Stocks took off on Friday on several big news items – most significantly President Trump’s announcement that the US and China have worked out phase one of a trade deal. In his podcast, Peter broke down the news. He also made an interesting observation: Trump and the Federal Reserve seem to be reading off the same script.
The consumer sentiment number for September came out Friday higher than expected. As Peter noted, this index is regarded as very important.
It measures whether or not the consumer is confident enough to go deeper into debt and keep buying stuff that he can’t afford. And assuming the consumer is so confident then everything is great because the spending continues and the GDP continues. But of course, if you look back historically, the consumer is never smart enough to be pessimistic when he should. He’s always very optimistic just before a major economic decline.”
Also on Friday, the Federal Reserve Bank of New York came out with its non-quantitative easing quantitative easing plan. The bank said it would buy $60 billion in short-term Treasuries each month.
Of course, don’t confuse this with quantitative easing when the Fed was buying $85 billion a month of Treasuries, because this is no way quantitative easing except, of course, that’s exactly what it is.”
The Fed also reiterated that it plans to use all of the interest it earns off its portfolio to buy more Treasuries. And as the bonds mature, it will take that money and buy more Treasuries, thus pumping up the balance sheet. Peter says this proves that Ben Bernanke was either lying or incompetent when he told Congress back in 2009 that the central bank was not monetizing the debt.
This has been a permanent debt-monetization, the exact opposite of what Ben Bernanke claimed he was doing.”
Peter reiterated that this is all about keeping interest rates from going up.
We don’t want to have to pay the price of these huge deficits. Because normally if you run massive deficits and everybody is borrowing and nobody is saving, the consequence is interest rates go up. But of course, the consequences are not pleasant for a lot of people who have a lot of debt, so the Federal Reserve is trying to spare the economy from suffering those consequences. But unfortunately, things get worse.”
The CBO estimates that the 2019 fiscal year deficit came in just a hair under $1 trillion.
Peter said the “success” of QE after the financial crisis was predicated on the fact that it was temporary and reversible.
Well, soon people are going to realize that neither of those is true, and it’s not going to be a success; it’s going to be a complete failure.”
Peter also talked about the trade war and the announcement that the US and China were close to “phase one” of a trade deal. Peter reminded us that not too long ago, Trump said there wasn’t going to be any kind of interim deal. It was all or nothing. Now we’re apparently doing the deal in steps.
When Trump was asked about the Fed, he said trade deal or no, the central bank should still cut rates.
Why? Why do we need more? If we got this great deal, we have the greatest economy ever, and now it’s going to be even greater because of this great deal — we need even more rate cuts? But the reason Trump said we need even more rate cuts is because the rates in Germany are lower than they are here.”
German rates have always been generally lower than US rates. This is by design because the central planners in Europe don’t want the value of the euro to go up relative to the dollar. Peter called the quest to keep currencies low with artificially low interest rates is a fool’s errand. And he emphasized that two wrongs don’t make a right.
If your friend jumps off a bridge, that doesn’t mean you do it too. Germany, Europe is making a mistake by keeping rates too low. Just because they’re making that mistake doesn’t mean we should repeat it. Of course, we’re going to repeat it. We are repeating it. And rates are coming down, not because we have a great economy but because we have a great bubble. And the only way to try to sustain the bubble is by blowing more air into it. And the way the Fed blows air into the bubble is by lowering rates and doing quantitative easing. And that’s exactly what it’s doing whether it wants to admit it or not.”
Peter said that when you boil it all down, there isn’t going to be this great comprehensive trade deal. And he noted that the Fed and the president operate in very similar manners.
The Fed constantly says something and then does the opposite. The Fed says that they’re not monetizing the debt. The Fed says that QE is temporary. They’re going to normalize interest rates. And then they don’t do it. But no one calls them out and says, ‘Wait a minute, this is not what you said.’”
Everything the Fed says is a lie. It’s constantly having to move the goalposts and go back and revise its policy.
Well, Trump is doing the same thing with trade.”
It’s almost like they’re reading off the same script.
But the market will hear what it wants to hear. It will tune out the bad news. Peter said that’s probably what consumers are doing too.
Peter closed out the podcast with an overview of what’s happening in the gold market.