Peter Schiff’s “calm before the storm” view could mean fix the roof while the sun is shining.
Peter Schiff, a permabear has recently stepped onto the stage and he is growling loudly again. We are simply in the calm before the storm and hard times are coming. Prepare now, or rue the day you didn’t” said Peter Schiff
Peter Schiff, CEO of Euro Pacific Capital, believes that anything which is a function of credit, such as autos, real estate, stocks.. will be in the eye of the storm and see a sharp price correction.
“We are simply in the calm before the storm and hard times are coming. Prepare now, or rue the day you didn’t”
Peter Schiff thrashed out his “calm before the storm” view in a speech to an audience at Vancouver’s International Mining Investment Conference.
The crux of Schiff’s “calm before the storm” is based on a view that the Fed will resort to moving more aggressively on rate hikes.
Moreover, Peter Schiff believes that higher rates at a time when the economy is so highly leveraged will be the final straw that breaks the world’s largest consumer-driven economy. Peter Schiff’s see eye to eye with the bond king, Bill Gross’s view that tightening will derail the economy.
Schiff’s “calm before the storm” view zeros in on the ballooning US government deficit. The deficit has currently surpassed 20 trillion dollars and continues to grow exponentially as welfare, warfare spending (on guns and butter) soar. The federal government’s annual government’s deficit is expected to soar over one trillion dollars in 2020.
“US growth slowed substantially in Q1”
So enjoy the “calm before the storm”, said Schiff.
Indeed, the calm that Schiff refers to is US stocks peaking in January early this year followed by a sharp drop of the Dow by 1000 points in a short period, which usually signals the top of a bull market. Schiff also notes that the USD had the worse January in thirty years.
Peter Schiff also notes that economic optimism has evaporated. “The Atlanta Fed had predicted 5.4% GDP growth in Q1 but ended up at 2.2%”, said Schiff
“US growth slowed substantially in Q1” he added.
How does Schiff reconcile his “calm before the storm” view with the recent tax cuts?
“Tax cuts reduce tax revenue and at the same, the government is increasing its expenditure on warfare and welfare spending,” said Peter Schiff.
Current spending is around 100 billion USD a month, a trillion a year and it rising because as interest rates keep going up the cost of financing (the debt) also rises”, said Peter Schiff.
Meanwhile, “rates are going to go much higher” said Peter Schiff.
When you build a debt-based economy and the cost keeps going up then the economy can’t carry the burden of debt… it is only sustainable if interest rates are at rock bottom levels” added Peter Schiff.
“Many people now think the Fed will nudge rates up again in June, leaving six months to get in the much-anticipated third hike of the year and possibly even get in a fourth” – Peter Schiff
So Schiff “calm before the storm” view is based on the idea that the economy can’t burden the heavy cost of servicing rising debt levels. When the cost of money becomes more expensive Schiff thinks the Fed will not be able to move to monetary normalization.
“Many people now think the Fed will nudge rates up again in June, leaving six months to get in the much-anticipated third hike of the year and possibly even get in a fourth” said Peter Schiff.
“The Fed bases its hawkishness on its anticipation of continued strong economic growth and increasing inflation” Schiff believe they have it half right. Inflation is going to continue to increase. But the central bankers don’t even really have that right. Schiff believes that inflation is actually going to go up faster than projected. The bottom line is that the Fed isn’t going to be able to push through all of these rate hikes,” said Peter Schiff.
Peter Schiff’s “calm before the storm” school of thought would then support a rally in price of precious metals going forward.
Peter Schiff, a gold bull, argues that the “Fed is not going to be able to deliver the rate hikes the Fed is expecting, and again, its the expectation of more rate hikes that is what is keeping the lid on the price of gold. But it’s only a matter of time before the market blows the lid off and the price of gold goes up.”
“Gold is basically trading sideways right now, in advance of a breakout” said Peter Schiff.
“Q1 had all the hype in it, all the anticipation of the tax cuts, the big build in inventories. Despite all that, we’re barely getting any growth in Q1” – Peter Schiff
It is the “calm before the storm”because the tax cuts have had little or no impact on the US economy, according to Peter Schiff.
Q1 had all the hype in it, all the anticipation of the tax cuts, the big build in inventories. Despite all that, we’re barely getting any growth in Q1 and because I think we had to pull growth forward from Q2 in order to get a pathetic 1.9, or wherever it’s going to be for Q1, then Q2 is going to be a lot lower because we’ve pulled that growth forward. And that just blows up this whole bullish scenario of 4 or 5% economic growth.”
So Peter Schiff’s “calm before the storm” is characterized by rising deficit, slowing economy and rising rates.
But there are also holes in Schiff “calm before the storm” view. Peter Schiff discounts the role that treasuries will play in financing future US public spending.
With Emerging markets in a new crisis and another peripheral sovereign debt crisis in Europe Treasuries are beginning to look attractive again, hence dollar is rising not falling, after all, there is no alternative.
Moreover, with regards to cost-push inflation due to rising oil prices, Schiff also discounts supply-side dynamics. If Russia and OPEC increases supply then the price of oil falls and so also inflation
So Peter Schiff might be right this is the “calm before the storm” but he could also be wrong about where precisely the eye of the storm will hit.