Peter Schiff’s bond investors wrong bet view is, as usual, a provocative one.
While Peter Schiff agrees that fixed-income investors are right about betting on a looming recession, he disagrees with them on one important issue. So what is it? Bonds are not a safe-haven asset, according to Peter Schiff.
Peter Schiff’s bond investors wrong bet view is scattering the cat among the pigeons, it makes investors reassess what is a safe-haven asset
The last few months have seen a rally in bonds with prices spiking and their corresponding yields falling, particularly in the last few weeks. The bond rally has been triggered by a rotation out of risk assets such as stocks into safe-haven assets, particular fixed income assets.
“Bonds are not a safe-haven asset, according to Peter Schiff”
Peter Schiff’s bond investors wrong bet view argues that investors have got it wrong
Investors are beginning to see a recession on the horizon and they are pouring into Treasuries believing they will provide a safe haven.
In Peter Schiff’s most recent podcast, the gold bug investor points out that bond investors have got it right about a pending recession but they are piling into the wrong asset.
Peter Schiff argues that the bull market in stocks has ended and he called the recent stock rally a bear market rally.
Peter Schiff’s view is that the rally was built on expectations that the Fed’s monetary policy was moving toward an easing cycle. But when investors got wind that Fed chair Jerome Powell was eager to move towards monetary normalization, which entailed quantitative tightening (the Fed selling assets) the stock market rally came to an abrupt end.
“In Peter Schiff’s most recent podcast, the gold bug investor points out that bond investors have got it right about a pending recession but they are piling into the wrong asset”
“What the Fed giveth by being more dovish than the markets expected, the Fed had finally taken away by being more hawkish” said Peter Schiff.
Paradoxically, a hawkish Fed spurs on a bear market in stocks and a rally in bonds which also underscores the fact that it is the Fed’s monetary policy which continues to drive asset prices going forward.
In this brave new world of hyper financialised markets, the fundamentals continue to be irrelevant and all that matters is the extent of liquidity the central bank is willing to supply to keep asset prices propped up.
The S&P 500 and the Dow Jones are both down about 5% from their early-May highs as Peter Schiff writes in this piece.
“I still think we are in a bear market. I do not believe that the rally that we had following the Fed’s pivot constituted a brand new bull market that is now already probably over and this is a new bear market. I think this is the same bear market” said Peter Schiff in his latest podcast.
“if bonds are in a bubble then perhaps investors will rotate into stocks, this is what those advocating the melt-up theory believe”
Peter Schiff’s bond investors wrong bet view could then be based on bonds being overbought in an ongoing bear market in stocks
But the greatest monetary easing experiment in the history of finance which entailed trillions of dollars of central bank created finance has already propelled the bond market to giddy price levels.
Put simply bond yields don’t reflect the level of risk as heavily indebted companies and governments continue to pile on the debts.
Peter Schiff’s bond investors wrong bet view is based on investors rotating into a bond asset bubble without fully appreciated the level of risk
But if bonds are in a bubble then perhaps investors will rotate into stocks, this is what those advocating the melt-up theory believe.
Bill Miller’s melt-up theory is a contrarian view, bearing in mind that two-thirds of American CFOs fear a recession by the third quarter of next year.
The mechanics of Bill Miller’s 30% stock market melt-up is based on the flow or rotation of capital from bonds into equities.
Peter Schiff’s bond investors wrong bet view also extends to stocks. Peter Schiff is of the bubble of everything school of thought. If the bond market is in a bubble then buying into a bubble asset is not a safe-haven play argues Peter Schiff.
So Peter Schiff, renowned for his bearish calls is not optimistic about the trajectory of bond and stock prices. Indeed, Peter Schiff believes that the latter could revisit the stock lows we saw early this year.
“If the Fed waits until we’re officially in a recession, well, then they’re just going to go straight to zero. They’re not going to pass go” – Peter Schiff
But won’t that prompt the Fed to act?
Yes, believes Peter Schiff the Fed will once again come to the market’s rescue. Investors could already be pricing in rate cuts even though Fed Chair Powell took them off the table.
The Fed will act when the official data confirms that we are in a recession, according to Peter Schiff.
“If the Fed waits until we’re officially in a recession, well, then they’re just going to go straight to zero. They’re not going to pass go. But if they started cutting rates sooner, like maybe next week or something, then maybe its possible they only go a quarter point or a half point. But that’s not going to be enough. That is going to do nothing. That is going to be like waving a scarf at a bull. Because the minute the Fed cuts the markets are going to push them to cut more,” said Peter Schiff. Moreover, Peter Schiff reckons that another round of QE is unlikely to have much of an impact this time.
Is Peter Schiff’s bond investors wrong bet view realistic?
If the Fed is going straight to zero then surely that is going to make fix income investments like bonds attractive. Moreover, if a recession is a deadhead where else can money manager hide to earn income on capital. Precious metals are proving itself to be a preserve of capital, but pension funds desperately need income too.