused by the Fed's failure to pull the trigger in September, when the economy appeared, at least to those who chose to ignore the bad data, to be on relatively solid footing. At that time, the Fed suggested that it needed to see more improvement before green lighting a liftoff. And while I tend not to place much stock in the pronouncements of most economists, one would be hard-pressed to find anyone who would claim that the data in December looks better than it did in September.
 
A much more likely explanation is that through its rhetoric the Fed had inadvertently backed itself into a corner. Even though the Fed would have preferred to leave rates at zero, the fear was that failure to raise them would damage its credibility. After having indicated for much of the past year that they had believed that the economy had improved enough to merit a rate increase later in 2015, to continue do to nothing would suggest that the Fed did not actually believe what it was saying. This was an outcome that they could not abide. If we could doubt them about their economic pronouncements, perhaps they have been equally disingenuous with their professed ability to shrink their balance sheet over the next few years, contain inflation if it ever reared its ugly head, or to prevent financial contagion from spreading during a new recession.
 
In truth there should be very little confidence that a new era has begun. A symbolic 25 basis point credibility-saving gesture, coming just two weeks before year-end, is really a non-event. It's the equivalent of a credibility Hail Mary, with the Fed desperately trying to infuse confidence into a "recovery" that for all practical purposes has already ended.
 
The question will be whether such a small move will be enough to push an already slowing economy into recession that much sooner. Over the past seven years the U.S. economy has become dependent on zero percent interest rates. But as with the famous Warren Buffet bathing suit maxim, these dependencies won't be fully revealed until the tide rolls out and those zero percent rates are taken away. The bigger question is how quickly the Fed will reverse course. Will it move once it becomes painfully obvious to everyone that we are headed into another recession, or will it wait until we are officially knee deep in a contraction that is even bigger than the last one?
 
The new rounds of rate cutting and Quantitative Easing that the Fed will have to unleash will echo the military "surge" in Iraq in 2007. Those fresh troops were needed to roll back the chaos that the Administration had ignored for so long. But just as that surge only bought us a few years of relative calm, look for the gains brought about by our next monetary surge to be even more transitory. That is a development for which virtually no one on Wall Street is preparing.

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The Duke of New York A No.1's picture

Good analogy there Peter - me thinks you may evetually be proven correct.... Mission Accomplished.

chumbawamba's picture

Right.  And Peter Schiff knows this because he used the same magic prognostication machine he used to make all his prior calls, none of which have come about?

I am Chumbawamba.

Soul Glow's picture

I can simplify what Petey means to write -

FUCK THE BANKSTERS.

franzpick's picture

The banner above the next fed speaker should read: MISSION IMPOSSIBLE.

jeff montanye's picture

they still need to put the insolvent banks into receivership, no matter how large, and purge the system of bad debt.  treat the big banks like the little ones.

indict, convict and jail law breaking financial executives.  many of their crimes have relatively long statutes of limitations.  treat the rich like the poor; it would be a morale booster.

so, yeah, mission impossible, apparently.

SoilMyselfRotten's picture

Or Janets book title, Mission Accomplice: How the Fed Intentionally Destroyed America

TrustbutVerify's picture

The reason they won't prosecute financial execs is during a trial it would be exposed that those in government are AT LEAST as complicit as those on trial.  

 

JRobby's picture

One outcome you can't argue with: MOAR DEBT !!!!!!!!!!!!!!!!!!!!!

PS: we raised the price this time!

Pheonyte's picture

"... none of which have come about"

I think you overlooked one: https://www.youtube.com/watch?v=jj8rMwdQf6k

El Dorado's picture

I think we've found CNBC contributor, Scott Nation's ZeroHedge username @chumbawamba

MFL8240's picture

Peter Schiff is wise in connecting the dots unlike the main street media that categorically, without explanation calls for another 10% rise in stocks while we are contracting!

junction's picture

"The Fed has backed itself into a corner."  This corner is called "checkmate." 

poor fella's picture

The Fed wouldn't see 'mate in two'

Croesus's picture

The Fed won't see checkmate until the last banker is hung from a tree with the entrails of the last politician.

Zorrohodge's picture

Uncharted tsunamis and an unprecedented level of can kicking by the fed make sites like zerohedge and  this guy look like a stopped clock.

 

Pretty sure all will be vindicated soon although not much fun for anyone when that happens. 

 

 

lordbyroniv's picture

2016 is our year 

 

of this

 

i have no doubt

CheapBastard's picture
Home inventory grows as sales slow in Houston, report finds

 

Houston’s housing market is shifting from a seller’s market to a buyer’s market, according to a new national report.

Home sales fell 4.5 percent year over year in November, according to Redfin’s data. The Houston Association of Realtors found steeper, double-digit declines in home sales in both October and November.

 

 

http://www.bizjournals.com/houston/news/2015/12/18/home-inventory-grows-...

 

With over 60,000 high paying engineering jobs lost in the energy sector and more and more energy companies shutting their doors every day down there, I feel confident the tumbling will gain momentum and the reversion to th emean will surprise those who claim, "House prices never drop." They're just too young [or too blind to see] to have witnessed past 'corrections' and real estate cycles.

stock market loser's picture
stock market loser (not verified) Dec 18, 2015 8:47 PM

I lost 40 bucks listening to this asshole Peter Shit for brains. He said, "the fed won't ever raise interest rates."  WRONG. Another bullshit prediction. 

Farmer Joe in Brooklyn's picture

You can be an asshole when the fed actually raises rates to something even close to resembling normal. Let's say even just 1%.

NO FUCKING CHANCE.

PERIOD.

biloselhi's picture

When the Fed raised, I thought I read here on Zerohedge that the Fed also announced it was anticipating 4 more rate increases in 2016. But I just listened to a panel discussion (including Schiff) on FOX Business and everyone seemed to agree that Yellen's forward guidance was that they were unlikely to keep raising and that, in fact, they may never raise again. Can someone correct me or clarify? Thank you in advance.  

Farqued Up's picture

Oh goody I can now get a big raise percentage wise, too bad I'll never see anything due to it not being passed on to the savers.

Book Cooking 101

lordbyroniv's picture

40 bucks !??!?!?!?!!??!?

Omg,...when do you get your allowance?  weekly or monthly????

 

What a looser

 

beachdude's picture

AAAAHHHHGGGph...! That's LOSER, NOT LOOSER.

lordbyroniv's picture

uh no,...

 

i know a looser moreon when I see one

lester1's picture

Peter Schiff has been pretty accurate accept for the fact he underestimates the power of the Federal Reserve, who is unaudited and able to create electronic money out of thin air.

 

The Fed has been able to prop up the markets for years and prolong the coming crash.

Farmer Joe in Brooklyn's picture

Which begs the question:

Just how big will QE4 have to be?

My puts are fucked....

CheapBastard's picture

Might be big enough to push gold to $3,000 next time around and silver to $100.

 

Platinum is so freakin cheap right now my co-worker has bought every plt coin he could with his extra salary after essentials. He may be on to something there. I don;t know if any ZH'ers collects platinum coins since I don;t think I have ever seen an article or comment about those.

 

One never knows.

sun tzu's picture

I'm shocked that PLT is 20% discount to Gold

commishbob's picture

sun tzu - Most of platinum's uses (approximately 70%) are for industrial purposes; whereas gold is mostly used for retail and as a store of value. With industrial activity in the crapper, it's hardly a surprise that platinum is trading at a discount.

The same applies to silver and helps to explain its low price.

Both of the above said, any and all PMs that have some "store of value" are being manipulated by the PTBs to keep their fiat dreams alive. 

But the industrial component of platinum and silver helps explain why the two have suffered disproportionately. 

Singelguy's picture

The dollar will not collapse and gold prices will not skyrocket until the world loses confidence in the US dollar. While the ECB and the BoJ continue to ease, the Fed raises a quarter point which only serves to strengthen the dollar in the short term. Until the market fully appreciates that the growing debt can never be repaid and that "normal" interest rates will bankrupt the US government, the US dollar will remain the cleanest shirt in the laundry hamper. My guess is that gold prices will decline further in US dollar terms in the short term. Whether QE4 will affect gold prices will be determined by the relative actions of the other major central banks at the time. The race to the bottom continues.

aurum4040's picture

The next problem isn't going to be qe4 or paradropping money - it's going to be figuring out how to gracefully default on our debt as the USD loses its Reserve currency status - it's coming faster than most realize. With oil at $35 a barrel it's probably one of the last things on most of our minds let alone the sheeple. But rest assured - it's coming just like the US blinking while staring at Russia in the Syria situation - they know who has the power and it isn't the West. The East will play the game until we are so FUBARED it will be like killing a sick cow. 

Sir John Bagot Glubb's picture

Platinum is 10x as rare as gold and is needed on rocket nosecones.  

ebworthen's picture

There never was a "recovery".  Dr. FED gave Wall Street hits of heroin, and Main Street an I.V. drip of saline and Midazolam (Versed).

Dr. Spin's picture

https://en.wikipedia.org/wiki/Midazolam

Spoctor Din 

OBTW:  Heroin is an amazing drug.  Too bad it has that pesky addiction problem...

DogeCoin's picture

It's all part of the plan.

Grandad Grumps's picture

Couldn't finish the whole article ... just saying. Got tired of thinking "who the f does this guy work for?"

Prisoners_dilemna's picture

Just for starters he was economic advisor to a presidential candidate and CEO of a multinational investment firm.

Also son to a brilliant father who passed recently.

SoDamnMad's picture

Peter's father didn't exactly pass away (as you nicely put it).  He was virtually murdered by denying medical care.  And why was a dying 87 year old man handcuffed to a bed?  Like your going to run away when your body is wracked with cancer?  God rest his soul.

bamawatson's picture

Central States pension Fund ---- Over 400,000 Teamsters members just received a letter advising their Pension Benefits have been slashed up to 70%…

(er, uh ...and it's gone)

CheapBastard's picture

ouch!

 

The Central States Pension Fund is pursuing a plan that would slash pension checks in half for some former union truck drivers. The fund is on the brink of insolvency and says it needs to cut benefits for 273,000 current and future retirees in order to stay afloat.

Hendershot was told earlier this month that he should brace for a 60% cut as early as July, pending approval from the Treasury Department. If that happens, his remaining check will be $1,396.

 

http://money.cnn.com/2015/10/15/retirement/central-states-pension-fund-c...

 

That's gotta hurt.

SuperRay's picture

Hurt? Think revolution when a few more get cut

ersatz007's picture

Imagine It will look lot like Greece 

Berspankme's picture

They figure retirees are old and can't revolt so they are easy pickens. Better to print money for Lloyd and Jamie

cynicalskeptic's picture

Teamster's Pension Fund in trouble?

Has nothing to do with all the 'loans' made to the mob, right?  But that's old school corruption, small potatos compared to what Wall Street has fgotten away with.

How much of Vegas was built with Central States Pension Fund money?  The Teamsters Union has screwed their members over for a long time with opverpaid union officials and questionable finioncial arrangements with questionable characters.  Did hey ever find Jimmy Hoffa?

tarabel's picture

 

 

It's not actually gone (yet), just a lot smaller than it was yesterday.

monk27's picture

Half of it is definitely gone ! As for the other half, there is still time...

css1971's picture

It's credit. It was never there in the first place.

stock market loser's picture
stock market loser (not verified) bamawatson Dec 18, 2015 9:40 PM

Reference please or do we just take your word for it.