It looks like we're heading toward a full-blown trade war.
As the war continues to escalate, Pres. Trump has levied more tariffs on Chinese imports in retaliation for China's retaliation after the US announced its first round of tariffs. A lot of people seem to think this is bullish for the dollar. In fact, the greenback has surged in recent weeks. But in his latest podcast, Peter Schiff said this is a bunch of nonsense.
Peter accurately describes these tariffs as "taxes." But despite the fact the world seems to be hurtling toward an all-out trade war, Peter noted that US stock markets haven't reacted as negatively as one might expect. The Dow has certainly dropped, but not precipitously. And the Russel 2000 - representing smaller companies - has actually continued to gain ground.
Peter said this indicates that investors seem to think the US will win the trade war, or that it at least won't significantly impact the US domestic economy. Peter called this "nonsense."
Nevertheless, the nonsense continues to drive the dollar higher. The dollar index has climbed above 95. Keep in mind, it was trading in the 88 range back in February. That was from a high of 105 in early 2017. The strong dollar is a big reason for the recent weakness in gold.
As Peter noted, everybody was bullish on the dollar in 2017 because of rate hikes. We got the rate hikes, but the dollar fell. Peter said now we have some other misconceptions that are powering the dollar.
"The thinking is - at least when it comes to trade - is that the dollar is going to benefit from a trade war, which I think is wrong. I think it's just as wrongheaded as the concept that the dollar is going to benefit from larger budget deficits."
Peter called the notion that budget deficits make for a strong dollar an "asinine theory." The big deficit coupled with the Fed shrinking its balance sheet means we will see trillions of dollars in Treasuries hit the market.
"The thinking is this is going to absorb all the dollars out there and there is going to be a dollar shortage, which is complete nonsense."
As Peter points out, once the government gets the dollars, it spends them right back into circulation. There's no shortage. Furthermore, Treasuries are really nothing more than interest-bearing dollars.
"You've got a Treasury, you've got a dollar. I mean, what's the difference between a 30-day Treasury bill and a dollar? You know, they're pretty much the same thing. The only difference is people don't readily spend their Treasuries, right? They don't go into a store and purchase something with a Treasury. But they can. They can cash it in and buy something. But they're effectively dollars. So, even though the Federal Reserve, in theory, will be shrinking its balance sheet, the US government will be expanding its balance sheet."
Practically speaking, the supply of dollars is really the supply of Federal Reserve notes and Treasury notes. They're all notes. They are all promises to pay dollars. The only difference is Treasury notes have a fixed maturity date and yield while Federal Reserve notes don't.
"It's all part of the global money supply. So to say that dollars were disappearing, we're going to have a shortage of dollars when the Treasury is flooding the world with its IOUs for dollars is nonsense."
On top of that, the government is broke. It can't afford to pay higher interest rates. That's why Peter believes the Fed will never actually shrink its balance sheet, and will ultimately cut rates and go back to quantitative easing.
Currently, private and institutional investors are buying US bonds. Peter said that demand could let the Fed off the hook for a while.
"But it's not going to create a shortage of dollars. The supply of dollars is going to grow and grow and grow. Eventually, what's going to happen is it's going to be the demand for those dollars this is going to collapse, not the supply. And when the demand for dollars collapses, then the price of the dollar collapses. You get massive inflation. That is what is coming."
Peter said the idea that a trade war is going to help the dollar is equally misguided.
The idea is tariffs will shrink the trade deficit, leading to a shortage of dollars. US trading partners get dollars by trading products to the US.
"But the problem is they've already got a glut of dollars. It's not like they don't have a bunch of dollars from exporting products to the United States for decades. Dollars are piling up around the world."
And as Peter pointed out, just because the trade deficits shrink doesn't mean they're going away. They'll still be enormous.
"So, we're still going to be over-supplying the world with an asset it already has in abundance. So, this idea that our enormous deficits getting slightly less enormous is somehow going to send the dollar skyrocketing, as everybody is scrambling to get their hands on them, this is nonsense."
Peter said the trade war will also likely lower US consumption. In the first place, a tariff is a tax that consumers ultimately pay. That means less spending power. Second, if the trade deficit is shrinking, that means America is not importing as much stuff from China and other countries. But it's not like America is making all of the things imported from China. If Americans aren't buying as much stuff from the Chinese, it will ultimately mean Americans are buying less stuff. That means a drop in US GDP.
"So, what's going to happen if the economy slows down and unemployment picks up? Well, the Fed is going to slow down on its hikes. It's either going to hike more slowly, or call off the hikes completely, or start cutting, depending on how much the economy decelerates."
So, where are people going to go? Gold.
"Even though gold has made a move down with the breakout in the dollar - or the move up in the dollar - I think that's the last safe haven standing. I mean, once you run out of safe havens, where are your going to go? That's where people are heading because nobody is looking there now. People don't even think they need a safe haven. In fact, I don't even know if money is moving based on a search for a safe haven. It's just going where the momentum is."
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