The markets have been jittery lately. The mainstream remains concerned about inflation – more specifically that the Fed is going to tighten monetary policy sooner rather than later to fight rising prices. But in his podcast, Peter Schiff makes the case that the markets are afraid of the wrong thing. They shouldn’t be worried about the Fed fighting inflation. They should be worried that it won’t.
There was a big global selloff in stocks earlier this week. The Dow was down nearly 900 points at its low. The mainstream blamed the big selloff on COVID fears. But Peter said he wasn’t so sure. After all, it’s not like anything really changed over the weekend. The delta variant of COVID-19 was just as much a problem on Friday as it was on Monday. Peter said he thought the coronavirus was a convenient excuse and that markets are becoming more concerned that the Fed is going to take away the punch bowl and prick the bubble.
The markets continue to fret over inflation. But it’s not inflation per se that they’re worried about.
What’s bothering the market is that the market believes the Fed is going to fight inflation - that the Fed is going to do what it said. After all, Jerome Powell just assured the nation, ‘Have faith. We will make sure there is no inflation. We believe it’s transitory, but in the event that we’re wrong, don’t worry. We’re going to be on the job. We’re going to use our tools. We’re reluctant to use them now, but don’t worry. We’ll use them in the future if we have to.’ And the markets are taking the Fed at its word. I don’t know why, but they still believe the things that Fed officials say.”
The markets are worried about higher interest rates and that the Fed will begin to taper asset purchases. They’re worried that the central bank will shut down the party sooner than expected.
The Reserve Bank of New Zealand recently announced an end to its quantitative easing program. Many believe this is a prelude to interest rate hikes in that country.
I think the fact that you have a central bank ending QE, the markets are now anticipating the other dominos that are going to fall. It’s not just going to be this one central bank in a small little country like New Zealand. This is simply indicative of something that’s going to be playing out on a much bigger scale with central banks all around the world. And that’s why it was a global selloff.”
The question is will the US follow that path? Peter doesn’t think so.
Even with the big risk-off day on Monday, investors didn’t pile into gold. The yellow metal was basically flat on Monday. And as risk sentiment returned on Tuesday, gold felt some selling pressure. Peter said the reason people aren’t piling into gold is because they not only think the Fed will fight inflation, but that it will be successful. But he thinks the price of gold will ultimately go way up.
Unlike the markets, I not only don’t expect the Fed to win a fight against inflation; I don’t expect it to get in the ring. I think inflation is going to win by default because the government’s not even going to attempt to fight because the consequences are too high. And that’s what the markets just don’t seem to understand.”
If the Fed was really willing and able to use its inflation-fighting tools, why hasn’t it started to use them given inflation has run hotter than expected every month this year?
Given the severity of the consequences of inflation not being transitory, it makes no sense for the Fed to roll the dice and take a chance. It should do something preemptively to prevent that from happening. The only reason it’s not doing something preemptively is because it doesn’t want to hurt the economy. Well, you should hurt the economy in order to prevent it from being hurt far worse in the future if the gamble doesn’t pay off.”
It’s easy to talk about doing something hard in the future. A fat guy can talk about going on a diet next week or next month. But actually going on that diet is a different matter altogether. When push comes to shove, will the Fed be able to back up its talk and give the economy the medicine that it needs, despite the consequences?
As difficult as it would be for the Fed to use its tools to fight inflation today, it’s going to be much more difficult tomorrow to use those tools because the inflation problem is going to be much bigger, which means they’re going to have to take a much bigger hammer to the economy. So, they’re going to do much more damage to an even greater leveraged economy when they have to fight an even larger inflation monster.”
Peter said investors are afraid of the wrong thing.
Instead of being afraid of the inflation fight, they should be afraid of inflation and the fact that it wins, that there is no fight, and it gets much worse than everybody expects.”