Last week was a good one for the stock market. Peter Schiff raised an important question in his latest podcast: why?
Answer: it’s all about the Fed.
Everybody is giddy because they think the central bank is going to save the day once again. In this podcast, Peter explains why they are wrong.
Last week, the Dow gained 4.7% and other stock indices followed the upward trend, snapping a six-week losing streak. So, what drove the market up? Was it great earnings reports?
Not really. There were a few companies that posted solid earnings reports, but nothing earthshaking.
Was it good economic data?
Nope. In fact, most of the news was bad. Most significantly, the non-farm payroll number for May came in at just 75,000 jobs. The projections had been for about 180,000 jobs. Peter pointed out that if you average the last three months, job growth comes to about 150,000 jobs per month.
Pretty anemic job growth, especially if you’re claiming you’re the jobs president and we have the strongest economy in the history of the country.”
Peter also noted that the economy is creating the same type of lousy part-time and low-paying jobs it was creating when Obama was president.
Meanwhile, the New York Fed lowered its GDP growth estimate both for Q2 and Q3.
The bottom line is we got much weaker than expected jobs growth. We got weaker economic data. We have downward revisions to GDP growth from the New York Fed. Yet the US stock market is soaring. Why?”
One thing has happened. That’s the Fed.
The Federal Reserve has changed on a dime and has done what I’ve been saying they would do for years. In fact, I said they would do this from the very beginning. And that is they have completely abandoned any pretense of normalizing interest rates or shrinking their balance sheet. The Fed is about to cut interest rates again.”
Consider this. That would mean the peak of this interest rate cycle was 2.5%.
That’s not exactly “normal.”
Why is the Fed going to have to cut interest rates? To prevent the bubble from deflating, to prevent the bubble economy from returning to recession.”
And this is exactly why we saw this boost in the stock market last week. The addict is giddy at the mere thought of a fix.
It’s only because the Fed is going to give the heroin addicts on Wall Street more of the heroin, this is why the market is going up. That is why the bond market is going up. That is why rates are falling, because the bond market thinks the Fed is going to work its magic one more time. It’s going to slash interest rates. It’s going to force-feed cheap money into the economy. It’s going to do quantitative easing. And it’s going to be a party in the bond market. It’s going to be a party on Wall Street. Except inflation is going to crash that party. A dollar collapse is going to crash that party.”
Peter said the only reason all of this monetary stimulus worked the last time was because everybody believed it was an emergency measure, that it was temporary, that it would be undone, that there was an exit strategy.
Everything the Fed has been saying for the past 10 years about its exit strategy, about its ability to normalize interest rates — everything they said was a lie.”
The Fed continues to insist that the economy is strong, but Peter said you need to keep your focus on what the central bank is actually doing.
The fact that they’re about to cut interest rates proves beyond a shadow of a doubt that the economy is weak, that any strength is artificial. It’s a result of the cheap money and they need more cheap money to maintain the illusion of economic growth.”
Peter has always said that levering up the economy is the easy part.
If you can’t remove the policy without the economy relapsing into recession, then the economy was a failure...
The easy thing to do was to get hooked on drugs. The hard part, or the impossible part, was kicking the habit. That’s what the Fed can’t do.”