Peter Schiff Was Wrong - Part 12
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Uploaded on Aug 17, 2010
This episode of CNBC Fast Money aired on June 21, 2010.
Schiff proclaims in this video "that US interest rates (and treasury rates) will surge (on China's move to revalue the renminbi)"
2 months later, this is what really happened:
"As Labor Day approaches, interest rates have collapsed, plunging along with economic optimism.
That turn of events, which has shocked savers and stunned investors, appears to indicate that financial markets' worries are turning in a very different direction from those of many governments.
The governments are seeking ways to bring down budget deficits, fearing that without austerity they could go so far into debt that they would never be able to borrow again. Investors in the financial markets seem to be much more concerned by the possibility of renewed recession and a general deflation that could send asset values and prices down.
That market reaction is the opposite of what happened in the late 1970s and early 1980s. Then "bond vigilantes" were reluctant to invest in United States Treasury securities because they feared runaway inflation. Their refusal drove up the interest rates the government had to pay on its borrowings and eventually led the Federal Reserve, under Paul A. Volcker, to wage war against inflation even if it meant choking off economic growth.
Now, far from showing a reluctance to finance the American government, investors are seeking safety and evidently believe American government debt is the safest possible investment. They have rushed to send money to the Treasury, thereby reducing borrowing costs for the government.
By late 2009, interest rates had fallen to levels previously thought inconceivable. The annual yield on a two-year Treasury note dipped below 1 percent. But it has since traded barely above one-half percent.
That interest rates have declined is good news in many respects. "There are," said Sal Guatieri, senior economist at BMO Capital Markets, "always people who have jobs who can take full advantage of lower interest rates to borrow and spend."
But that impact now may be weakened by two factors, perhaps increasing the need for fiscal stimulus.
First, there are many who will not be helped. Homeowners with ample equity and income can refinance their mortgages at record low rates, which fell to 4.4 percent last week. But millions of homeowners either lack sufficient income or have houses no longer worth what is owed on the mortgage. They cannot refinance.
And while government borrowing costs have plunged in the countries deemed safest by investors, they have risen in some others. Germany now pays 1.4 percent on five-year borrowings, while Greece pays more than 11 percent. The German economy is booming, while the Greek recession is worsening.
The second negative factor from lower interest rates now is harder to quantify, but may be of growing importance. Those people who depend on their savings to provide income now earn far less from their thrift than they used to receive. Some avoided sharp declines by purchasing longer-term certificates of deposit from banks. But as those C.D.'s mature, the banks are offering low rates even on long-term deposits.
The growing disenchantment with government spending has led to talk of the world reaching a "Keynesian endpoint," as Anthony J. Crescenzi, a strategist for Pimco, a large investment firm, put it this summer. At such a time, countries needing to rescue banks and stimulate their economies would be unable or unwilling to do so.
The Federal Reserve's move last week, in which it committed to buying up a small amount of Treasury securities, showed its determination to act but "may have exacerbated the fears," said Dean Maki, the chief United States economist for Barclays Capital. "The Fed seemed to have significantly downgraded its economic outlook," but its policy change "appeared fairly minor in comparison."
Lower interest rates are already helping some companies. I.B.M. is paying only 1 percent to borrow $1.5 billion for three years. And as some investors search for better yields, many companies are benefiting. Last week, a record $14.3 billion of new bonds were issued around the world by companies with bond ratings lower than investment grade, Thomson Reuters reported.
But for now, the financial markets seem to fear recession and deflation much more than they fear deficit spending."
This is what happens when you listen to Peter Schiff. Immediately, the markets go the other way and you as an investor, are left holding the bag. With the exception of gold (which he got right because of the wrong reasons), he has almost positioned his clients on the extreme wrong side of the trade every time.
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