In his most recent podcast, Peter Schiff said something that seems rather perplexing on the surface. He said that the current stock market rally isn’t being driven by a strong economy. It’s actually being driven by a weak economy.
How can this be?
Well, the underlying economic weakness is what keeps the Federal Reserve in play and it’s the Fed’s loose monetary policy that’s goosing this market.
The Federal Reserve released the minutes from its October FOMC meeting. The Fed cut interest rates for the third time this year during that meeting, but the committee gave some indication that it would likely pause future hikes.
The minutes indicated that the majority of the committee believed that monetary policy after the 25 basis-point cut would be “well-calibrated” to support moderate growth, a strong labor market, and inflation near its “symmetric” 2% objective, and that it would continue “as long as incoming information about the economy did not result in a material reassessment of the economic outlook.”
But the committee gave no indication about what a “material reassessment” would actually entail.
As Peter noted, while the central bank did hint at a pause in cutting after the October meeting, it effectively took future rate hikes off the table. During the post-meeting press conference, Powell said the Fed would need to see a “really significant” and persistent move up in inflation before considering rate hikes. That leaves just two options for the Fed in the near-term.
“All that’s going to happen now, the only two possibilities, is that rates stay the same or that they get cut.”
There really wasn’t anything in the Fed minutes to change that view.
Meanwhile, the Fed is continuing “not QE” and expanding its balance sheet.
“Everybody is in favor of doing that, but no one is actually in favor of calling it quantitative easing.”
Markets didn’t respond much to the minutes because there really wasn’t anything new.
“It was kind of a yawn. Nothing really happened.”
Stocks, bonds, precious metals nor the dollar moved significantly after the minutes came out. Peter noted that even with the loose monetary policy, gold remains below $1,500.
“One of the interesting things about the gold market is that even though we’ve had this big rise in stocks, we haven’t seen a big drop in the price of gold. I mean yes, it had already dropped, and it’s back below $1,500, but it’s not seeing significant weakness. It’s just kind of treading water as the stock market is going up.”
Meanwhile, we’re not seeing a lot of dollar strength with the rising stock markets either.
“I would think that would be another troubling sign for the market — that it’s not really as strong as people think because if it was so strong, foreigners would be buying into it. They would be buying dollars. If there was a strong economy that was driving this market, if it was a good economy, then a strong economy would be dollar-positive. The dollar would be going up with a strong economy. But it’s not. Because this rally has nothing to do with a strong economy. In fact, it’s a weak economy that’s more instrumental in driving the market higher because the weak economy keeps the Fed in play. It keeps quantitative easing in play. It keeps interest rates going down.”
Peter said ultimately, the dollar is going to implode.
“I’m not even sure what’s keeping it up, other than ignorance. But at some point, the ignorant are going to have some type of epiphany, at least a significant minority of the ignorant, and you’re going to start to see the dollar moving down.”
In this podcast, Peter also talked about the possibility of a “phase 1 trade deal,” saying perhaps Trump should consider a “phase 1-A” trade deal. He also delved into the problem of government spending, citing a report that compared the spending during the first two-and-a-half years of the Obama administration and first two-and-a-half years of Trump. Spending is up 13% under Trump.
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