Peter Schiff, chief economist and global strategist of Euro Pacific Asset Management, is famous for his bearish takes. A falling stock market, a deep recession, and a sovereign debt crisis were among his predictions in the past.
As the first trading week in January came to a close, The Epoch Times sat down with Schiff to get his outlook for the new year. According to the libertarian economist, the outlook is grim and driven by two factors: inflation and the Federal Reserve.
“The last couple of times the Fed was able to orchestrate a pivot, it did it when inflation was 2 percent or less,” he told The Epoch Times. “Pivot” refers to the moment when the Federal Reserve stops hiking interest rates and begins cutting them again, historically done in response to severe financial stress.
Since the mid-1980s, monetary-easing cycles have been in low-inflation environments. With the Consumer Price Index (CPI) still above 7 percent, what happens if the Fed pivots now?
”They are throwing gasoline on the fire,” Schiff warned. “High inflation gets even higher, and in that environment, I don’t see financial assets as a group doing well.”
“I think bonds get killed.”
In addition, Schiff sees companies with high price-to-earnings (P/E) ratios that do not turn a profit—typically referred to as growth stocks—will not be able to keep up with inflation, given their lack of pricing power.
“That’s important in an inflationary environment. You have to be able to raise your prices without destroying your sales.”
This could spell bad news for many unprofitable tech companies that rely on advertising revenue, because many advertisers will likely slash marketing budgets in the coming recession, Schiff said. Investors may shift their focus to less flashy companies with a steady revenue stream.
“If money is losing value much faster than 2 percent a year, you don’t want to wait 10–20 years to get your money,” he said. “It’s not companies that are promising earnings in the future. It’s companies that have earnings right now.”
Like Warren Buffet, Schiff considers himself a value investor, meaning he invests in companies with a proven track record of profitability and a robust customer base. High inflation will wear down the consumers’ discretionary income, making it difficult for many businesses to maintain revenue.
“If your customers are spending a lot more money on food, on energy, on insurance, on rent, on taxes, and they have nothing left over, then it doesn’t even matter if you cut your prices. You don’t have any customers.”
Schiff laid the blame for the economic doom to come at the doorstep of the Federal Reserve. By distorting financial markets and the value of money, “the Federal Reserve has turned the market into a casino,” he said.
“It’s really helped undermine the productivity of the American economy, which is one of the reasons we have huge trade deficits.”
Many investors and wealth managers today structure their investment theses around trying to predict the Fed’s monetary policy. According to Schiff, this undermines the purpose of a stock market, which is to provide companies with much needed capital.
“The Fed should be irrelevant. Nobody should be making investment decisions based on the Fed. Right now, the Fed is the only thing anybody cares about. ‘Are they going to raise rates? By how much?’”
“Everything is riding on the decision of a few guys sitting in a room in Washington, D.C. That’s not how capitalism is supposed to work.”
Schiff questioned the sanity of such a system. “They decide the price of money. They decide the quantity of money. Why?”
“That makes no more sense than putting together a bureau to decide the price of oil, or the price of milk, or the price of bread … That’s what the Soviet Union used to do, and it was a disaster.”
On a more positive note, gold advocate Schiff was happy to see gold mining stocks up, claiming that many of his firm’s holdings were up more than 10 percent on the week.
