By: Peter Schiff, President and CEO Euro Pacific Capital
-- Published: Wednesday, 25 March 2020 | Print | Disqus
Peter Schiff, President and CEO Euro Pacific Capital
The Federal Reserve has launchedQE infinity. As Peter Schiff put it, the Fed has gone all-in on quantitative easing.
So, what does this mean? What are the ramifications of all this debt monetization and money printing? In his podcast, Peter said this is where the problems really start.
The US stock markets got a mega-boost Tuesday as the reality of QE infinity began to sink in. The Dow Jones saw its biggest point gain in history, up 2112.98 points. It was the biggest percentage gain since, 1933, during the bear market in the midst of the Great Depression.
Peter said he was expecting a stimulus-related rally or correction.
I don’ know if this is just a one-day wonder or if it is the beginning of a larger correction. I do not believe it’s the beginning of a new bull market nor the end of the current bear market. But it is typical of bear markets to have these kinds of rallies.
In fact of the five biggest rallies in the Dow, four of them occurred during the Great Depression and yesterday’s ranks as number four. Of the top 10, two more were during the depression and two were during the 2008 crash. The final rally was after Black Monday in 1987.
Nine out of the top-10 days happened in the middle of bear markets or early in bear markets, so I’m sure this is not the exception. … But I would not get to excited about this rally in the stock market.”
But Peter said he wouldn’t be surprised if we see a bit of an upward correction, especially given all of the stimulus that’s been promised.
On Monday, the Fed announced it would buy an unlimited amount of US Treasuries and mortgage-backed securities. It also said it will begin buying corporate paper for the first time ever. (Peter gave the basic outlines of QE Infinityduring a live video session.) The central bank didn’t even bother to put a dollar- amount on the program. It’s just “whatever it takes.”
This goes far beyond what the Fed did in 2008. (And it did a lot then – to the tune of about $4 trillion). Peter said the central bank is going to buy all the bonds – corporate bonds, municipal bonds, bonds backed by credit card debt, bonds backed by auto loans.
I mean, you name it, they’re going to buy it.”
As he put it in his videocast, they are going to back up the truck and buy the whole bond market.
Peter has been expecting this massive quantitative easing program for a long time. The coronavirus just accelerated it.
The Fed has no choice but to move into the private debt market. If it only bought Treasuries and government-backed mortgages, it would push up interest rates on private debt due to the inflationary pressure of all that money creation.
When everybody is so levered up, people can’t afford, or companies or states can’t afford, to pay the higher interest. So, I said in order to keep the rest of the bond market from imploding, in order to keep a lid on corporate interest rates and municipal interest rates, that the Federal Reserve would be forced into monetizing all of those bonds too. And that’s exactly what happened.”
This is where the problem really starts. If the Fed is going to monetize everything, the amount of inflation it will create will be enormous. In his videocast, he called it a “tsunami of inflation.”
With this major bid that the central bank has put in the market, the Federal Reserve is effectively saying, “We are going to overpay for bonds.”
The Fed has to overpay because it can’t let nominal interest rates rise to compensate the bondholder for the loss of inflation. It has to create artificial demand in order to prop up bond prices and push interest rates down.
So, that is an open invitation for anybody who owns any dollar-denominated bonds, hey, the Fed will buy them. You know, that’s your get out of jail free card. Sell your bonds to the Federal Reserve. And so, everybody is going to take the Fed up on their offer. Because they know if they don’t and somebody else does, all the money that the Fed prints to buy everybody else’s bonds is going to cause the dollar to fall and inflation to rise. And so nobody wants to be left holding the bag.”
Keep in mind, during QE, the central bank is literally turning debt into money.
So as they monetize more and more debt, they create more and more inflation.”
You could very well see foreign holders of US Treasuries like China and Japan go on a selling spree. They know they can dump their dollar-denominated debt without crashing the market because you know there is always a buyer in the Fed.
Nobody can hold dollars. Nobody can hold any bonds denominated in dollars. This is now like a game of musical chairs where nobody wants to get caught with dollars when the music stops playing.”
So when central banks and others start dumping dollars what are they going to buy?
What else are they going to do? I mean, what are they going to use as an asset? They’re not going to just swap dollars for euros or swap dollars for yen. They’re going to just buy gold.”
Generally, there is some advantage to holding Treasuries in the fact that you get interest. But that’s not the case right now. In fact, on short-term Treasuries, the yield is negative.
It’s a lot cheaper for central banks to store gold than to store dollars. And they know the dollars are going to lose value because the Fed is going to flood the world with them. They just basically committed to doing that. They went all-in on QE and it’s QE forever. They’ll buy anything in any amount – unlimited amounts. And so, this is like OK, you got to get out. This is a giant sell signal.”
Peter summed it all up in a tweet.
Treasury bonds are not a safe haven. The Fed will own all the Treasury bonds, as well as most other U.S. dollar-denominated debt. The problem is that the tens of trillions of dollars the Fed will print to buy all those bonds will be practically worthless.#Goldis the safe haven.”
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06840
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.
Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.
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