Somewhat lost in the chaos of the DC protests was the fact that Democrats won both Georgia Senate runoff races. That effectively gives the Democrats control of both houses of Congress. In his podcast, Peter Schiff made the case that Congress is the real threat to America, not the protesters who broke into the Capitol building.
Peter said he thinks that Trump’s threat to veto the spending bill unless Congress upped the stimulus checks to $2,000 was a key reason the Democrats won.
That put Senate Republicans in an untenable position where they were the only thing standing between voters and a $2,000 check.”
Rep. Nancy Pelosi immediately seized on the opportunity that Trump handed her and called for a vote in the House on the bigger stimulus. But Sen. Mitch McConnell blocked the move.
That opened up a great window of opportunity for president-elect Joe Biden because he was basically able to frame the Georgia election as a referendum on those checks. Biden actually bribed the electorate, the voters, by basically saying, ‘Hey, if you want your $2,000 check, you need to vote Democrat. If you vote Republican and the Senate stays in Republican hands, you’re not going to get your $2,000 because those greedy Republicans won’t sign on to the legislation.'”
So Georgians voted Democrat. And they’re almost certainly going to get $2,000
But what is that $2,000 going to buy? Probably not very much.”
The bottom line is now the Democrats are going to be able to get a lot of things done that they wouldn’t have been able to do had the Senate stayed in Republican hands. You can almost certainly count on tax increases on corporations and “the rich,” and more regulations. As Peter put it, “Democrats will keep their promises when it comes to making government bigger and more expensive.”
None of this is good for the market. In fact, after the presidential election, the markets rallied on the belief that the Republicans would hold the Senate and serve as a firewall against an all-out Democratic Party agenda. And yet the stock market rallied again after it became clear that the Democrats would take the Senate. The Dow was up 437 points and set a record. The S&P 500 set another record. And the Russell 2000 was up by nearly 4%. This despite protesters storming into the US Capitol building.
Why was the market up? This is clearly bad news. The only thing that a Congress controlled by the Democrats means is corporate earnings will almost certainly be lower with higher taxes and more regulations, and the economy will be weaker than it would have been had the Republicans been in a position to hinder the Biden agenda.
But as Peter put it, “Who gives a damn?” The only thing that matters to this market is that there will be more spending and bigger deficits. And that means the Federal Reserve will have to print more money to finance the deficits.
That is the reason the stock market is up. It is money printing. It is inflation that is driving the stock market.”
Meanwhile, Treasuries got clobbered. The yield on the 10-year rose back above 1%. That sounds low and it is in absolute terms. But compared to yields as low as 40 basis points earlier this year, 1% is a pretty big gain.
So, even though we’re low in relative terms, we’re much higher than we used to be. And what’s more important is the trend. We could see an explosive move up in interest rates. Now, the only reason we may not see an explosive move up in interest rates is because the Federal Reserve doesn’t let it happen. Because the Federal Reserve interferes in the bond market by printing even more money to buy even more bonds to prevent rates from rising.”
Inflation is driving this market. And the irony is that the Fed will have to create more inflation in order to prevent inflation from pushing interest rates up.
They’re literally fighting fire with fire. Bond prices are falling because investors are worried about inflation. And so the Fed creates more inflation to prevent bond prices from falling and now investors have even more to worry about. This is the Catch-22. This is the situation that’s going to unravel.”
So, why isn’t gold getting a big boost? It’s an inflation hedge.
Gold did have a strong rally on the first trading day of the year. But it was down in the aftermath of the Georgia Senate runoff. Peter said he thinks that is primarily a function of risk-on sentiment. Investors are focused on the surging stock market, not worrying about safe-haven. Rising interest rates may have also put some drag on the gold market. People often equate rising interest rates as bad for gold, especially if you think the Fed is about to hike short-term rates.
Traders are overlooking the fact that the Fed is not going to raise rates. It doesn’t matter what’s happening to inflation. The Fed’s not going to fight it. It doesn’t matter what’s going on with long-term rates. The Fed is not going to raise short-term rates. The other factor that the markets are overlooking is that even though long-term rates are rising, these are nominal rates. The inflation rate is rising faster than interest rates. So, even though nominal rates are rising, real rates are falling. That is bullish for gold.”
In this podcast, Peter also talked about some of the economic data that came out, and he offers some thoughts on bitcoin and the DC protests.