The Peter Schiff Show Podcast

Holiday Rally

Major U.S. stock markets managed to finish a holiday-shortened week with strong rallies.  The Dow Jones was up 254 points on the day; earlier in the day it was up better than 400, so the last hour did see the U.S. markets giving up part of their gains.  The NASDAQ up 114 points, S&P up 35.87 points, so these rallies today were enough to put the market in the black for the week. But not for the month - all the markets are down significantly in the month of March, and also for the first quarter.  All the major stock market indexes are down.

First Down Quarter in 10

This was the first time in 10 quarters - we had 9 consecutive positive quarters.  I think that's a record; I'm not sure, but 9 consecutive up quarters.  The U.S. stock market finally broke that winning streak.  We'll see how investors who thought U.S. stocks can only go up, we'll see how they may react to their first down quarter in 10, but it's not going to be the last down quarter. It's not going to be the last down quarter. I think its going to be the beginning of several down quarters to come.  Remember the market action that I've been observing really looks to me like a bear market.

Window Dressing

Today, of course, window dressing; oftentimes you see rallies on the last day of the quarter.  Managers maybe are trying to buy up some of the stocks they own to dress up their statements so they look better so they can bill on higher portfolio value. If you have enough people doing the same thing: paint the tape, whatever you want to call it, you can get some of these rallies.  But my guess would be that we can quickly undo this rally next week when the second quarter begins, and maybe some people who are looking at the quarterly performance decide that this is it.  We rode the upstream and let me allocate some of the money out of U.S. stocks, whether it's to bonds, whether it's to foreign stocks or because they want to go to cash, whatever, we can certainly see some reallocations beginning early next quarter.

Don't Screw up the Final Day of the Quarter

Especially if some of these downtrends that really broke in some of these major stocks.  I talked about some of the big losers on my last podcast, and a lot of those stocks got clobbered yesterday; they did manage to rally  back today.  Maybe Donald Trump was being careful about his tweets today because he didn't want to screw up the final day of the quarter.

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Incredible Stock Market Volatility

We're having more incredible stock market volatility and I've spoken about the pickup in volatility as another sign that things are different; that we've had a change.  Increased volatility usually happens at inflection points, especially when we had a record period of minimum volatility.  A of a sudden, we're having incredible swings in the stock market.  Case in point: Monday and Tuesday.

Up Day on Friday

When I did my podcast on Friday, I thought maybe we could have a Black Monday.  We had a big down day on Friday, we had a big down day on Thursday.  The market was down around 1100 points in 2 days.  Could we have another big down day?  Of course we actually ended up having a massive up day, in fact, I think the Dow was up better than 700 points on Friday. It closed 600 and change; not quite 700.  The NASDAQ was up about 220 points, so even a bigger percentage move.

How to Boil a Frog

So we had this huge gain, and what a lot of people don't realize is that the stock market has some of its biggest daily gains in a bear market, not in bull markets.  You have some spectacular rallies in bear markets.  That is how bear markets operate.  They are trying to follow the slope of hope. It's like trying to boil a frog.  You turn up the heat slowly so the frog doesn't notice the temperature change and jump out. The idea is when you have these big spikes in the market, that creates some hope and optimism to hold on to stocks, thinking the decline is over.  People are afraid to miss out on the next big up day, so it keeps people in the market, like keeping the frog in the water.

The Rally that Wasn't

So yesterday we had this huge rally and today we started off with another rally; the Dow was up over 200 points early on, NASDAQ was up 40 or 50 points and then by mid day the market rolled over.  At one point the Dow was down better than 400 points.  The NASDAQ at its lows was actually down more than the gain yesterday. Now there was a small rally on the close, the NASDAQ was only down 211 so about 10 points less than yesterday.

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Incredible Stock Market Volatility

We're having more incredible stock market volatility and I've spoken about the pickup in volatility as another sign that things are different; that we've had a change.  Increased volatility usually happens at inflection points, especially when we had a record period of minimum volatility.  A of a sudden, we're having incredible swings in the stock market.  Case in point: Monday and Tuesday.

Up Day on Friday

When I did my podcast on Friday, I thought maybe we could have a Black Monday.  We had a big down day on Friday, we had a big down day on Thursday.  The market was down around 1100 points in 2 days.  Could we have another big down day?  Of course we actually ended up having a massive up day, in fact, I think the Dow was up better than 700 points on Friday. It closed 600 and change; not quite 700.  The NASDAQ was up about 220 points, so even a bigger percentage move.

How to Boil a Frog

So we had this huge gain, and what a lot of people don't realize is that the stock market has some of its biggest daily gains in a bear market, not in bull markets.  You have some spectacular rallies in bear markets.  That is how bear markets operate.  They are trying to follow the slope of hope. It's like trying to boil a frog.  You turn up the heat slowly so the frog doesn't notice the temperature change and jump out. The idea is when you have these big spikes in the market, that creates some hope and optimism to hold on to stocks, thinking the decline is over.  People are afraid to miss out on the next big up day, so it keeps people in the market, like keeping the frog in the water.

The Rally that Wasn't

So yesterday we had this huge rally and today we started off with another rally; the Dow was up over 200 points early on, NASDAQ was up 40 or 50 points and then by mid day the market rolled over.  At one point the Dow was down better than 400 points.  The NASDAQ at its lows was actually down more than the gain yesterday. Now there was a small rally on the close, the NASDAQ was only down 211 so about 10 points less than yesterday.

The Rally that Failed

On my last podcast, which I recorded on Wednesday, I pointed out that the market's failure to hold the rally in the aftermath of the rate hike. In the face of all of the bullish statements made by Powell about how great everything was, and how strong the economy was, we had a near 300 point rally that failed.

All Systems Go for a Market Decline

The Dow surrendered the entire rally, closed on the lows of the day; not a huge decline - it was only about a 45 point decline, but seems significant to me was the reversal.  The fact that the market could not hold onto those gains - to me, that looked technically very weak.  And I said on that podcast that I thought all systems were go for a stock market decline.

Not a Correction

Of course, I had a lot of other anecdotal evidence and things that I look at that had been leading me to believe that more down side was coming.  In fact, I have never believed that we are in a correction.  Everybody wants to talk about it on television - it's a stock market correction, because they don't consider it a bear market until you're down 20%.

In a Bear Market

Well, in every bear market, before you get down 20%, you've got to be down 10%. So if this is a bear market, if we ultimately go down by more than 20%, then this is a bear market right now.  It's only a correction if it doesn't turn into a bear market.  But if it becomes a bear market, it's been a bear market the entire time. I think we are in a bear market.

Fed Will Come in with Live Support

Now, I don't believe this bear market will be as bad as it could be.  This market could go down way over 50%; I am not expecting that, because I do believe that the Federal Reserve will come in at some point and save the market, or at least try to save the market.  But I think it's going to be a bear market before that happens, meaning the Dow will have to be below 20,000 before the Fed actually realizes that it needs to be put on life support.

1154 Point Decline in 2 Days

But what happened yesterday - the Dow dropped 724 points, huge decline, and then again today we were down another 424 points.  1154 point decline in 2 days.  The bigger decline, percentage wise happened on the NASDAQ.  The NASDAQ still hasn't made a new low for this move.  It did close today below 7000, down 174 points, 2.43% on the day, but we still have further to go.

 

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The Rally that Failed

On my last podcast, which I recorded on Wednesday, I pointed out that the market's failure to hold the rally in the aftermath of the rate hike. In the face of all of the bullish statements made by Powell about how great everything was, and how strong the economy was, we had a near 300 point rally that failed.

All Systems Go for a Market Decline

The Dow surrendered the entire rally, closed on the lows of the day; not a huge decline - it was only about a 45 point decline, but seems significant to me was the reversal.  The fact that the market could not hold onto those gains - to me, that looked technically very weak.  And I said on that podcast that I thought all systems were go for a stock market decline.

Not a Correction

Of course, I had a lot of other anecdotal evidence and things that I look at that had been leading me to believe that more down side was coming.  In fact, I have never believed that we are in a correction.  Everybody wants to talk about it on television - it's a stock market correction, because they don't consider it a bear market until you're down 20%.

In a Bear Market

Well, in every bear market, before you get down 20%, you've got to be down 10%. So if this is a bear market, if we ultimately go down by more than 20%, then this is a bear market right now.  It's only a correction if it doesn't turn into a bear market.  But if it becomes a bear market, it's been a bear market the entire time. I think we are in a bear market.

Fed Will Come in with Live Support

Now, I don't believe this bear market will be as bad as it could be.  This market could go down way over 50%; I am not expecting that, because I do believe that the Federal Reserve will come in at some point and save the market, or at least try to save the market.  But I think it's going to be a bear market before that happens, meaning the Dow will have to be below 20,000 before the Fed actually realizes that it needs to be put on life support.

1154 Point Decline in 2 Days

But what happened yesterday - the Dow dropped 724 points, huge decline, and then again today we were down another 424 points.  1154 point decline in 2 days.  The bigger decline, percentage wise happened on the NASDAQ.  The NASDAQ still hasn't made a new low for this move.  It did close today below 7000, down 174 points, 2.43% on the day, but we still have further to go.

 

Fed Surprised No OneToday, the Federal Reserve surprised nobody. They raised interest rates by 25 basis points; the 6th rate hike since the Fed began, in December of 2015.  The rate is now between 1.5% and 1.75%, so the midpoint of that is around 1.635. So we're still significantly below 2%, but I guess we're closer to 2% than 1% and obviously, we're a lot higher than zero which is where rates stood during most of the Obama Administration.The Fed Already Broke ItAs I said in my last podcast, everybody was convinced the Fed was going to raise rates, which is probably the reason they did it. The Fed doesn't want to upset the apple cart; the Fed does not want to concern anybody;  if anything seems to be going well,  "If it ain't broke, don't fix it." Of course, the Fed already broke it although the Fed does not understand that.Fed Looking All the Way out to 2020In fact what the market was looking for was an indication of whether or not the Fed was going to hike 3 times this year, or would they hike 4 times. I still don't think they know, although the consensus seems to be that as a result of today's statement and press conference, we're going to get 3 rate hikes this year, which means 2 more, not 3 more, but it's still not a done deal. But the Fed seems to be even more optimistic ab0ut the economy going forward, so the Fed is predicting 3 more rate hikes in 2019 and then more rate hikes in 2020. So the Fed is looking all the way out to 2020, saying the economy is going to be great, and we're going to keep on raising rates.Fed's Optimism Waxes as Economic Reality WanesIn fact, the Fed seemed more optimistic about the U.S. economy then they were in the past, which, to me, is all politics. Powell is up there, trying to talk up the U.S. economy because that's exactly what his boss, Donald Trump, wants him to say, so he is being a team player. One of the funnier parts of Powell's prepared statement is that he said the outlook for growth has been improving in recent weeks. Recent weeks! How is he saying that the outlook for growth has been improving when it has done the opposite?Q1 GDP Forecasts CollapseSix weeks ago the Atlanta Fed's Q1 GDP Estimate was at 5.4%. The are now down at 1.8%. Those are the same weeks where Powell says the economic outlook has been improving.  How is it improving when you have a collapse from expecting 5.4% to expecting 1.58%?  It's not just the Atlanta Fed.  All the investment banks, everybody who forecasts GDP  growth has ratcheted down their foresasts significantly in the very weeks where Powell is now saying the economy is improved.

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Fed Surprised No OneToday, the Federal Reserve surprised nobody. They raised interest rates by 25 basis points; the 6th rate hike since the Fed began, in December of 2015.  The rate is now between 1.5% and 1.75%, so the midpoint of that is around 1.635. So we're still significantly below 2%, but I guess we're closer to 2% than 1% and obviously, we're a lot higher than zero which is where rates stood during most of the Obama Administration.The Fed Already Broke ItAs I said in my last podcast, everybody was convinced the Fed was going to raise rates, which is probably the reason they did it. The Fed doesn't want to upset the apple cart; the Fed does not want to concern anybody;  if anything seems to be going well,  "If it ain't broke, don't fix it." Of course, the Fed already broke it although the Fed does not understand that.Fed Looking All the Way out to 2020In fact what the market was looking for was an indication of whether or not the Fed was going to hike 3 times this year, or would they hike 4 times. I still don't think they know, although the consensus seems to be that as a result of today's statement and press conference, we're going to get 3 rate hikes this year, which means 2 more, not 3 more, but it's still not a done deal. But the Fed seems to be even more optimistic ab0ut the economy going forward, so the Fed is predicting 3 more rate hikes in 2019 and then more rate hikes in 2020. So the Fed is looking all the way out to 2020, saying the economy is going to be great, and we're going to keep on raising rates.Fed's Optimism Waxes as Economic Reality WanesIn fact, the Fed seemed more optimistic about the U.S. economy then they were in the past, which, to me, is all politics. Powell is up there, trying to talk up the U.S. economy because that's exactly what his boss, Donald Trump, wants him to say, so he is being a team player. One of the funnier parts of Powell's prepared statement is that he said the outlook for growth has been improving in recent weeks. Recent weeks! How is he saying that the outlook for growth has been improving when it has done the opposite?Q1 GDP Forecasts CollapseSix weeks ago the Atlanta Fed's Q1 GDP Estimate was at 5.4%. The are now down at 1.8%. Those are the same weeks where Powell says the economic outlook has been improving.  How is it improving when you have a collapse from expecting 5.4% to expecting 1.58%?  It's not just the Atlanta Fed.  All the investment banks, everybody who forecasts GDP  growth has ratcheted down their foresasts significantly in the very weeks where Powell is now saying the economy is improved.

Tomorrow is the first of the Fed's 2-day Federal Open Market Committee Meeting, and it's going to be the first meeting where there is supposed to be a rate hike and a press conference for the new chairman, Jerome Powell.  The markets are pretty much at 100% probability that the Fed is going to raise rates on Wednesday.  What the markets are grappling with is whether or not the Fed will raise rates 4 times this year, or only 3.

Now, if they are going to raise them 4 times, it would mean they raised rates once per quarter.  So they raise them in March, they raise them in June, they raise them in September and then they raise them again in December. Now, if they only do it 3 times, then, they pick one of these quarters where they don't do it. Most likely, if they only do 3 hikes, the hike they're going to skip is going to be the June hike.  And, of course, if they skip the June hike, they're probably not going to hike in September or December, either because the economy will be much weaker by then, the U.S. stock market could be much lower.  The fact is, I'm still not 100% sure that the Fed is going to hike on Wednesday.

I would agree that it is more likely than not that the Fed is going to hike, because they've been hiking interest rates all along.  The Fed so far has not given any indication that they're not going to hike because they don't want to give up the ghost of this "vibrant recovery", where they need to raise rates because everything is going so well. But that whole narrative, that whole illusion seems to be fading very quickly. As a matter of fact, on Friday the Atlanta Fed's model for Q1 GDP went down another notch! They are now down to 1.8% for Q1 GDP.  Now does it sound like the Fed should be rushing to hike rates when GDP growth for Q1 is only going to be 1.8%? Does that sound like an economy that is in danger of overheating? When they were at 5.4% 6 weeks ago or so and now they're down to 1.8% and falling? For all we know, we could end up being below 1%.

Does the Fed really want to add more downward pressure to an accelerating economy by raising interest rates?  So far, everybody just assumes that they're going to hike rates. but we'll see.  Another factor that may weigh on the Fed's decision is the stock market. We still have tomorrow and Wednesday morning for the stock market to tank. Today, the tanking process already began.

At one point today, the Dow was down almost 500 points.  At its low it was down around 490.  The NASDAQ, the bigger decliner was down almost 200 points intra day.  Now the markets recouped some of those losses, so the NASDAQ only closed down 137 points; that's still a 1.84% drop.  It's a big drop, not nearly as big as 200.  The Dow was down 335.  It's back in the red on the year.  The Dow was down about 100 points so far this year.  We're only about 800 Dow points above the closing low from March.  I think we're more like maybe 1300 Dow points above the intra-day low in the U.S. session.  But who knows? the market could tank tomorrow, we'll see, and then, is the Fed going to hike rates with the market tanking?

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Tomorrow is the first of the Fed's 2-day Federal Open Market Committee Meeting, and it's going to be the first meeting where there is supposed to be a rate hike and a press conference for the new chairman, Jerome Powell.  The markets are pretty much at 100% probability that the Fed is going to raise rates on Wednesday.  What the markets are grappling with is whether or not the Fed will raise rates 4 times this year, or only 3.

Now, if they are going to raise them 4 times, it would mean they raised rates once per quarter.  So they raise them in March, they raise them in June, they raise them in September and then they raise them again in December. Now, if they only do it 3 times, then, they pick one of these quarters where they don't do it. Most likely, if they only do 3 hikes, the hike they're going to skip is going to be the June hike.  And, of course, if they skip the June hike, they're probably not going to hike in September or December, either because the economy will be much weaker by then, the U.S. stock market could be much lower.  The fact is, I'm still not 100% sure that the Fed is going to hike on Wednesday.

I would agree that it is more likely than not that the Fed is going to hike, because they've been hiking interest rates all along.  The Fed so far has not given any indication that they're not going to hike because they don't want to give up the ghost of this "vibrant recovery", where they need to raise rates because everything is going so well. But that whole narrative, that whole illusion seems to be fading very quickly. As a matter of fact, on Friday the Atlanta Fed's model for Q1 GDP went down another notch! They are now down to 1.8% for Q1 GDP.  Now does it sound like the Fed should be rushing to hike rates when GDP growth for Q1 is only going to be 1.8%? Does that sound like an economy that is in danger of overheating? When they were at 5.4% 6 weeks ago or so and now they're down to 1.8% and falling? For all we know, we could end up being below 1%.

Does the Fed really want to add more downward pressure to an accelerating economy by raising interest rates?  So far, everybody just assumes that they're going to hike rates. but we'll see.  Another factor that may weigh on the Fed's decision is the stock market. We still have tomorrow and Wednesday morning for the stock market to tank. Today, the tanking process already began.

At one point today, the Dow was down almost 500 points.  At its low it was down around 490.  The NASDAQ, the bigger decliner was down almost 200 points intra day.  Now the markets recouped some of those losses, so the NASDAQ only closed down 137 points; that's still a 1.84% drop.  It's a big drop, not nearly as big as 200.  The Dow was down 335.  It's back in the red on the year.  The Dow was down about 100 points so far this year.  We're only about 800 Dow points above the closing low from March.  I think we're more like maybe 1300 Dow points above the intra-day low in the U.S. session.  But who knows? the market could tank tomorrow, we'll see, and then, is the Fed going to hike rates with the market tanking?

Retail Sales Down Three Months in a Row

I've got so much to talk about today, it's hard to even figure out where to begin.  So I'll start with some of the economic data that came out today, in particular, the February Retail Sales number. Remember last month we had a bad number, -.3, the second month in a row we had a decline in retail sales.  The expectation was for a big rebound in February, +.4. Now, I suppose the good news, if you are looking for retail sales to pick up is that they revised the January number upward from -.3 to -.1.  Still a drop, but not quite as big. But instead of getting a rebound, we got another drop! We got another .1% decline in February.  That's a trifecta. Three months in a row of falling retail sales. That hasn't happened in 6 years. This is pretty rare.

Great Jobs, Lousy Sales

Why is this happening? Remember on Friday, we got this "beautiful", too-good-to-be-true, just what the doctor ordered jobs report that said about a million people got jobs. Why didn't any of those million people take their paychecks and spend them at a retailer? Trump is talking about all the great jobs and all the raises that people are getting and all the tax cuts, why are retail sales down for 3 months in a row?

Spike in Inventory Numbers

In fact, we also got some inventory numbers that came out that spiked up because of an 18-month slump in sales.  So inventories are building because nobody is buying what's on the shelf. Well, that doesn't make sense if you believe the economy is great and we've got all these jobs. But if you're like me and you've been very skeptical of the economy being good, this is a validation, because Americans are broke.

Borrowing at Record Highs

This is despite the fact that borrowing is at a record high.  Consumers are borrowing a lot of money, yet they're not spending it on retailers, what are they doing with the borrowed money? The government is borrowing a lot of money, we're running these huge deficits, yet it is not even affecting retail sales. That is really the goal, they want people to go out and shop, and it's not happening.

Atlanta Fed Again Lowers Q1 GDP Estimate

After the retail sales numbers came out, we got the Atlanta Fed updating their forecast for Q1 GDP.  Remember, this is the forecast that was at 5.4% about 5 or 6 weeks ago.  Of course, you remember on my podcast, as soon as that came out, I said, "This is crazy.  There's no way we're going to be anywhere near that. They will be doing this limbo for weeks and months and they're going to be lowering the bar".  On Friday, I reported on my podcast that they has lowered the bar to 2.5%, the lowest forecast since they started forecasting Q1 for 2018.  And what I said on Friday was, "They aren't done going lower. there's room for this bar to go down". I said I thought that the GDP for Q1 would be under 2%.

Goldman Sachs Also Lowers Q1 GDP Forecast to 1.9%

Today, after these retail sales numbers, the Atlanta Fed went down to 1.9%. That is a decline of 65% in their forecast from 5 or 6 weeks ago.  It's not just the Atlanta Fed.  Goldman Sachs is now at 1.9%.  And you know what?  This is probably not the low water mark. I think there is at least a 50-50 shot that we end up with a zero handle on Q1 GDP.

Borrowing Q2 GDP Growth and Shoving it into Q1

Given how weak the data has been coming in, especially the big trade deficits.  The only reason we might end with a 1 handle and not a zero handle is these rising inventories.  In the short run, they give a boost to the GDP, but if inventories are rising because nobody is spending, what does that mean? That means that businesses are going to allow the inventories to wind down, they're not going to keep stocking up.  So what we're doing is we're borrowing GDP growth from Q2 and we're shoving it into Q1.

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