Schiff: Commodities Ripe For Fed U-Turn

March 31, 2014

Peter Schiff, CEO and chief global strategist for Euro Pacific Capital, is most famous for accurately calling the top in the housing bubble, and predicting the financial crisis that ensued. He is a firm follower of the Austrian School of economics and a regular critic of the Federal Reserve’s policies. He has authored several books, including “Crash Proof” and “Crash Proof 2.0,” both New York Times best-sellers. A revised and updated version of his newest book, “The Real Crash,” is due out on April 8. Schiff is a regular on CNBC, hosts The Peter Schiff Show on radio and is often quoted in the financial media.

Schiff recently sat down with ETF.com to voice his concerns about the Fed’s policies, and sees on the horizon the biggest bubble of all time about to deflate. He predicts what’s ahead for QE-tapering and interest rates in the coming years. He also discusses which currencies, commodities and international equities are poised to benefit the most from a crashing U.S. dollar.

ETF.com: You shot to fame after accurately predicting the housing crash, and the financial crisis of 2008 that ensued shortly after. Are there any crises brewing at the moment that concern you?
SCHIFF: The government policy that created the housing bubble that led to the financial crisis—those policies are not only still in effect, but they’ve grown in their strength. So the government is doing more of what it did to create that problem. So, unfortunately, the next crisis is going to be even worse than the one we experienced in 2008. In fact, it’s going to be several orders of magnitude worse. If you thought that 2008 was bad, you ain’t seen nothing yet.

ETF.com: In a scenario where the market crashes the way it did in 2008, with greater magnitude, what can investors do to protect their investments?
SCHIFF: My thought is that the market isn’t going to crash the way it did in 2008. It’s going to crash in a way that’s going to be far more destructive, but maybe not as obvious. It may not crash at all in terms of dollars. In fact, the market may even go up. It might be the dollar that’s going to crash.

The Fed will be in a situation shortly where it has to choose between the dollar and everything else—the economy, the stock market, the real estate market—because if the Fed continues with the tapering as scheduled, and then begins to raise interest rates, we will have a worse financial crisis than in 2008.

We’ll have a big drop in the stock market, a big drop in the real estate market. All the banks that they bailed out in 2008 will fail again. Only this time there’s not enough money to bail them out, because they’re so much bigger. Everybody is going to be entering into this crisis with a lot more debt than they entered the last one.

So, thanks to the Fed, we didn’t de-lever, we doubled down on leverage. It’s a bigger bubble. There’s a lot more air that’s going to come out of it. Last time around, depositors didn’t lose money. The next crash, they will lose money. They’re going to have to take haircuts. There’s no money in the FDIC.

To prevent that from happening, they’re going to have to kick the presses into overdrive. They’re going to have to ramp up QE. Janet Yellen is going to slow down and then reverse the taper, crank the presses back up and launch a whole new round of QE, ending up buying more than $100 billion a month in Treasurys and mortgage-backed securities to try to blow air back in to the deflating bubble.

The bubble is already deflating. The economy is already sinking back into recession. So they have to reverse that. The dollar’s going to get killed, because the dollar is being supported based on the false belief that the Fed can unwind its balance sheet, that the Fed can raise interest rates, and that all this can be done and the economy can keep growing, which is all impossible.

It’s not even the economy that’s really growing; it’s just our debt that’s supporting the asset bubbles in stocks and real estate that’s masquerading as a recovery. The actual economy has been deteriorating the entire time that the government has said it’s been recovering. It’s the government’s monetary medicine that’s acting as a toxin that’s preventing the economy from actually recovering.

ETF.com: You’re clearly bearish on the dollar in the long term. Which currencies look attractive to you at the moment, and which currencies do you avoid?
SCHIFF: The big ones that we try to avoid are the yen, the pound and the euro. Most people think, if you’re not going to buy the dollar, what are you going to buy? The yen, the euro, the pound. Those are not the currencies that are high on our shopping list.

We look at currencies like the New Zealand dollar, Norwegian krone, Singapore dollar, Aussie dollar, Canadian dollar and Hong Kong dollar.

Not the major currencies, but the currencies we think are being issued by more competent central banks. Their governments are not running the types of deficits that we are, and so they’re in better fiscal shape. It makes it easier for your central bank to be responsible if you’re not creating a lot of debt when they’re supposedly monetizing. We’re also down in South America; we have some money in Chile and Peru. It’s just not getting out of the dollar; it’s what do you get into, because we’re not the only central bank that’s printing money.

ETF.com: Say Janet Yellen tapers QE, notices that the economy is crashing, so then has to re-up QE. Besides currencies, are there any other asset classes you’re targeting?
SCHIFF: Obviously gold. Gold’s going to be a primary beneficiary. Gold is real money, so it’s not just a substitute like these currencies are. I think the demand for gold and other commodities will explode when the Fed has to admit the truth.

If you look at the Fed’s track record on the economy, particularly since the days leading up to the financial crisis and subsequent, the Fed has always gotten the economy wrong by a long shot. It’s not like some years they think the economy is going to be weak and it ends up being stronger, or sometimes they think it’s going to be strong and it ends up being weak. They always think it’s going to be strong and it always ends up weak.

They always miss it by being too optimistic, which shows me it’s not even random. The fact that they always overestimate the strength of the economy, to me, shows that it’s really an agenda. I think the Fed wants to believe that their policies are going to work. Since they want to believe they’re going to work, they assume they’re going to work when they make their forecasts.

They make a forecast based on that expectation. When they don’t get the good recovery they thought they were going to get, they never question their prescription. They just say, “Well, I guess we didn’t do enough stimulus,” or “It must be about something else; there must have been some external factor that derailed the recovery that we couldn't have forecast, like, a crisis in Europe, or the weather.”

I think the other part of it is the Fed is very much concerned about expectations, about what people think is going to happen. What the Fed doesn’t want to do is create a self-fulfilling prophecy, where the Fed says, “We think the economy’s going to be weak,” and then it is weak. Because people react to what the Fed says.

So I think the Fed says, “We want to be a cheerleader for the economy. We want to go out there and say how much better we think things are going to be, because that will influence behavior; people will go out and spend if they’re confident. People will go out and hire and invest.” You're not the cheerleader by being the Negative Nancy.

ETF.com: Besides gold, are there any other commodities you’re bullish on?
SCHIFF: Most of the commodities. Agricultural commodities can certainly do well. Is corn going to be better than wheat? Will soybeans be better? I don’t know; I’m not an expert on each individual commodity.

But I think agriculture will do well. I think energy will do well. Certainly the events that are going on in Russia right now are only going to add to the bullish case for oil. But other energy—natural gas might finally start to do well after having been in such a downtrend. I think maybe that market has turned.

Also, some of the base metals have been crushed. Look at copper. Some of these markets have come down based on the anticipation of tighter monetary policy, a stronger dollar. None of this is going to materialize.

Right now you’re having assets that are mispriced, just the way assets were mispriced during the real estate bubble. I think people are looking at this now and saying, “The dollar’s going to get stronger, the U.S. economy is going to grow.” They’re not factoring in—when they’re trying to value these commodities—another round of QE and a weaker dollar.

ETF.com: Do you favor any international equity markets at the moment?
SCHIFF: Yes, the countries I just mentioned where they have strong currencies. The countries that we’re investing in are the same currencies that we like. It’s the same fundamentals. The strong economies have strong currencies, the responsible central banks. The countries that are balancing their budgets, that are lowering government expenditures, cutting taxes, limiting regulations. They have strong currencies, they have vibrant economies, they go hand in hand.

 

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