Inflation continues to surprise to the upside. Meanwhile, the economy continues to surprise to the downside. But the markets continue to believe that the Federal Reserve can slay the inflation monster while still guiding the economy to a so-called “soft landing.” FedEx announced some news last week that undercuts this narrative. In his podcast, Peter Schiff talked about why the landing is going to be hard. And when the economy crashes, the Fed inflation fight will be over.
Peter said in the short run, investors are not reacting properly to what’s going on.
I knew we were getting higher inflation. I knew we were getting weaker growth. Most people didn’t know that. But what’s still happening is every time investors are surprised with a hotter-than-expected inflation number, that makes them feel that the Fed is now going to have to fight harder to bring inflation back down to 2%. Nobody doubts the Fed’s resolve, or its ability to bring inflation back down to 2%. So, the higher inflation goes, the harder everybody expects the Fed to fight to win. And that keeps propping up the dollar, and that keeps suppressing gold.”
Peter said he has no idea when the markets are going to figure out that higher inflation just means the Fed is losing the fight, and no matter how hard it fights, it’s going to keep losing.
It’s not fighting hard enough because it can’t.”
Even if the Fed comes out with a 100-basis point hike this week, real rates will remain at -5%.
In what universe can you fight inflation with negative five percent real rates? You can’t, It is impossible.”
As Peter said in a previous podcast, the Fed falls further behind the inflation curve every time it hikes.
The Fed won’t succeed in killing inflation. But it will kill the economy. And that’s because it’s a bubble. The entire economy is based on artificially low interest rates.”
The economy can’t just levitate in midair. It has to fall down when the monetary supports are pulled out from under it.
There is no way to normalize interest rates after more than a decade of abnormally low interest rates and not let everything come toppling down.”
There are already signs that the economy is shaky. We’ve already had two quarters of negative GDP growth and the Atlanta Fed lowered its Q3 estimate to 0.5% last week. The housing market is falling apart. And last week, FedEx dropped a bombshell, announcing office closures and layoffs due to falling demand for shipping.
As Peter pointed out, it’s no wonder that package volume is dropping. Consumers are spending more, but they’re not buying more stuff. They’re just paying more for everything. FedEx exposes the underlying rot in the economy, and it’s going to get worse. Peter said when that happens, the Fed will abandon the inflation fight.
Layoffs are coming as real spending is going down, and that’s when the Fed ultimately is going to pivot. Once the economy really starts to buckle, the Fed is going to turn.”
Peter said he thinks the only reason Federal Reserve Chairman Jerome Powell continues to talk tough about fighting inflation is because he’s still delusional enough to think he can do it without destroying the economy. Powell still thinks he can manage a “soft landing.” He’s willing to put the economy in a mild recession and allow unemployment to tick up a little bit.
That would be getting out of Dodge with barely a scratch. So yes, he’s willing to do that. But is he willing to create a worse financial crisis than 2008? Is he willing to put the economy in the equivalent of a depression — great recession worse than we had in 2008? Of course not! He has zero tolerance for that.”
But Powell still doesn’t expect that, nor does anybody else in the mainstream. Most people concede that the US economy will move into a recession. But everybody thinks it will be “short and shallow.” But how do they know that? Why should it be short and shallow? As Peter pointed out, the bust needs to be proportional to the boom.
We’ve never had a boom this big. We’ve never had interest rates this low for this long. We’ve never had an economy more screwed up than the one we have right now. We’ve never had bigger asset bubbles, bigger debt bubbles, more misallocations of capital and resources. So, we have more mistakes that we need to fix now than ever before. So, how are we going to do that with a short shallow recession? We’re not. It’s going to be a massive recession. And again, the Fed has no stomach for that, and that’s why the Fed is going to pivot.”
And of course, this pivot is going to happen when inflation is still well above 2%. If the Fed goes back to zero percent interest rates and quantitative easing, it’s going to drive inflation even higher.
In other words — stagflation.
In this podcast, Peter also talks about silver as the silver lining in gold’s cloud, the declining stock market, the likelihood of a Black Monday in the near future, why bonds may crash harder than stocks, and the implications of that crash.