Deja Vu All Over Again – SchiffReport January 8, 2016

  • Hi everybody, this is Peter Schiff and I am recording this on Friday, January 8, and Wall Street just finished the worst opening week to a new year in the history of the stock market
  • The Dow Jones was down another 1% on Friday to finish the week better than 1,000 points – it was a 6% decline on the week
  • Now there have been weeks that have been down more than 6% in the history of the stock market, in fact we had one about 4 years ago, but we’ve never had a week this bad in the first week of January
  • Now, the financial media is coming up with all sorts of excuses to blame this big decline on
  • On Monday, they were blaming the sell-off on the rumors that North Korea tested a hydrogen bomb
  • But for most of the week, they were blaming the sell-off of the U.S. stock market on the sell-off in China, despite the fact that China rallied on Friday and we sold off
  • The Chinese market was down about 10% on the week, despite the Friday rally
  • The U.S. stock market is not falling because of the Chinese stock market. The Chinese stock market and the U.S. stock market are falling for the same reason
  • It’s not that one is causing the other, they’re both going down and the reason they’re falling is because the Federal Reserve raised interest rates in December and they are threatening to raise them at least 4 more times, according to the most recent minutes.
  • The belief that the Fed is going to keep raising rates is putting pressure on the Chinese currency, the Yuan, to decline along with a lot of other currencies that have already fallen substantially against the dollar, on the anticipation of higher interest rates
  • It’s the weakness in the Chinese currency that is pulling down the Chinese market, but it’s all because of the Fed – but that’s the same reason we’re going down
  • If you remember, all year I was saying that I didn’t think the Fed was going to raise rates at all in 2015, and the reasons were:
  • I thought thee economy would not be able to handle it – the Fed always claimed that they were data dependent and I thought they were hiding behind that, but I though they could use the weak data, which had been coming all year, as cover for not raising rates – in fact, that was their cover until they backed themselves into a corner because they had promised to raise rates by the end of the year and a refusal to raise rates would be an admission that the economy was weaker than forecasted
  • I also said I didn’t think the market could handle a rate hike.  It had stopped rising based on the absence of QE, but if the Fed actually increased rates, the air would come out of the bubble a lot faster
  • So with the economy going down and the stock market going down, I thought the next thing they would do is reduce rates back to zero and launch QE4 and would look like complete fools
  • So by not raising rates, they would look like a lesser fool by acknowledging that the economy needed additional stimulus
  • We may already be in a recession
  • The Atlanta Fed has already downgraded their forecast for 2015 Q4 to just .8%
  • I think by the time we get the first estimate on the 29th the month, we could actually have a negative number for the fourth quarter
  • If you look at all the data that’s coming in, and I’ll get to that in a minute, we can easily have a negative first quarter of 2016, and we’re in recession
  • If the economy is in recession, and we are in or close to a bear market in stocks, and without the Fed, there’s nothing to stop this market from falling, the Fed will have to come to the rescue of both the economy and the market with QE
  • But if you remember, a lot of analysts were very sanguine about the market’s ability to handle a rate hike, but here we are, the Fed raised rates just a few weeks ago, and the Dow has dropped better than 1,100 points since the Fed raised rates.
  • The one thing that hasn’t declined since the Fed raised rates is gold
  • Gold is up better than $40/oz. since we got that hike, and, if you remember everybody was unanimous that if the Fed raised rates, gold was going to tank
  • But I was saying the opposite.
  • I knew the price of gold had been falling for years in anticipation that the Fed would raise rates and my perspective was, “Buy the rumor sell the fact” and I thought the price of gold would go up
  • This week alone the price of gold is up 4%.  We closed at $1,100/oz., and if you measure the stock market in gold, the Dow dropped better than 10% this week in terms of gold, which is a horrible week for the market in real terms, and I think there is a lot more coming
  • What’s happening right now, in the economy and in the markets, is very reminiscent of what happened in 2001, or 2008 just before the major meltdowns
  • Everybody seems oblivious
  • In 2001 it was different because back then you had a stock market bubble, but the dollar was at record highs and had been rising for 4 or 5 years based on the idea that we were going to pay off the national debt, that we had surplus as far as the eye could see, the rest of the world was a mess and everything in the U.S. was perfect
  • There was evidence that that was not the case, but people ignored it until it was too late
  • Even more so in 2008, because by early 2008, all the problems that I had been warning about for years, in the housing market, were finally blowing up
  • You could see that there was a big problem, yet everybody was still oblivious and, of course it was very frustrating to me to argue in early 2008 with people who were telling me that there was no recession in sight and we were already in one
  • People who said there was no housing bubble and it had already burst
  • They then said, “It is contained to sub-prime…” and I kept saying, no, it’s not just sub prime, it’s the mortgage market
  • They’re doing the same thing now, in every aspect
  • First of all, look at manufacturing.  Manufacturing is clearly in a recession, in fact even Wall Street bulls will acknowledge that we are in an industrial recession
  • But then they say not to worry, because manufacturing is a small part of the economy and it’s contained to manufacturing
  • First of all, the fact that manufacturing is a small part of the economy is a problem in and of itself
  • But to believe that the problems that we are witnessing are contained to the manufacturing sector…
  • They’re as contained to the manufacturing sector as mortgage problems were contained to sub-prime
  • They’re not.  In fact the biggest irony is that the consumer and the service sector is actually in worse shape than the manufacturing sector
  • The manufacturing sector can go down at some point. The consumer is going to go down for the count
  • The only thing sustaining the consumer right now is credit
  • The things he is buying on credit are artificially cheap because the dollar is artificially high because everybody believes this bubble is a legitimate recovery and the Fed can actually raise rates without pricking the bubble
  • Once the dollar turns, and the credit dries up, there goes the consumer
  • Meanwhile, all the evidence is already there that the consumer has run out of purchasing power despite the fact that we got a better than expected jobs report today
  • So many people look at the jobs numbers as proof that the economy is strong, yet they ignore all the other data points that show that it’s not strong, in fact, all of the data that nobody seems to care about is weak
  • Yet, the only data point that anybody seems to care about, the jobs numbers come out strong, at least superficially but what should really give people pause is that all the data that is weak is forward looking and the jobs data is backward looking – it’s a lagging indicator
  • Employers do not lay people off because they see a recession coming
  • They lay people off when they are blindsided by a recession they didn’t see coming
  • I think all these jobs that we got in 2015 and 2014, assuming we actually gained them, because I think the government may have overestimated these jobs
  • A lot of the jobs that were added will be lost in 2016 when the recession officially begins
  • Many of these jobs are low paying jobs and part time jobs anyway, but they are going to be lost when the recession begins
  • All the other data shows recession
  • What drives me crazy is that I see analysts on television actually acknowledge this dichotomy
  • Their conclusion is that all the other data must be wrong, and the jobs data is right, which makes no sense.
  • If you get all these data points that say one thing, and then you get one outlier that says something else, why would you assume it’s the outlier is correct?
  • The logical conclusion is that there’s something wrong with the jobs numbers, but no one wants to see it that way, they all want to make lemons out of lemonade, so they just look at the jobs numbers and claim that everything is O.K.
  • Let’s get into the December Non-Farm Payroll number: this was last month of the year, and of course it will include a lot of part-time jobs from Christmas season hiring
  • We were supposed to create 200,000 jobs, that was the consensus, and we came in at 292,000 – way above estimates
  • Not only did we beat the estimate, but they went back to the prior two months and they revised those up aboiut 50,000/month each
  • So we actually got about 200,000 more jobs in the quarter than anticipated
  • The unemployment rate held steady at 5%
  • The only blemish on this report was average hourly earnings, which were actually down slightly instead of up .2%, which was forecasted
  • This was the data point that people use to prove that the economy is strong, because look at all this job growth
  • Again, all this is backward looking because all the other data, including data that came out today shows how weak the economy really is
  • If the Atlanta Fed is right, and GDP is barely above zero, how is an economy that is barely growing, creating all these jobs?
  • All the data that came out earlier in the week were covered in my two most recent podcasts where I go over in depth all the economic data that came out prior to this jobs report
  • We got two other reports today that no one is talking about because they’re bad:
  • One was Wholesale trade – this is one of the reasons that the Atlanta Fed revised down their GDP forecast – they were expecting a flat number for November and instead we got -.3% and they revised down the prior month from -.1% to -.3%
  • The biggest problem was that inventories were declining on a wholesale level because sales were declining even faster
  • So the inventory to sales ratio actually went up despite the fact that inventories went down; it’s now at 1.32, this is the highest it’s been since the great recession of 2008-2009
  • In fact the only other time that we have been this high was in 2001, when we were also in a recession
  • A lot of data that came out this week that we have not seen levels this bad unless we were in a recession
  • One of two things are possible:  we are actually in a recession, which makes sense according to the current economic data
  • Or there is something really wierd about this recovery that it just looks like a recession
  • This recession looks like a recession and it probably is, but the Fed does not want to admit it
  • The moment the Fed has to recognize we are in recession it will also have to admit that there monetary policy was wrong
  • The other weak number we got was consumer credit, which was expected to expand to 18.8 billion, instead we got growth of 14 billion. That’s the lowest of the year
  • Auto loan consumer credit is the lowest in 4 years
  • There is ample evidence that the sub-prime auto loan bubble has burst
  • As this bubble bursts and inventory piles up, there will be layoffs in the auto sector and its supply chain
  • Additionally, I was saying all last year that I thought we would have a bad retail holiday season and that the layoffs would begin early in 2016
  • Sure enough, Macy’s announced massive earlier this week

Peter Schiff is an economist, financial broker/dealer, author, frequent guest on national news, and host of the Peter Schiff Show Podcast.

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