🔴 Powell Dashes Hopes for a December Rate Cut - Ep 1048

Key Concepts

• Federal Reserve Monetary Policy: Interest rate decisions, quantitative tightening (QT), quantitative easing (QE), Federal Open Market Committee (FOMC).
• Inflation: Official inflation rate, actual inflation, price levels, core inflation, tariffs' impact on inflation.
• Monetary Policy Tools: Fed funds rate, balance sheet, bond purchases/sales, mortgage-backed securities (MBS).
• Economic Indicators: GDP, employment, wages, stock market valuations, AI stocks, Nvidia's market cap.
• Gold as an Asset: Gold price, gold standard, gold as a barometer of monetary policy, gold as a store of value and medium of exchange.
• Fiat Currency vs. Gold: Dollar crisis, sovereign debt crisis, loss of confidence in fiat currencies.
• Investment Strategies: Diversification, foreign stocks, emerging markets, base metals, energy stocks.
• Bitcoin: Bitcoin's performance relative to gold and tech stocks, consensus trade, potential for a bubble.
• Tariffs: Impact on workers, consumers, and domestic industries.
• Shift Gold Platform: Trading gold and silver, storing metal, debit/credit cards, gold-backed tokens.

Federal Reserve Meeting and Policy Decisions

The Federal Reserve concluded its two-day FOMC meeting, announcing an expected 25 basis point interest rate cut. This brings the Fed funds rate to a range of 3.75% to 4%. The speaker, Peter Schiff, argues that despite the official inflation rate being around 3%, real interest rates are effectively negative, and even more so considering taxes on interest. He believes the actual inflation rate is significantly higher than reported.

The Fed also officially announced the end of its quantitative tightening (QT) program in December. Schiff notes that the Fed's balance sheet currently stands at approximately $6.7 trillion, a substantial increase from pre-2008 levels (below $1 trillion). He criticizes former Fed Chair Ben Bernanke's past assertions that the Fed's bond purchases were temporary and not debt monetization, stating that the current balance sheet size proves this was a lie or incompetence, and that the US is now effectively a "banana republic" due to debt monetization.

Schiff expresses surprise that QT is ending, having expected it to conclude sooner and anticipating a return to quantitative easing (QE) in the near future. He highlights that while the Fed will roll over maturing Treasuries, it will not roll over maturing mortgage-backed securities (MBS), instead reinvesting in Treasuries. This means the MBS holdings on the Fed's balance sheet will continue to contract, potentially leading to rising mortgage rates, contrary to some market expectations. The market reacted negatively to this announcement, with bond yields on 10-year to 30-year maturities rising sharply. Schiff forecasts further rate increases before the December meeting.

Market Reaction and Fed Communication

A significant aspect of the announcement was Fed Chair Jerome Powell's repeated emphasis that monetary policy is not on a preset path and that a December rate cut is "far from a foregone conclusion." This statement significantly reduced market expectations for a December cut, which had been considered a near certainty. Schiff believes the markets did not react more negatively due to a belief that a cut will still occur, possibly due to political pressure and the Fed's underestimation of the economy's weakness. He notes that the stock market, particularly the NASDAQ, hit new highs despite this hawkish tone, suggesting an overvalued market.

The meeting also revealed divisiveness within the Fed, with two dissents. Stephen Moore, appointed by Donald Trump, voted for a 50 basis point cut, aligning with Trump's calls for aggressive rate reductions. Another member, believed to be the head of the St. Louis Fed, voted for no change. Schiff points out the inconsistency in Trump's rhetoric, praising the economy's strength while simultaneously demanding massive rate cuts.

Inflation and Economic Narratives

Powell presented an optimistic view of the economy, citing near 2% GDP growth and full employment. Schiff dismisses these claims, arguing that current employment metrics are misleading and that the GDP numbers understate inflation. He criticizes the Fed for perpetuating government propaganda and for its reliance on official inflation numbers, which he believes are inaccurate.

Powell acknowledged that while inflation has decreased, prices have not, leading to public dissatisfaction. He also attempted to downplay the impact of tariffs on inflation, suggesting that excluding them brings inflation closer to the 2% target. Schiff refutes the concept of "tariff inflation," arguing that tariffs and inflation are distinct. He questions why the Fed targets 2% inflation when prices have significantly risen and why it doesn't pursue policies to bring prices down, especially given the public's concern. He contrasts this with the Fed's past actions to average inflation up when it was below 2%.

Schiff argues that the Fed's policy of maintaining low interest rates, even with rising prices, is a mistake. He believes the Fed's goal of wages catching up to prices will lead to a wage-price spiral, as policies to increase wages also increase prices. He contends that rate cuts stimulate demand through borrowing, which drives up prices, rather than stimulating supply, which creates real economic growth and jobs. He advocates for higher interest rates to encourage savings, capital investment, and production.

The Neglect of Gold and Market Bubbles

A key point of criticism is the complete absence of discussion about the price of gold at the FOMC meeting. Schiff highlights that gold is a primary monetary asset and that its significant price increase between meetings should have been a central topic. He references former Fed Chair Alan Greenspan's use of gold prices as a barometer for monetary policy, noting that $4,000 gold today signifies a far looser policy than $400 gold did in the past.

Schiff discusses the recent pullback in gold prices below $4,000 but maintains that it represents a support zone. He argues that gold's rise in conjunction with Fed rate cuts is a clear signal that the Fed's policies are mistaken. He criticizes journalists for failing to ask about gold or interpret its warnings.

Shift Gold Platform and Future Plans

Schiff introduces a new product at Shift Gold: a trading platform where users can buy gold and silver in small increments for storage in a third-party vault, rather than for physical delivery. This allows for cost-effective acquisition of precious metals, close to spot prices. His long-term vision is to build an ecosystem where gold can serve as a medium of exchange. This includes plans for debit and credit cards linked to gold accounts, allowing users to spend gold in real-time, withdraw cash, or borrow against their gold holdings at low interest rates. He also aims to enable peer-to-peer gold transfers between Shift Gold account holders and to onboard merchants who accept gold payments.

Furthermore, Schiff plans to introduce a "goldback token," a stablecoin backed by gold, as an alternative to dollar-backed stablecoins. He argues that gold offers true stability, unlike the dollar. He mentions potential engagement with figures like CZ from Binance regarding this concept.

Critique of Bitcoin and Tech Stock Valuations

Schiff contrasts the current market with Bitcoin, which he describes as a "crowded trade" with excessive conviction and unrealistic expectations of massive gains. He believes Bitcoin is overvalued and poised for a significant drop, especially as it fails to keep pace with risk assets like the NASDAQ and shows negative correlation with gold. He argues that Bitcoin cannot solve the problems it purports to, unlike gold, which he believes can be utilized as a modern medium of exchange through his new platform.

He also addresses the valuations of AI and tech stocks, particularly Nvidia, which has reached a market cap of over $5 trillion, exceeding the total market capitalization of countries like Japan. Schiff finds it alarming that a single company's valuation rivals that of entire national stock markets. He dismisses Powell's assertion that current tech valuations are not a bubble, comparing it to the dot-com bubble, and argues that even with business plans and earnings, excessive multiples and vendor financing can create unsustainable bubbles. He criticizes the Fed for fueling this mania with cheap money and for its role in making automation and labor replacement cheaper through low interest rates.

Tariffs and Industrial Decline

Schiff reiterates his criticism of Donald Trump's tariff policies, arguing that while they may theoretically benefit a small segment of manufacturing workers, they harm the vast majority of consumers through higher prices. He points out that the largest employers in the US are retailers and delivery services, indicating a shift away from manufacturing. He contrasts this with countries like Japan and Germany, where manufacturing is a dominant sector. Schiff concludes that the US lacks the industrial base to benefit from tariffs and that they will only make remaining industries less competitive. He sees this as evidence of the disintegration of the US industrial economy under the Fed's watch.

Conclusion and Investment Outlook

Schiff concludes that the Fed's policies are a series of mistakes leading to a trap from which it cannot escape, ultimately resulting in a dollar crisis and sovereign debt crisis. He urges listeners to protect themselves by buying gold and silver, moving money into foreign stocks and emerging markets, and considering investments in base metals and energy stocks, which he believes are poised for significant gains. He reiterates his bearish outlook on Bitcoin and his belief that gold will continue to rise as a hedge against the Fed's policy errors.