At this point, the European Central Bank isn't nearly as keen on raising interest rates as the Federal Reserve. The ECB announced Thursday it would likely hold its interest rate steady at zero through the summer of 2019.
"We decided to keep the key ECB interest rates unchanged and we expect them to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary," ECB President Mario Draghi said during a press conference.
As Peter Schiff pointed out in his most recent podcast, nobody expected the dovishness of the ECB and it roiled the markets. But ultimately, he thinks the Europeans will try to fight the wave of inflation that is about to engulf the planet. Meanwhile, the Fed probably won't.
When the Fed raised rates, the reaction was pretty much what I expected. The dollar did not strengthen, gold did not go down because all of that had been priced into the market. What caused the dollar to rally and gold to sell off was the ECB and their unexpected ease, which put a bid into the dollar. We got a huge rise in the dollar yesterday (Thursday). We got like a 2% drop in the value of the euro against the dollar, and the weakness in the euro and the therefore strength in the dollar caused a lot of the emerging market currencies to sell off as well. So, it was a huge dollar rally not because the Fed hiked but because the ECB effectively eased."
On Thursday, gold was up a couple dollars, but it was near breakout levels in euros, jumping 2%. Then, on Friday, the yellow metal sold off, dropping more than 2% in dollar terms. Peter said he had expected gold to break out, but anticipated it would be to the upside. In fact, gold has gone up after every Fed rate hike - and it did again on Thursday. But the ECB's surprising dovishness snapped that trend.
Peter said the ECB's announcement could strengthen the dollar further, but he doesn't think Draghi and company will really wait until 2019 to start raising rates. He thinks the Germans will force the ECB's hand and it will start raising rates to battle inflation.
I still believe the ECB is actually going to be hiking rates, probably around the time that the Fed starts cutting them. So, this whole idea that America is going to keep tightening while the rest of the world is easing is wrong."
The conventional wisdom seems to be that the global economy is slowing down, while the US economy is growing. As Peter put it, America is an island of growth in a sea of weakness. He said he thinks they have it backward.
So, why won't the ECB really delay raising rates until next year? Peter said you have to look at eurozone inflation.
In the past, the ECB goal was to keep inflation below 2%. Two percent was the ceiling. But in order to justify all of the money printing and QE, Draghi came up with this idea that inflation needs to be "close to" 2% without going over. Well, the CPI number for the eurozone in May came in at 1.9%.
How much closer to 2% can you get without going over than 1.9? I mean, they're not satisfied with that? What is Draghi going for? 1.99? We need to create more inflation because we're only at 1.9? We're not quite close enough to 2%?"
In fact, CPI in Germany is already at 2.2%.
So, I think everybody just assuming that the ECB is going to leave rates zero for all this time - I think they're wrong."
Peter said the markets are also wrong in thinking that the Fed is going to be able to keep raising rates and the economy will be fine. This dovetails with analysis showing rates already may be near a tipping point in the business cycle.
And it's not just the eurozone that has an inflation problem. Import prices came out last week. Year over year, they were up 4.3%. Peter also noted that inflation accounted for nearly half of the surging retail sales numbers.
Inflation is going to break out all over the world. We've already created the inflation. It's all the money supply. It's all the QE. It's all this money printing and bond buying. That's the inflation. It's just that it's starting to move from the financial assets - stocks, bonds, real estate - into consumer prices. But this is the beginning of a huge wave of inflation that's going to engulf the entire planet. But I believe that Europe is going to be more likely to fight the inflation based on the influence of the Bundesbank then will the Federal Reserve based on the influence of Donald Trump trying to get reelected."