Peter Schiff Warns Of "Calm Before The Storm"

Tyler Durden's picture

Authored by Peter Schiff via Euro Pacific Capital,

In light of the 30-year anniversary of the Black Monday Crash in 1987 (when the Dow lost more than 20% in "one day", we should be reminded that investor anxiety usually increases when markets get to extremes. If stock prices fall steeply, people fret about money lost, and if they move too high too fast, they worry about sudden reversals. As greed is supposed to be counterbalanced by fear, this relationship should not be surprising. But sometimes the formula breaks down and stocks become very expensive even while investors become increasingly complacent. History has shown that such periods of untethered optimism have often presaged major market corrections. Current data suggests that we are in such a period, and in the words of our current President, we may be "in the calm before the storm."

Many market analysts consider the Cyclically Adjusted Price to Earnings (CAPE) ratio to be the best measure of stock valuation. Also known as the “Shiller Ratio” (after Yale professor Robert Shiller), the number is derived by dividing the current price of a stock by its average inflation-adjusted earnings over the last 10 years. Since 1990, the CAPE ratio of the S&P 500 has averaged 25.6. The ratio got particularly bubbly, 44.2, during the 1999 crescendo of the “earnings don’t matter” dotcom era of the late 1990’s. But after the tech crash of 2000, the ratio was cut in half, drifting down to 21.3 by March of 2003. For the next five years, the CAPE hung around historic averages before collapsing to 13.3 in the market crash of 2008-2009. Since then, the ratio has moved steadily upward, returning to the upper 20s by 2015. But in July of this year, the CAPE breached 30 for the first time since March 2002. It has been there ever since (which is high when compared to most developed markets around the world). (data from Irrational Exuberance, Princeton University Press 2000, 2005, 2015, updated Robert J. Shiller)

But unlike earlier periods of stock market gains, the extraordinary run-up in CAPE over the past eight years has not been built on top of strong economic growth. The gains of 1996-1999 came when quarterly GDP growth averaged 4.6%, and the gains of 2003-2007 came when quarterly GDP averaged 2.96%. In contrast Between 2010 and 2017, GDP growth had averaged only 2.1% (data from Bureau of Economic Analysis). It is clear to some that the Fed has substituted itself for growth as the primary driver for stocks.

Investors typically measure market anxiety by looking at the VIX index, also known as “the fear index”. This data point, calculated by the Chicago Board Options Exchange, looks at the amount of put vs. call contracts to determine sentiment about how much the markets may fluctuate over the coming 30 days. A number greater than 30 indicates high anxiety while a number less than 20 suggests that investors see little reason to lose sleep.

Since 1990, the VIX has averaged 19.5 and has generally tended to move up and down with CAPE valuations. Spikes to the upside also tended to occur during periods of economic uncertainty like recessions. (The economic crisis of 2008 sent the VIX into orbit, hitting an all-time high of 59.9 in October 2008.) However, the Federal Reserve’s Quantitative Easing bond-buying program, which came online in March of 2009, may have short-circuited this fundamental relationship.

Before the crisis, there was still a strong belief that stock investing entailed real risk. The period of stock stagnation of the 1970s and 1980s was still well remembered, as were the crashes of 1987, 2000, and 2008. But the existence of the Greenspan/Bernanke/Yellen “Put” (the idea that the Fed would back stop market losses), came to ease many of the anxieties on Wall Street. Over the past few years, the Fed has consistently demonstrated that it is willing to use its new tool kit in extraordinary ways.

While many economists had expected the Fed to roll back its QE purchases as soon as the immediate economic crisis had passed, the program steamed at full speed through 2015, long past the point where the economy had apparently recovered. Time and again, the Fed cited fragile financial conditions as the reason it persisted, even while unemployment dropped and the stock market soared.

The Fed further showcased its maternal instinct in early 2016 when a surprise 8% drop in stocks in the first two weeks of January (the worst ever start of a calendar year on Wall Street) led it to abandon its carefully laid groundwork for multiple rate hikes in 2016. As investors seem to have interpreted this as the Fed leaving the safety net firmly in place, the VIX has dropped steadily from that time. In September of this year, the VIX fell below 10.

Untethered optimism can be seen most clearly by looking at the relationship between the VIX and the CAPE ratio. Over the past 27 years, this figure has averaged 1.43. But just this month, the ratio approached 3 for the first time on record, increasing 100% in just a year and a half. This means that the gap between how expensive stocks have become and how little this increase concerns investors has never been wider. But history has shown that bad things can happen after periods in which fear takes a back seat.

Past performance is not indicative of future results. Created by Euro Pacific Capital from data culled from & Bloomberg.

On September 1 of 2000, the S&P 500 hit 1520, very close to its (up to then) all-time peak. The 167% increase in prices over the prior five years should have raised alarm bells. It didn't. At that point, the VIX/CAPE ratio hit 1.97…a high number. In the two years after September 2000, the S&P 500 retreated 46%. Ouch.

Unfortunately, the lesson wasn’t well learned. The next time the VIX/CAPE hit a high watermark was in January 2007 when it reached 2.39. At that point, the S&P 500 had hit 1438 a 71% increase from February of 2003. As they had seven years earlier, the investing public was not overly concerned. In just over two years after the VIX/CAPE had peaked the S&P 500 declined 43%. Double Ouch.

For much of the next decade investors seemed to have been twice bitten and once shy. The VIX/CAPE stayed below 2 for most of that time. But after the election of 2016, the caution waned and the ratio breached 2. In the past few months, the metric has risen to record territory, hitting 2.57 in June, and 2.93 in October. These levels suggest that a record low percentage of investors are concerned by valuations that are as high as they have ever been outside of the four-year “dotcom” period.

Investors may be trying to convince themselves that the outcome will be different this time around. But the only thing that is likely to be different is the Fed's ability to limit the damage. In 2000-2002, the Fed was able to cut interest rates 500 basis points (from 6% to 1%) in order to counter the effects of the imploding tech stock bubble. Seven years later, it cut rates 500 basis points (from 5% to 0) in response to the deflating housing bubble. Stocks still fell anyway, but they probably would have fallen further if the Fed hadn't been able to deliver these massive stimuli. In hindsight, investors would have been wise to move some funds out of U.S. stocks when the CAPE/VIX ratio moved into record territory. While stocks fell following those peaks, gold rose nicely.

Past performance is not indicative of future results. Created by Euro Pacific Capital from data culled from Bloomberg.

Past performance is not indicative of future results. Created by Euro Pacific Capital from data culled from Bloomberg.

But interest rates are now at just 1.25%. If the stock market were again to drop in such a manner, the Fed has far less fire power to bring to bear. It could cut rates to zero and then re-launch another round of QE bond buying to flood the financial sector with liquidity. But that may not be nearly as effective as it was in 2008. Given that the big problem at that point was bad mortgage debt, the QE program’s purchase of mortgage bonds was a fairly effective solution (although we believe a misguided one). But propping up overvalued stocks, many of which have nothing to do with the financial sector, is a far more difficult challenge. The Fed may have to buy stocks on the open market, a tactic that has been used by the Bank of Japan.

It should be clear to anyone that since the 1990s the Fed has inflated three stock market bubbles. As each of the prior two popped, the Fed inflated larger ones to mitigate the damage. The tendency to cushion the downside and to then provide enough extra liquidity to send stock prices back to new highs seems to have emboldened investors to downplay the risks and focus on the potential gains. This has been particularly true given that the Fed’s low interest rate policies have caused traditionally conservative bond investors to seek higher returns in stocks. Without the Fed’s safety net, many of these investors perhaps would not be willing to walk this high wire.

But investors may be over-estimating the Fed's ability to blow up another bubble if the current one pops. Since this one is so large, the amount of stimulus required to inflate a larger one may produce the monetary equivalent of an overdose. It may be impossible to revive the markets without killing the dollar in the process. The currency crisis the Fed might unleash might prove more destructive to the economy than the repeat financial crisis it's hoping to avoid.

We believe the writing is clearly on the wall and all investors need do is read it. It’s not written in Sanskrit or Hieroglyphics, but about as plainly as the gods of finance can make it. Should the current mother-of-all bubbles pop, for investors and the Fed it won’t be third time’s the charm, but three strikes and you’re out.

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JoeTurner's picture

Peter Schiff for FED chairman !

Five Star's picture

Everyone is forgetting about the trillions in excess bank reserves....


LawsofPhysics's picture



Go ahead Mr. Yellen, raise those rates!!!!

Paul Kersey's picture

Peter Schiff is always warning about something, but his piss poor timing has lost his investors fortunes. These were Peter Schiff's predictions in 2007:

US Equity Markets Will Crash.
US Dollar Will Go To Zero (Hyperinflation).
Decoupling (The rest of the world would be immune to a US slowdown).
Buy foreign equities and commodities and hold them with no exit strategy.

The US equity market did crash, but the foreign equities crashed even harder. The dollar did not go to zero and the rest of the world was anything buy immune to the US slowdown.

LawsofPhysics's picture

Again, trade in Federal reserve Promissory Notes is in fact decreasing, but as you point out, not as quickly as Peter has been forecasting.  We are becoming more corrupt, it just so happens that it isn't as fast as we thought. Still not a good thing for the average sheeple...

"Full Faith and Credit"

Mr.Sono's picture

I am sure eventually Peter will be right.

Paul Kersey's picture

As they say, even a stopped clock is right twice a day.

MagicHandPuppet's picture

"Print harder !!!"

Paul Krugman

philipat's picture

In the meantime, Schiff or no Schiff, I sure as Hell wouldn't be in these "Markets" at this point. I would prefer to be a few years early than a few days too late; especially this time around?

abyssinian's picture

I bought gold on his recommendation every time he warns about a crash coming... now I have not more money to buy anything.. and had to sell my gold at many losses. Thanks Peter, you sure know how to make people how to lose money on a up market both in stocks and bonds. 

Give Me Some Truth's picture

Re: Buying gold (or silver) ...

As many of us have learned, when you do buy gold or silver you are going AGAINST the wishes of pretty much EVERY central banker, government, bureaucrat, lobbyist, giant company, Wall Street, giant banks, investing funds, pension funds, talking head economist or CNBC guest, etc.

There's a lot more of them than there are of us, and they have a lot more power and control than we do.

If all of these people and entities were not conspiring to keep the price of gold as low as possible ... gold would be much, much higher. But they are conpiring to kill "sentiment" for gold, and will continue to do so.

Schiff, Stockton, even Ron Paul (and Give Me Some Truth) all underestimated how brazen and determined the Powers that Be would be in propping up and extending the Status Quo. 

At some point, their efforts will fail and fail spectacularly, but I've given up predicting when this might happen. In an economic and political world that was not rigged and corrupt - and in a world where journalists and "regulators" challenged and investigated the powerful - this would have already happened. To me, the likes of Schiff and Stockman and Paul are not "bad guys" for being brave enough to be contrarians and for making predictions that massive bubbles would burst. The "bad guys" are the people working 24-7, 365 to protect a corrupt and insane status quo. "City Hall" is an even tougher adversary than even Schiff and Ron Paul realized.

When things get "serious," the rigging and lies become even more serious. In hindsight, more of us should have expected such a ramped up response.



SeuMadruga's picture

I agree with Peter Schiff's views, and even used to admire him for his libertarian stance. But since he started to constantly trash crypto-currencies to the point of denying account opening at his Euro Pacific Bank (soon to be relocated in Puerto Rico, moving out from Saint Vincent and The Grenadines) for potential clients whose only "sin" was the  trading of BitCoin in any exchange of the world, my disappointment with such blatant hypocrisy is making me reevaluate my opinion about what kind of man he really has become.

RafterManFMJ's picture

You’re what the White Man calls “weak hands.”

shizzledizzle's picture

And a working one improperly set  is never correct.

I Art Laughing's picture

Eventually there will be blood in the streets and having timed to the nearest minute when the first body doesn't achieve a dead cat bounce will matter not at all.

Give Me Some Truth's picture

Looking back on the past eight years two truisms are self-evident:

1) The Powers that Be WANTED and NEEDED stock markets to go much higher (certainly not to crash and stay crashed).

2) The Powers that Be Want and Need gold and silver markets to perform attrociously or at least awful enough where the average Joe on the street doesn't suddenly start thinking about buying gold and silver on a recurring basis.

Given that the Powers that Be actually control both markets, you would have to be a fool to not buy stocks and to buy gold and silver.

But eight years ago who knew that rampant rigging in these "markets" would be allowed and would not be questioned? Who really knew that "they" would get away with it? "They" probably didn't even know they would get away with it. Eventually "they" concluded "Hey, no one is going to do anything" and their  behavior reflected this knowledge. If you realize you can get away with anything, you're likely going to do whatever you want. So we are where we are.

As it turns out, absolute power does corrupt absolutely. Schiff still (probably) doesn't get this truism: The Powers that Be are determined to make sure almost all of his predictions fail. His predictions have a key logic flaw. He must still think markets are "free," that they "correct," that people and institutions who might intervene in these markets will be exposed and punished. Well, apparently not.

Once upon a time, it would be unfair to criticize some pundit for making such assumptions. Now, however, you can criticize anyone who doesn't make the opposite assumptions. By now, EVERYONE (Schiff included, myself included) should know that the game is rigged.  In 2017, any and all economic predictions should reflect this truism.  



nsurf9's picture

Venezuelan stock markets can appear much larger than they are - when you slowly, but steadily, substitute a millimeter-stick to measure yards.

In other words, not unlike Maduro, these bastards are destroying every US dollar we've earned the day, month, year and decade before.

Paul Kersey's picture

You're right, it will be a very bad thing for the "average sheeple". A stock market crash will precipitate a real estate crash and hasten the collapse of the common man's pension. Real estate sales are booming in the southern states, but if the stock market experiences a sustained downturn, then our gated community house buyers from the north, once they no longer feel the security of the wealth effect, from well performing stock portfolios and 401k accounts, will become far more cautious about buying big ticket items. Retirement homes and second homes in the South are seriously big ticket.

Fewer buyers will mean that there will be fewer builders, fewer subcontractors working, fewer flippers and fewer folks running to Home Depot to by granite for their kitchen countertops. There will be a deep recession. It's no accident that the goldmanites in the Trump Administration are in full-on ponzi pump mode.

LawsofPhysics's picture

Wah wah wah...

Stop trying to "fix" stupid, you are only wasting precious capital and resources.


Stocks have NOT been "well performing" for some time now.  A well performing company is one that actually creates products of REAL FUCKING VALUE.

Stock buybacks facilitated by FREE "money" is NOT value you stupid fuck.

Paul Kersey's picture

Who said anything about value, and where do you get off calling anyone a "stupid fuck"?  You might have changed your screen name, but you are still the same troll who has nothing to post but personal attacks.  What is your problem?  

LawsofPhysics's picture

YOU are a disingenuous cunt.  YOU are the one that implied value in your "well performing stocks" comment.

Sorry to call YOU out on your bullshit but stocks are doing well because of the fact that the "market" is now a political tool that The Fed has facilited via ZIRP/NIRP.

It's the truth, deal with it. Yes, like others, I have taken advantage of it, but at least I can admit the truth. You on the other hand cannot.  Good luck with that cognative disonance!

"Full Faith and Credit"


same as it ever was

Paul Kersey's picture

You don't know the difference between well performing stocks and well performing companies. Well performing stocks make money for those who are holding them, regardless of whether the underlying company is well performing or not. Tesla is a perfect example of that.

Squid, you really need to move back to New Jersey, where your cross dressing won't be looked down upon the way it is here in the south. Your estranged husband has been trying to get you to move back there for years.

LawsofPhysics's picture

It would seem insults suit you just fine Paul.  Cannot wait to stretch your fucking neck motherfucker. TESLA is subsidized by the fucking state to the max!!!! So now you admit that there is no connection between the value of a company and the value of their stock!  Yes, exactly the problem!!!


Give Me Some Truth's picture

Re: Real Estate Sales are Booming ..

I live in the South (Alabama), and real estate sales are certainly not booming. My house (a nice house in a desirable area with lots of upgrades) has been on the market for a year. My asking price is $25,000 lower than my purchase price six years ago. I got one offer that was $35,000 lower than my purchase price.

I've checked other house prices in the MSA. They have dropped significantly. Even the tax assessor reduced my home appraisal by approximately $35,000.

I don't dispute that there is a "real estate boom" and bubble in many makets. However, I think that in just as many markets, housing prices are declining.

TheLastTrump's picture

China suffered badly during the 2008-2010 timeframe, many millions out of work with zero social services support.

Justin Case's picture

China has bounced back from the crisis much more robustly than other nations.

“Most strikingly, GDP levels in these developed countries have declined permanently since 2008 by as much as 10% below their respective long-run trends, despite more than 5 years of continuing quantitative easing after the crisis. China’s GDP level, however, had fully rebounded to its long-run trend in early 2010 without appealing to unconventional monetary policies.

I was surprised to learn that China may not be dramatically affected by the United States financial crisis. As it turns out, we in the US rely far more heavily on China than she does on us.

China owns roughly 19% of US treasuries; if needed, it plans to use its sizable budget surplus to snap up even more. In addition, the United States gobbles up the majority of Chinese-made goods, meaning a decrease in consumer demand here will make for a chilly Chinese export market.

However, China is not solely dependent on the United States for financial stability. A host of new trade agreements mean China has a number of potential suitors waiting for vast quantities of goods. Domestic demand is also on the up-and-up.

Finally, China’s financial system has been closed for many years, protecting it from shady assets. Though the country will feel the international slump, its banking system is probably safe. Its high domestic demand, huge pile of capital, and numerous other major trading partners will counter the effects of US contagion.

junction's picture

It is nice to see Peter Schiff finally departing from his strange fixation on the evils of the minimum wage.  His reliance on numbers, CAPE and VIX and all that, is a misplaced reliance in a rigged economy.  Since Reagan, everyone in positions of power has realized that the best way to be a big thief is to control the government.  Reagan got rid of banking regulators, gutting the Bank Board, and looters from Wall Street to Texas (refer to Seamen's Bank for Savings) ran bust out operations on banks they acquired.  When whoremeonger Bill Clinton was governor of Arkansas, he let the Mena airport be the gateway for tons of cocaine flown into the USA.  Exceptions are rare to this rule of getting government power to help you and your friends loot the country.  JFK was an exception to the rule and look at what happened to him.  Trump is no exception.    

LawsofPhysics's picture

Hey, at least Regan sent bankers and financiers to fucking prison after the S&L crisis.  He also knew that when the fraud/stealing becomes too obvious, you need to send a fucking message.

Paul Kersey's picture

"Hey, at least Regan sent bankers and financiers to fucking prison after the S&L crisis."

He also sent Peter Schiff's father to prison in 1985.

LawsofPhysics's picture

Yes, an imperfect system, but there certainly are degrees of corruption aren't there?

Justin Case's picture

When it happens, do you want to look like an idiot? Or would you rather choose to look like one now, so that you can look brilliant then?

It's unknowable exactly how much longer our unsustainable markets can remain at their record levels. But there is one thing we know for certain: we're closer to their day of reckoning than we've been at any point over the past seven years. A recession is due soon by historical standards, and long overdue by fundamental ones.

illuminatus's picture

I think it is highly unlikely that the people who have captured the markets will ever let go of control. That means a crash will happen when and if they decide it will happen and not only that but they will decide what will crash and that includes the PM's and probably bitcoin also.

 Most analysts are still under the impression that old paradigms of demand and supply etc still apply, I'm not sure if Mr, Shiff is one of them, but their paycheck depends on quoting figures and showing charts that have nothing to do with today's reality.

I Art Laughing's picture

Ah, the hubris. One of the many glories of Babylon at it's Zenith.

Give Me Some Truth's picture

There are no "markets" anymore, only "interventions." As far as I'm concerned, this is all one needs to know about markets. The "stock market" will be pumped up and defended and the monetary metal "markets" will be suppressed. 

Efforts to manipulate said markets will and have become more brazen as time has passed. This trend, one assumes, will continue. It is clear there is no "risk" to rigging markets. As in, nobody is going to be exposed or thrown in jail for participating in these efforts. To the contrary, they will be rewarded with financial gains.

libertyanyday's picture

Peter provides some possibilities that are for you to expected winning lottery numbers ?

SeuMadruga's picture

Are those reserves big enough to back all "USD" world supply, specially including the unknown yet certainly huge eurodollars  derivatives ?

Hammer823's picture

It's been an 8 year calm LOL


curbjob's picture


"Peter Schiff for FED chairman !"


Ah yes, FINALLY someone from the Rastafarian faith gets a shot at central banking.

Cosmic Energy's picture

Seems tthat someone did not understand where all the evil is coming from...

hoist the bs flag's picture

 whatever. Peter is a broken clock.  everything is actually pretty awesome. so just buy FANG stawks, and dump your silver and gold... & get into Bitcoin!

 this time it's different!

Obadiah's picture

Is he discounting the "PRINT FOREVER" variable?


zimbabwe here we come

hoist the bs flag's picture

liquidity trap...8 years on and still going strong

Philo Beddoe's picture

His claim to fame is being correct once. Yippy! 

Now he just keeps throwing the same piece of shit at the same old fan hoping that it will stick again. 

Quantum Bunk's picture

No actually. He's an austrian. He claimed the big banks would go broke. Then that  the Fed would bail them out. Then that there would be stagnation (under 3%year GDP growth) Then inflation and USD collapse.  It pretty much has to go the way he says it. Just takes long

Philo Beddoe's picture

Just takes long...I'll fucking say. Nice out. 

I Art Laughing's picture

If I had to have an out I'd choose the helicopter to throw money from. That way my backup plan would already be in order.

hoist the bs flag's picture

everyone eventually is right on a long enough timeline.


Anarchyteez's picture


The guy is a rock star.

To all his haters...., hate is an easy cop-out. He was right, and is right.