The Peter Schiff Show Podcast

Dow Ending a Down Week on a Positive Note

The Dow managed to finish a down week on a positive note; the Dow Jones was up about 55 points - 24,270-ish is where we closed.  Although intra-day, we were up better than 250 points, so most fo the losses came toward the end of the day, as the Dow was not able to hold on to all those gains.  It held on to some of the gains, but Russell 2000, not as lucky. That index ended up finishing a down week down on the day. Probably the difference is the oil stocks, which are really helping out the Dow, to a lesser extent maybe the S&P 500 and that also closed positive on the day, but just barely, and well off the intra-day highs.

I Predicted Oil Would Be Heading Toward $80/Barrel

While we're talking about crude oil, we were up again today, in fact, we haven't even finished trading as I'm recording this, but as I am looking at it, it is at 74.40, up .$.95 - right near the high of the day. I think so far that was $74.46, so, almost 74.50.  Oil is just a powerhouse.  For those of you who say, "Hey Peter Schiff, you haven't gotten anything right since 2008!", I beg to differ.  I've gotten some things right; I've gotten some things wrong, but one of the things I nailed this year is the oil market. I was very bullish on oil early in the year.  I was saying that oil prices were headed up to $80-$100/barrel at the beginning of the year.  When the year started, we were barely above $60, so $80 still looked like it was far away, but I was pretty sure we were going there. And, obviously, we're not there yet, but the year is only half over, and we're a lot closer to $80 than half way. I don't think we're going to stop at $80.  I think it will be somewhere between $80 and $100/barrel.

What is Driving Crude Oil Right Now?

The question is, what is driving crude oil right now, because the dollar is rising. Today, it did not rise.  Today the dollar index got smoked.   Some of that had to do with political news announced last night in the Eurozone regarding immigration, but the dollar wasn't just weak against the euro today, it was across the board.  All the currencies scored big gains.  The dollar index is back down below 95 - 94.63.  Remember I said on my last podcast I did not think there was much room above 95 for the dollar index to rise. So far I'm right about that.

 

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Dow Ending a Down Week on a Positive Note

The Dow managed to finish a down week on a positive note; the Dow Jones was up about 55 points - 24,270-ish is where we closed.  Although intra-day, we were up better than 250 points, so most fo the losses came toward the end of the day, as the Dow was not able to hold on to all those gains.  It held on to some of the gains, but Russell 2000, not as lucky. That index ended up finishing a down week down on the day. Probably the difference is the oil stocks, which are really helping out the Dow, to a lesser extent maybe the S&P 500 and that also closed positive on the day, but just barely, and well off the intra-day highs.

I Predicted Oil Would Be Heading Toward $80/Barrel

While we're talking about crude oil, we were up again today, in fact, we haven't even finished trading as I'm recording this, but as I am looking at it, it is at 74.40, up .$.95 - right near the high of the day. I think so far that was $74.46, so, almost 74.50.  Oil is just a powerhouse.  For those of you who say, "Hey Peter Schiff, you haven't gotten anything right since 2008!", I beg to differ.  I've gotten some things right; I've gotten some things wrong, but one of the things I nailed this year is the oil market. I was very bullish on oil early in the year.  I was saying that oil prices were headed up to $80-$100/barrel at the beginning of the year.  When the year started, we were barely above $60, so $80 still looked like it was far away, but I was pretty sure we were going there. And, obviously, we're not there yet, but the year is only half over, and we're a lot closer to $80 than half way. I don't think we're going to stop at $80.  I think it will be somewhere between $80 and $100/barrel.

What is Driving Crude Oil Right Now?

The question is, what is driving crude oil right now, because the dollar is rising. Today, it did not rise.  Today the dollar index got smoked.   Some of that had to do with political news announced last night in the Eurozone regarding immigration, but the dollar wasn't just weak against the euro today, it was across the board.  All the currencies scored big gains.  The dollar index is back down below 95 - 94.63.  Remember I said on my last podcast I did not think there was much room above 95 for the dollar index to rise. So far I'm right about that.

 

Election Results in N.Y.C. Indicate Political Backlash

Trump has already said that he's "Made America Great Again", so whatever problems he inherited, he's already claimed to have solved, which means any problems that arise now are brand new, under Trump's watch, and he and the Republicans are going to take the blame. An early warning sign of just how big a disaster this can be arrived yesterday in a N.Y.C. Congressional primary. You had a 10-term incumbent Democrat - the guy's been in Congress for 20 years. These guys are impossible to get rid of - trying to get rid of them is like trying to get rid of herpes. Joseph Crowley had been unopposed for 14 years.  28-year old Alexandria Ocasio-Cortez is going to be, if she wins, will be the youngest woman ever elected to the House of Representatives.  She is a former bartender with no real political experience other than being a member of the Democratic Socialists of America. They believe in the abolition of capitalism in favor of an economy run by either the workers or the government.

Oil Prices Prop up DJIA, but not Broader Markets

Even the surge in oil stocks was not enough to keep the U.S. stock market in the black today. The Dow Jones finished in the red by 165 points. That is a drop of .68 percent, but the broader markets which don't have the exposure to the energy sector faired much worse.  You had the composite down 116 points - 1.5% - and the Russell 2000 down almost 1.7%.  Oil prices had a huge day today.  They closed off the highs, but still up $1.80. $72.33 per barrel for the price of oil. We did get as high as $73.06 on West Texas earlier today, so this is a new high for the year. Remember, this is what helped the market avoid an 8-day losing streak when we got that 9th day rally, thanks to oil stocks; and I said at that time that I didn't think that was good news for the markets because higher oil prices may be good for companies, but they're not good for the overall economy. They're even higher now and it will be an even bigger drag on the economy.

Trade Wars and Deficits Bearish for the Dollar

More importantly than the oil price in dollars is the oil price in euros, which continue to weaken against the dollar and other currencies,  The dollar index had another strong day.  We're back above the 95 handle: 95.26. I think this is where the resistance is for the dollar, so I don't expect much headway above 95 on the dollar index.  I still think that the markets have this all wrong; a trade war is not a positive for the dollar.  So everybody who is betting that all of these trade tensions escalating is somehow dollar positive, they're wrong. Just as the people who are betting larger budget deficits are dollar bullish. Both of these events are dollar bearish, as the dollar bulls are soon going to find out.

Oil Prices Threaten Inflation in the Eurozone

In the meantime, the increasing price of oil is going to send Eurozone inflation blowing through the 2% ceiling.  I talked about that in this podcast. They don't have a 2% target in the Eurozone, like we supposedly have in the U.S. Here, the Fed is targeting 2%. They've even said they're targeting higher than 2% to be symmetrical around 2%. But in the Eurozone, 2% is the ceiling. That's why Draghi keeps saying we want to get close to, but below 2%, because it's a hard ceiling. Why they're trying to get close to it is beyond me because if you get too close to it you're in danger of going above it.

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Election Results in N.Y.C. Indicate Political Backlash

Trump has already said that he's "Made America Great Again", so whatever problems he inherited, he's already claimed to have solved, which means any problems that arise now are brand new, under Trump's watch, and he and the Republicans are going to take the blame. An early warning sign of just how big a disaster this can be arrived yesterday in a N.Y.C. Congressional primary. You had a 10-term incumbent Democrat - the guy's been in Congress for 20 years. These guys are impossible to get rid of - trying to get rid of them is like trying to get rid of herpes. Joseph Crowley had been unopposed for 14 years.  28-year old Alexandria Ocasio-Cortez is going to be, if she wins, will be the youngest woman ever elected to the House of Representatives.  She is a former bartender with no real political experience other than being a member of the Democratic Socialists of America. They believe in the abolition of capitalism in favor of an economy run by either the workers or the government.

Oil Prices Prop up DJIA, but not Broader Markets

Even the surge in oil stocks was not enough to keep the U.S. stock market in the black today. The Dow Jones finished in the red by 165 points. That is a drop of .68 percent, but the broader markets which don't have the exposure to the energy sector faired much worse.  You had the composite down 116 points - 1.5% - and the Russell 2000 down almost 1.7%.  Oil prices had a huge day today.  They closed off the highs, but still up $1.80. $72.33 per barrel for the price of oil. We did get as high as $73.06 on West Texas earlier today, so this is a new high for the year. Remember, this is what helped the market avoid an 8-day losing streak when we got that 9th day rally, thanks to oil stocks; and I said at that time that I didn't think that was good news for the markets because higher oil prices may be good for companies, but they're not good for the overall economy. They're even higher now and it will be an even bigger drag on the economy.

Trade Wars and Deficits Bearish for the Dollar

More importantly than the oil price in dollars is the oil price in euros, which continue to weaken against the dollar and other currencies,  The dollar index had another strong day.  We're back above the 95 handle: 95.26. I think this is where the resistance is for the dollar, so I don't expect much headway above 95 on the dollar index.  I still think that the markets have this all wrong; a trade war is not a positive for the dollar.  So everybody who is betting that all of these trade tensions escalating is somehow dollar positive, they're wrong. Just as the people who are betting larger budget deficits are dollar bullish. Both of these events are dollar bearish, as the dollar bulls are soon going to find out.

Oil Prices Threaten Inflation in the Eurozone

In the meantime, the increasing price of oil is going to send Eurozone inflation blowing through the 2% ceiling.  I talked about that in this podcast. They don't have a 2% target in the Eurozone, like we supposedly have in the U.S. Here, the Fed is targeting 2%. They've even said they're targeting higher than 2% to be symmetrical around 2%. But in the Eurozone, 2% is the ceiling. That's why Draghi keeps saying we want to get close to, but below 2%, because it's a hard ceiling. Why they're trying to get close to it is beyond me because if you get too close to it you're in danger of going above it.

Stagflation

Nobody realized just how bad the economy is, but they're about to find out.  All of the economic data that came out this week points to stagflation, if you look at the data.  Look at the Philly Fed - dropped down to 19.  It is the biggest drop in 4 years; the lowest since the election. Look at the manufacturing PMI - those numbers came out yesterday - dropped to a 7-month low, the lowest since November 2017.  If you look at the actual numbers - new orders fell sharply but input cost rose to their highest since September 2013.  So you have rising input costs, yo have falling orders; to me this is all stagflation.

The Fed's Stress Test was too Easy

As I pointed out, even Alan Greenspan, not too long ago on CNBC talking about stagflation. He can see it.  But you know who can't see stagflation?  anyone at the Federal Reserve.  The Federal Reserve announced the results of their stress tests, and surprise, surprise! Everybody passed. So the Federal Reserve designed tests to measure the banks that they regulate would perform under adverse economic scenarios. First of all, if a teacher gives a test, and everybody gets an A, then the test was too easy.  Clearly the Federal Reserve designed this test so that everybody would pass, which of course, is why the test means nothing. Obviously they don't want to announce that the banking system is not sound, so they want to run these bogus stress tests to create a false sense of confidence in the banking system.

Look at the Fed's Assumptions

I want to actually look at the stress test.  You really can't tell anything unless you look at the assumptions.  What type of stress is the Federal Reserve assuming the economy might encounter? First of all, you have the most likely scenario they assume - their base case.  Their base case scenario, which is their forecast is that everything is great. The economy continues to grow 2 - 2.5%/year - a little bit more this year but then it slows down.  Inflation stays right at 2%, interest rates stay about where they are, unemployment goes a little bit lower - everything is great, right? Now, their adverse scenario goes as follows:  the U.S. has a mild recession, and during that mild recession the Federal Reserve is able to lower interest rates down to about zero again.  The yield on the 10-year falls to about .75%, so 10-year yields fall below 1%; Inflation falls; they don't say how low but it falls below 2%, unemployment rises and peaks at 7%. This is their adverse scenario.  Interest rates go back down to zero. That doesn't sound that horrible. Inflation goes down - what is so horrible about lower inflation? This is not that bad.

The Elephant in the Room is Stagflation

But then, you've got to look at their extreme.  In that scenario, we have a bigger recession, and according to the Federal Reserve, there is a global aversion to buying government debt, like bonds.  So because of that aversion, the yield on the 10-year doesn't fall to .75% the way it does under the adverse scenario, it stays where it is - right around 3%. So because interest rates do not fall, there is a bigger decline in asset prices - I think they have a 65% decline  in stock prices, a 30% decline in real estate prices, unemployment rises to 10%, and inflation falls to 1%. I can't help but laugh at this severely adverse scenario, where inflation is only 1% and the Fed is able, again to lower interest rates down to zero. What is the Fed missing? The elephant in the room: stagflation.

The 2008 Financial Crisis Was Not Even Close to the Worst Case Scenario

There's an old saying that generals always prepare to fight the last war, and the same is true with central bankers.  What was the last war? It was the 2008 Financial Crisis. What happened during that crisis? Interest rates went down, inflation went down,  the dollar went up (by the way, the adverse scenario also assumes appreciation of the dollar,

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Stagflation

Nobody realized just how bad the economy is, but they're about to find out.  All of the economic data that came out this week points to stagflation, if you look at the data.  Look at the Philly Fed - dropped down to 19.  It is the biggest drop in 4 years; the lowest since the election. Look at the manufacturing PMI - those numbers came out yesterday - dropped to a 7-month low, the lowest since November 2017.  If you look at the actual numbers - new orders fell sharply but input cost rose to their highest since September 2013.  So you have rising input costs, yo have falling orders; to me this is all stagflation.

The Fed's Stress Test was too Easy

As I pointed out, even Alan Greenspan, not too long ago on CNBC talking about stagflation. He can see it.  But you know who can't see stagflation?  anyone at the Federal Reserve.  The Federal Reserve announced the results of their stress tests, and surprise, surprise! Everybody passed. So the Federal Reserve designed tests to measure the banks that they regulate would perform under adverse economic scenarios. First of all, if a teacher gives a test, and everybody gets an A, then the test was too easy.  Clearly the Federal Reserve designed this test so that everybody would pass, which of course, is why the test means nothing. Obviously they don't want to announce that the banking system is not sound, so they want to run these bogus stress tests to create a false sense of confidence in the banking system.

Look at the Fed's Assumptions

I want to actually look at the stress test.  You really can't tell anything unless you look at the assumptions.  What type of stress is the Federal Reserve assuming the economy might encounter? First of all, you have the most likely scenario they assume - their base case.  Their base case scenario, which is their forecast is that everything is great. The economy continues to grow 2 - 2.5%/year - a little bit more this year but then it slows down.  Inflation stays right at 2%, interest rates stay about where they are, unemployment goes a little bit lower - everything is great, right? Now, their adverse scenario goes as follows:  the U.S. has a mild recession, and during that mild recession the Federal Reserve is able to lower interest rates down to about zero again.  The yield on the 10-year falls to about .75%, so 10-year yields fall below 1%; Inflation falls; they don't say how low but it falls below 2%, unemployment rises and peaks at 7%. This is their adverse scenario.  Interest rates go back down to zero. That doesn't sound that horrible. Inflation goes down - what is so horrible about lower inflation? This is not that bad.

The Elephant in the Room is Stagflation

But then, you've got to look at their extreme.  In that scenario, we have a bigger recession, and according to the Federal Reserve, there is a global aversion to buying government debt, like bonds.  So because of that aversion, the yield on the 10-year doesn't fall to .75% the way it does under the adverse scenario, it stays where it is - right around 3%. So because interest rates do not fall, there is a bigger decline in asset prices - I think they have a 65% decline  in stock prices, a 30% decline in real estate prices, unemployment rises to 10%, and inflation falls to 1%. I can't help but laugh at this severely adverse scenario, where inflation is only 1% and the Fed is able, again to lower interest rates down to zero. What is the Fed missing? The elephant in the room: stagflation.

The 2008 Financial Crisis Was Not Even Close to the Worst Case Scenario

There's an old saying that generals always prepare to fight the last war, and the same is true with central bankers.  What was the last war? It was the 2008 Financial Crisis. What happened during that crisis? Interest rates went down, inflation went down,  the dollar went up (by the way, the adverse scenario also assumes appreciation of the dollar,

Upping the Ante

The shot heard around the world in the ever-escalating trade war was fired last night by Donald Trump, threatening to impose another $200 billion of tariffs on American consumers wishing to buy Chinese goods. This followed the $50 billion in tariffs.  And, remember, when Trump announced the first $50 billion tax on Chinese goods, he threatened that if China retaliated by taxing its own citizens, that Trump would up the ante with even more taxes on American citizens, although he did not use those terms. He's acting as if the guns are pointed in the other direction. But, the Chinese, of course, not to lose face, immediately went tit for tat with Trump and now Trump had no choice but to follow through with $200 billion more in taxes.  Now, I guess the ball is in China's court. We'll see where they take it.

Dow Closed Down for Sixth Consecutive Day

The markets obviously didn't take it very well.  They sold off.  In fact, the decline in the U.S., as seems to be typical, was much more muted than the reaction was around the world. The Dow was down, it closed down for the 6th consecutive day. This was the longest losing streak for the Dow since March of 2017; down 287.  The lows were down about 415-430 or so, but not that big a decline. And the Russell 2000 was up again. Another all time high.  I think on the 6 days that the Dow has been down, the Russell 2000 has only been down 2 of those days. So it keeps going up, and this shows you that traders have convinced themselves that America is going to win the trade war - or at least, take the fewest casualties. Because the reason that the Russell 2000 is doing better than the Dow or the S&P is that you don't have the multi-nationals.

Trump: Greatest Economy in the History of the World

The theory is that the domestic economy can easily weather the trade war.  That it is no big deal, that trade is a small part of the U.S. economy, and so we have nothing to worry about! But if you are worried, well maybe worry about the multinationals that stand to lose, so just focus on all these small companies that are benefitting and basking in the glow of the greatest economy in the history of the world, and if you don't believe it, just ask President Trump.

 

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Upping the Ante

The shot heard around the world in the ever-escalating trade war was fired last night by Donald Trump, threatening to impose another $200 billion of tariffs on American consumers wishing to buy Chinese goods. This followed the $50 billion in tariffs.  And, remember, when Trump announced the first $50 billion tax on Chinese goods, he threatened that if China retaliated by taxing its own citizens, that Trump would up the ante with even more taxes on American citizens, although he did not use those terms. He's acting as if the guns are pointed in the other direction. But, the Chinese, of course, not to lose face, immediately went tit for tat with Trump and now Trump had no choice but to follow through with $200 billion more in taxes.  Now, I guess the ball is in China's court. We'll see where they take it.

Dow Closed Down for Sixth Consecutive Day

The markets obviously didn't take it very well.  They sold off.  In fact, the decline in the U.S., as seems to be typical, was much more muted than the reaction was around the world. The Dow was down, it closed down for the 6th consecutive day. This was the longest losing streak for the Dow since March of 2017; down 287.  The lows were down about 415-430 or so, but not that big a decline. And the Russell 2000 was up again. Another all time high.  I think on the 6 days that the Dow has been down, the Russell 2000 has only been down 2 of those days. So it keeps going up, and this shows you that traders have convinced themselves that America is going to win the trade war - or at least, take the fewest casualties. Because the reason that the Russell 2000 is doing better than the Dow or the S&P is that you don't have the multi-nationals.

Trump: Greatest Economy in the History of the World

The theory is that the domestic economy can easily weather the trade war.  That it is no big deal, that trade is a small part of the U.S. economy, and so we have nothing to worry about! But if you are worried, well maybe worry about the multinationals that stand to lose, so just focus on all these small companies that are benefitting and basking in the glow of the greatest economy in the history of the world, and if you don't believe it, just ask President Trump.

 

ECB Announces Dovish Tightening

The big market-moving central bank announcement this week was not the Fed.  They came out with their so-called "hawkish hike", but yesterday, the ECB came out and they were supposed to announce the end of their Quantitative Easing program, their own version of the taper, which they did.  But they surprised the market by indicating that they would not raise rates above zero, where they are stuck, until the summer of 2019. The markets had not expected such a delay in rate hikes, so it was a dovish tightening announced by the ECB.

The ECB Effectively Eased

When the Fed raised rates, the reaction was pretty much what I expected.  The dollar did not strengthen. Gold did not go down. All of that had been priced into the market.  What caused the dollar to rally and gold to sell off was the ECB and their unexpected ease, which put a bid into the dollar.  We got a huge rise in the dollar yesterday.  We got a 2 percent or so drop in the value of the euro against the dollar.  And the weakness in the euro, along with the strength in the dollar caused a lot of the emerging market currencies to sell off, so it was a huge dollar rally, not because the Fed hiked, but because the ECB effectively eased.

Initially, yesterday, gold jumped 2% in terms of the euro. In fact it jumped up the the high end of the range that had been trading against the euro and it was very close to a breakout against the euro. It was only up a couple of bucks against the dollar, so all of the rise was in terms of euros, and of course, other currencies also fell against the dollar.

Unexpected ECB Move Caused Gold Sell-off

This morning, the traders came out huge. When we couldn't get above that key level in terms of the euro, there was massive selling of gold this morning right out of the gate, and gold finally dropped about $20. Remember on Wednesday I talked about the fact that gold had been in a $12 range all month, and I knew that that wasn't going to persist.  Gold was going to have to break out one way or the other.  I anticipated gold to break to the upside because I expected gold to rise after the Fed hiked rates, which is what has been happening.  What I did not expect was for the ECB to come out with an effective ease, and that's what caused gold to break out of that range.  So I was right about the breakout but I was wrong about the direction due to the unexpected ECB move.

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ECB Announces Dovish Tightening

The big market-moving central bank announcement this week was not the Fed.  They came out with their so-called "hawkish hike", but yesterday, the ECB came out and they were supposed to announce the end of their Quantitative Easing program, their own version of the taper, which they did.  But they surprised the market by indicating that they would not raise rates above zero, where they are stuck, until the summer of 2019. The markets had not expected such a delay in rate hikes, so it was a dovish tightening announced by the ECB.

The ECB Effectively Eased

When the Fed raised rates, the reaction was pretty much what I expected.  The dollar did not strengthen. Gold did not go down. All of that had been priced into the market.  What caused the dollar to rally and gold to sell off was the ECB and their unexpected ease, which put a bid into the dollar.  We got a huge rise in the dollar yesterday.  We got a 2 percent or so drop in the value of the euro against the dollar.  And the weakness in the euro, along with the strength in the dollar caused a lot of the emerging market currencies to sell off, so it was a huge dollar rally, not because the Fed hiked, but because the ECB effectively eased.

Initially, yesterday, gold jumped 2% in terms of the euro. In fact it jumped up the the high end of the range that had been trading against the euro and it was very close to a breakout against the euro. It was only up a couple of bucks against the dollar, so all of the rise was in terms of euros, and of course, other currencies also fell against the dollar.

Unexpected ECB Move Caused Gold Sell-off

This morning, the traders came out huge. When we couldn't get above that key level in terms of the euro, there was massive selling of gold this morning right out of the gate, and gold finally dropped about $20. Remember on Wednesday I talked about the fact that gold had been in a $12 range all month, and I knew that that wasn't going to persist.  Gold was going to have to break out one way or the other.  I anticipated gold to break to the upside because I expected gold to rise after the Fed hiked rates, which is what has been happening.  What I did not expect was for the ECB to come out with an effective ease, and that's what caused gold to break out of that range.  So I was right about the breakout but I was wrong about the direction due to the unexpected ECB move.