The US stock markets had another big day Wednesday with a number of indexes, including the Nasdaq and the S&P 500, in record territory. So, what's with the recent move up in US stock markets?
Donald Trump and a lot of Republicans have been taking credit for it, saying their economic policies are causing a boom. But in his latest podcast, Peter Schiff thinks the real impetus for this leg up is the dovish tone of recent Federal Reserve comments.
Now, maybe Trump can take credit for those. Maybe Donald Trump was able to get Jerome Powell's mind right after all when it comes to rate hikes."
The mainstream spin was that Powell stood strong at Jackson Hole and resisted Trump's pressure to stop pushing rates higher and "help the economy." But that wasn't really what was said. As Peter said in his previous podcast, the underlying message is that the Fed is willing to let the inflation genie out of the bottle.
The Fed is basically backtracking on rate hikes that the markets may have anticipated for 2019 by talking about how interest rates are closer to normal now, that 2% today is not the same as 2% in the 1990s, not wanting to invert the yield curve, waiting for the whites of inflation's eyes before they come out blasting by doing everything that it takes. I mean, I think that the Fed has basically said we are going to sit back. We are not going to be preemptive on inflation fighting. We don't think inflation is going to break out. But if we're wrong, we'll do whatever it takes. Basically, the Fed's new attitude is why take an ounce of prevention when you can always use a pound of cure when it comes to inflation?"
Peter said the whole idea is kind of crazy when you really think about it.
That ounce of prevention, given how frail the economy actually is, what a big bubble we have - that ounce of prevention could be lethal. So, let's just forget about that. But somehow we're going to be able to slam the economy with a pound of cure? We're going to be able to get aggressive on fighting inflation if for some reason it ends up being much worse than we thought? I mean, I know that's not going to happen."
He speculated that some traders might be starting to realize the Fed is pivoting toward a more dovish position and they're beginning to price some of the later rate hikes out of the market. That would explain the sudden stock market surge. Yay! They aren't really going to take the punch bowl away.
If some of the traders now are reading into Powell's comments what I'm saying - that the Fed is not going to be as quick on the trigger to try to preempt inflation, that they're willing to give the economy more 'running room,' more slack the way the Keynesians like to describe, you know, kind of let the economic car run a little hot, not really pump on the brakes as quickly as people might have thought, this is bullish, right? More cheap money is bullish for the markets because cheap money is what got the whole bull market going, and people hope more cheap money is what will keep it going."
Obviously, this scenario isn't good for the dollar. That's why the dollar has sold off pretty significantly since the Jackson Hole meeting.
Of course, there is still a lot of consumer confidence out there. In fact, consumer confidence numbers came in much higher than expected. But Peter said that is false confidence.
If somebody is confident the ice is thick and they walk out on a pond and then the ice is thin - just because they think the ice is solid doesn't mean it is going to end well."
Gold has also rallied a bit over the last couple of days. Despite the strong consumer confidence numbers, it's held the $1,200 level. Peter said he thinks all of this is due to the changing perception of the Fed.
And this is just the early stages because this has a lot of evolution going forward, as people really start to price out future rate hikes, and then start to price in a pause in the hikes and then actually the cuts - which are going to come. And then QE4."
Of course, that's a long way off, but Peter said the markets are beginning to see the writing on the well.