During the New Orleans Investment Conference, Peter Schiff participated in a panel discussion with Ben Hunt and Mike Larson. They talked about bubbles, booms and busts.
Hunt called it the “bubble of everything.” But he said the “gravitational force” created by all of the assets central banks have purchased over the last year have changed the “bubble-popping process.” That makes it hard to predict when things will actually start to deflate. He said it will take something the undermines the market confidence that central banks can bail us out. Hunt said inflation was possibly the pin that could prick the bubble.
Larson called it the “uber-bubble,” and he said he already sees some of the background concerns that have been simmering for a long time are starting to “bubble over.” (Pun intended.) He said the last two bubbles were high in amplitude, but limited to certain parts of the economy (dot-coms and housing). The current bubble isn’t as high in amplitude, but it’s broader-based. We see bubbles in stocks, high-yield bonds, housing (again), and commercial real estate, along with a lot of other assets you don’t hear as much about – such as art and comic books.
“I think the process of unwinding this is already beginning.”
Peter focused in on the cause of the bubbles.
“When you see rampant, wide-scale bad decisions, generally a central banker is behind it, and they have made a bad decision to create too much money and to artificially manipulate interest rates down.”
This creates distortions in the economy because interest rates are really nothing more than price signals.
“And like all prices, they need to be determined by the free market.”
Whenever the government – and central banks are really an extension of governments – price fixes something, it creates big distortions and malinvestments.
“We have had artificially low-interest rates for an unprecedented number of years at an unprecedented low rate. So, the mistakes that have been made during this time period dwarf the mistakes that have ever been made in any bubble in the past because the bubble is so much bigger.”
When a bubble finally bursts, it’s really just the free market trying to clean up the mess created by the intervention. The bigger the boom, the bigger the bust.
“The problem now is that the boom is so big that the bust will be catastrophic. And what’s going to make this bust different is that there is no bailout. There is no stimulus. It is impossible to reflate this bubble, because, as has been said, this is a bubble of everything. They can’t make a bubble go someplace else. It already is everyplace.”
Peter said the only place there isn’t a bubble is in gold. That means there is also a bubble in complacency and optimism.
“People are so drunk on all this cheap money, they think nothing can go wrong.”
As far as what pin will prick the bubble, Peter said there are all kinds of pins out there. The problem is that when you’re in a bubble, you can’t see the pins.
The panel goes on to discuss some of the specific manifestations of the bubbles and where they see trouble spots.
And Peter makes a pitch for gold, saying his 24 karat gold cufflinks will outperform the S&P 500 over the next five years. He pointed out that when they started popping the dot-com bubble, gold was under $300. It got as high as $1,900 in 2011.
“This game is not over. The fat lady hasn’t sung yet. When this final bubble pops, gold is going through the roof –I do think that by the time this bubble has run its course, you’ll be able to buy the Dow Jones for an ounce of gold.”
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