Crowd gathering on Wall Street after the stock market crash of October 1929 - Photo credit: Wikipedia
Peter Schiff, the eternal provocateur, suggests the Fed’s extraordinary support of bond and housing markets will lead to a market crash as interest rates rise, leaving banks, mortgage originators, and lenders stuck with homes and low yielding loans as the economy slows, exacerbating the decline and throwing the economy into a deeper crisis.
Fed Chairman Ben Bernanke endured some hostile questioning in Congress last week. At one point, responding to a question about QE by Republican Congressman Lynn Westmoreland, Bernanke wasexplaining “[quantitative easing] doesn’t involve any new spending or revenue,” when he was cut off by Westmoreland, who said “oh, I got you, just money printing, right?” The Fed Chairman’s demeanor froze for a second, after which he continued “it’s acquiring securities in order to reduce interest rates and ease financial conditions in the economy,” tacitly accepting the “money printing” comment.
Precisely those purchases of assets to further ease monetary policy are cooking a bigger financial crash than in 2008, Peter Schiff of Euro Pacific Capital argues, and that collapse will start with the housin and bond markets.
Paradoxically, the housing market is firing on all cylinders, with homebuilders like KB Home and Lennar trading close to their 52-week highs. This is irrational exuberance, according to Schiff, as the market is fully subsidized by the Fed. “The U.S. government is guaranteeing all mortgages, and then buying them up,” explained Schiff, “it’s an artificial market, but the Fed, rather than Lehman Brothers, owns it.”
Schiff incredibly agrees with what has become a mainstream opinion: the Fed is behind this rally, both in stocks and bonds, and even in real estate markets. Yet Schiff differs in that, while most believe the Fed-induced rally has “training wheels” that can later come off, the Fed’s support “are the only wheels” keeping the market going, and removing them will spark a crash.
Pointing to housing markets, Schiff notes that “we are building more homes than we can afford,” as hedge funds and speculators gobble up hundreds of thousands of properties being cranked out by the homebuilders. Indeed, hedge fund manager Deepak Narula of Metacapital made $125 million last year buying up mortgages, delivering net returns north of 40% while the S&P 500 squeaked out about 14%; several hedge funds followed suit. The foreclosure process is stalled in several “judicial” states while banks are still sitting on massive inventories of housing. Major banks and mortgage originators haven’t gotten out of the mess they caused in the financial crisis: Bank of America,Wells Fargo, JPMorgan Chase, and Citigroup arestill in the process of settling a nearly $20 billion tab with homeowners across 49 states.
The day of reckoning will come when the Fed starts to tighten, according to Schiff. “It is amazing Bernanke can admit he has no exit strategy,” he explained, noting the Fed will monetize some of its Treasury and mortgage holdings, but will have to sell a lot of both to normalize its monetary stance. Bernanke has made it clear they will telegraph the move to the market, but Schiff believes telling others they will sell “is the worst thing they can do [as] everyone will try to front-run the Fed.”
That is when “public selling will overwhelm the Fed,” Schiff says as “the big buyers are only there because the Fed is.” While the central bank is buying a big chunk of all debt issued by the Treasury, it holds only about 15% of debt outstanding Bernanke explained, rendering it unable to stop a run on Treasuries, which would lead to interest rates rising very quickly.
With bond prices falling and rates surging, banks will be left with depreciating assets (Treasuries) and stuck with low yielding long-term loans. As the “rug is pulled from under the banks,” the housing market will collapse as well, Schiff believes. The housing market will also breakdown.
During the crisis, “the Fed kept short rates low, supporting teaser rates and allowing subprime to gain traction,” explained Schiff, “now, instead of learning their lesson, they are concentrating on the 30-year fix.” Rising rates will make it more difficult for people to qualify for mortgages and get homes, while a cooling economy, as a consequence of tighter monetary conditions, will limit renters’ ability to pay. As the housing market stalls, the financial system will begin to seize up, resulting in a stock market collapse and a deeper recession than in 2008.
Investors can buy protection against this collapse, Schiff says, by stocking up on gold. The yellow metal is down nearly 7% in 2013, but Schiff attributes that to misplaced optimism. “People are as dumb as they’ve always been [but] the sentiment is wrong, they should be buying gold.”
At the end of the day, Peter Schiff’s views are based on a philosophical notion that fiat money, and the actions of central banks like the Federal Reserve, are destabilizing and bubble-inducing. Chairman Bernanke did admit they may have disrupted markets and created bubbles, in bond markets for example, but believes they are unwanted side effects of his policies aimed at propping up the economy and creating jobs. Only time will tell if Bernanke, or the Schiffs of the world are right. Until then, those siding with the latter can stockpile some gold.The Global Economic Crisis: The Great Depression of the XXI Century
Market-Crushing Treasury Collapse To Hit Around 2013
Peter Schiff, the divisive investor and commentator that predicted the subprime/real-estate bubble, is forecasting a U.S. dollar and bond crisis over the next couple of years. Schiff blames intervened bond markets, where rates are artificially and excessively low, and expects the coming crisis to blow the 2008-9 financial crisis out of the water.Marxism and the Global Financial Crisis
There is little doubt that the Federal Reserve, with Chairman Ben Bernanke at the helm, is holding markets by the hand. Bernanke, himself a divisive figure, has done all he can to push interest rates lower, using quantitative easing and Operation Twist once nominal rates had hit the zero-range. While many believe ultra-loose monetary policy is dangerous, Schiff thinks it will lead to a catastrophic correction.
“The more you delay it, the bigger it will be,” Schiff tells Forbes in a phone interview Tuesday, “so we need to raise interest rates during the recession to confront the inefficiencies.” Schiff, who runs Euro Pacific Capital and is seen by many as permanently bearish, argues that government-intervened bond markets are leading to massive distortions in capital allocation that have only been exacerbated as the Fed reacted to the last couple of recessions.
Recent market behavior supports his thesis that massive dislocations in bond yields distort reality. Ten-year Treasury yields had traded in a narrow-range for about four months, on the presumption that a weak economy would continue to count on Bernanke’s monetary support (particularly of the bond market). On March 13, the policy-setting Federal Open Market Committee (FOMC) acknowledged an improved recovery, but did not mention more quantitative easing, or bond purchases, were on the way, sparking a violent sell-off in Treasuries (exacerbated by JPMorgan’sdividend announcement the same day, which triggered a rally in financial stocks) as market players fled a bond rally they considered fixed by the Fed.
While Bernanke delivered calm to bond markets on Monday in a speech that promised “continued accommodative policies,” the violence of the sell-off speaks to Schiff’s argument. “We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back,” says Schiff.
The controversial investor and commentator expects a massive crash over the next two to three years as a bond market bubble, coupled with the U.S. dollar, collapses under the weight of excessive debt. Schiff, like PIMCO’s Bill Gross, doesn’t believe in the current deleveraging cycle. While households have reduced their leverage, government debt has ballooned on the back of stimulus programs, but, argued Schiff, the government’s debt is the people’s debt, thus overall leverage has actually increased.
In CNBC interview Wednesday, Schiff called Bernanke “public enemy number one” and warned that banks would crash if the bond market collapses. While most major banks, including the likes of JPMorgan, Wells Fargo, and evenBank of America, passed the Fed’s strenuous stress tests, which stipulated a massive decline in equity and real estate prices, Schiff still believes they’re in trouble. “The Fed didn’t ask the banks to stress test a big drop in the bond market because that’s what coming, and the banks would fail that,” he said.
Schiff cites the rising price of gold as evidence that U.S. dollar debasement, and inflation, are higher than the Fed, and consumer price data, suggest. Following the Austrian economic tradition, Schiff believes that only a massive correction, via a deflationary recession, can set the system straight. “In a deflation, real wages will rise because the cost of goods will fall faster,” he says, adding that the government should accompany the correction by lowering taxes and cutting back on regulation.
While Schiff does suggest saving in gold, he understands the limitations of the investment. “If you invest in gold, then the economy doesn’t benefit from savings, I want investment to go to plants and equipment.”
The system, he argues, is as broken as it was before the financial crisis. Schiff, who was very prescient in his forecast and prediction of how the subprime debacle would filter through to the broader real estate market and thus bring down the economy, believes complacency is widespread. “All of the people who were 100% wrong [back in ‘08] are saying that everything’s OK [now]. I am telling them they didn’t solve the problem and are making it so much worse.”
Schiff, who knows how to build his case, concludes it thusly: “I didn’t get lucky, I just understood the problem, and we are going to get another big one coming soon.”Business as Usual: The Roots of the Global Financial Meltdown
http://www.forbes.com/sites/afontevecchia/2013/03/05/peter-schiff-and-the-coming-housing-collapse-the-fed-instead-of-lehman-owns-the-mortgage-market/
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