The U.S. stock market has seen a steep pullback since early September and according to Peter Schiff, the Fed is running out of ideas.
As seen in the performance of the Dow Jones, which has lost more than 1,000 points in the past month, the U.S. stock market has struggled to demonstrate resistance to growing selling pressure from global markets.
The uncertainty around the trade talks with China, the recession in the manufacturing sector, and the expectations of a poor earnings month in October have darkened the mood around the stock market.
Schiff says U.S. stock market is a house of cards, expects a crash
Peter Schiff, CEO of Euro Pacific Capital and an avid investor in gold, said the U.S. stock market is off to its worst Q4 start since 2008.
“The stock market is now off to its worst quarterly start since 2008. Q4 of 2018 was the worst 4th quarter since the Great Depression, but even that quarter didn’t start off this badly. Given that the Fed is out of ammo, how will it keep the house of cards from toppling this time?”
The investor noted that despite the cut in the benchmark interest rate by the Fed in September and growing hopes for additional cuts heading into 2020, the effect of easy monetary policy is dwindling over time.
Schiff emphasized that despite the Fed’s claim of not initiating quantitative easing (i.e., printing money), its balance sheet expanded by upwards of $88.1 billion.
The idea that the American consumer is strong and will save the economy is nonsense. Consumers has never been weaker. Their ability to spent is contingent on their willingness and ability to go deeper into debt. Both will end soon. The party is over. Time to pay the piper!
— Peter Schiff (@PeterSchiff) October 3, 2019
Historically, the initiation of quantitative easing and the expansion of the balance sheet of the Fed has led to a stock market rally as it generally contributes to a short term increase in demand in the markets.
In recent weeks, however, the U.S. stock market as shown by major stock indices like the S&P 500 and the Dow Jones, has performed poorly, decreasing the likelihood of a strong recovery by the end of 2019.
“The Fed claims its not doing QE, but last week it’s balance sheet expanded by $88.1B. It’s grown by $176B in the past 3 weeks. During QE3 at most the Fed’s balance grew by $85B per month. So the Fed is buying more than twice as much debt when it’s not doing QE than when it was!,” said Schiff.
Will further rate cuts be ineffective?
As most of the largest economies continue to move forwards accommodating near-zero interest rates, the Fed is likely to be pressured to maintain low interest rates, especially if geopolitical risks continue to build without a trade deal in sight.
At this point, with Deutsche Bank and other major banks predicting three more cuts by the first quarter of 2020, it remains uncertain whether further cuts are already priced into the stock market.
Investors like Schiff have said that more rate cuts are unlikely to revive the previous momentum of the stock market in the medium term.