Last week, Peter Schiff said we may well be in the calm before the economic storm. In his latest podcast, he said the storm may be on the horizon. But most people are still oblivious, including the Federal Reserve.
The Dow Jones dropped another 200-plus points on Friday. The last day of the week hasn't been good for stocks recently. It was the fourth straight down Friday for the Dow. But Peter said the real trouble was in the bond market. Yields have risen to levels not seen since before the 2008 crash. More significantly, the yield curve is flattening.
The amazing thing is look at the 30-year. The 30-year is 3.15. It's actually just under 20 basis points. Nineteen basis points is all you get for taking 20 additional years of interest rate and inflation risk. Think about that. Think about how crazy that is. I mean, interest rates, right now, on the 10-year, are just under 3%. On the 30-year, they're slightly above 3%. But why would anybody believe that 3% yields are here to stay?"
As Peter pointed out, if you go back to the Second World War and look at average bond yields, these low rates are an aberration. They've been low for a long time, but they aren't going to stay low forever. And yet the market seems to think it's going to go on for another 30 years.
Clearly, the market assumes that interest rates on 10-year government bonds are going to stay just barely over 3% for the next 20 or 30 years. I mean, that is crazy. Why would anybody think that?"
Just consider the deficits. The federal government is running $100 billion per month budget deficits - and this is supposedly during an economic expansion. What's going to happen when we hit a recession? And of course, rising interest rates just compound the problem. As Treasuries come due, the government has to replace them with higher interest rate bonds. This expands the deficit even further.
Inflation makes up another part of the equation. Again, why would anybody assume inflation is going to remain relatively low given all the money that's been printed over the last decade?
So, we have interest rates at around 3% and there is already some handwringing. But as Peter said, they could easily blow through four or even 5%. The Fed keeps saying it plans to reduce its balance sheet, but it hasn't sold very many bonds to date. What happens if they follow through with tightening plans and start dumping bonds on the market?
If [the Fed] continues to stay on this path, or at least the rhetoric is on this path, rates could blow through 3% like a hot knife through butter."
If the stock market really crashes, that could put a temporary pause on things as people buy bonds in an attempt to escape stock market carnage. But generally speaking, it looks like interest rates are on an upward trajectory - unless the Fed takes action to push them back down.
Peter said the real safe haven should be gold. But gold hasn't gained much traction. It pushed above $1,350 last week, but has fallen back significantly.
So, we have the table set for a major breakout in interest rates, but everybody is oblivious.
To me, it's just a maximum level of complacency that you see the potential for a huge breakout in interest rates, where they spike much higher. Not just 2, 3%, 4%. But you can't see that in the bond market. You can't see that in the yield curve. You can't see it in the stock market. You certainly don't see it in the gold market. Everybody is oblivious to these risks."
In fact, Minneapolis Fed President Neel Kashkari said they can't find any signs of an impending crisis. He said there are no warning signs at all.
Well, of course, that's exactly what they said in 2007 and 2008. In fact, even when there was the mother of all warning signs - the crash of the subprime market - the Fed looked at that and said, 'That's nothing. It's contained.' We're not worried about that.' So the Fed has already proved when it comes to warning signs and seeing them in advance, they're like Mr. Magoo. They have no idea what's going on. And in fact, just like Mr. Magoo, they create all kinds of havoc all around them as they blindly move through the economy having no idea what's going on, and there's just all kinds of carnage. We are headed for a massive financial crisis."
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