Podcast: Peter Schiff on Brexit’s Impact on the Fed, Gold and Silver
James West: Peter, thanks for joining us again today.
Peter Schiff: Oh, thanks for having me on.
James West: Peter, let’s jump right into the elephant in the room: Brexit. What are the implications for central banks, gold, sovereign debt?
Peter Schiff: Well, it’s obviously good for gold. I mean, gold is already moving higher against all currencies; certainly it’s moving up the most against the British pound. Gold is up about 20 per cent, I think, in pound terms. So that’s a huge move. It shows how gold does its job of protecting purchasing power, and I think there’s a lot more purchasing power that’s going to be lost worldwide in the coming weeks, months and years, and so people should be buying gold.
But as far as Brexit is concerned, if the global financial system were healthy, I don’t think Brexit would be that big a deal. I mean, does it really matter whether the U.K. is part of the EU in the scheme of things? Think of all the countries that are not part of the EU; one country fewer really wouldn’t matter. The problem is, we don’t have a healthy global financial system. We’ve got a gigantic bubble, and it’s all propped up by cheap money and QE and it’s based on hype and hope and confidence, and what happened with Brexit is, this is a confidence-shaking event and it kind of exposes the underlying fragility of this system. It shows you how dangerous things are, how precarious the perch is that we’re on.
I think this is more like a match that lights a tinderbox. It’s not that Brexit itself is the problem; it is what it’s helping to expose, and I think this is the first of many dominoes that are likely to fall. It’s not so much Brexit but what the implications are for a lot of other things happening that people didn’t expect and don’t want.
James West: Yeah. So would you say that the sort of the tinderbox that has been lit, is going to expose the very real fact that the ostensible recovery that we’re supposedly in, if you listen to certain central bankers, is actually just a bandage that has hidden the deep problems of excess liquidity and credit in the system that catalyzed the financial crisis of 2008 in the first place?
Peter Schiff: Yeah. I mean, if you look at what’s happening in Britain, obviously the reason that British voters voted the way they did was because of the underlying problems in the economy, even though despite the best efforts of all the powers that be, they were not able to persuade the electorate to remain. And it does show that governments are losing control. People have confidence that they’re going to keep everything in control because it’s all manipulated, it’s all propped up. And the fact that it’s failing, it’s kind of like a little hole that just sprung open in a dyke. The question is, how many more holes are going to spring, and is the whole thing going to collapse because of all the water? That is what the concern is. And I think people should be concerned over here, too, on our side of the pond, because we’ve got our own problems that are probably deeper than the ones that are confronting the British.
Unfortunately, they can get away from Brussels; we can’t get away from Washington, D.C. We’re stuck here. We can’t vote to leave!
James West: That’s true! So on that note, to me it seems that perhaps there’s a bit of a backlash against the Liberal bias that has been occurring in developed nations’ politics lately, and the manifestation of a nationalist attitude in the form of the Brexit vote, and possibly could you see that as being reflected in the rise of Donald Trump in the political scene against all odds?
Peter Schiff: Well certainly. Trump is our own version of Brexit, watered down as it is, but it’s a protest vote, it’s a pox on both your houses, and that’s what Trump represents. He’s almost giving the middle finger to the establishment, even in the Republicans. I mean, that’s what they’re doing. The same thing Bernie Sanders on the left, he’s the protest candidate over there. In fact, about half the people that were supporting Sanders don’t want to support Clinton, so some of them will vote for Trump. Some of them will vote for Gary Johnson. I mean, they might not even know who he is, but they’ll just see the name and it’s not Hillary and it’s not Trump so they’ll vote for it.
So yeah, this protest is here, but I think it’s going to get bigger, and it’s not just the governments. It’s the central banks, I mean, all the powers that be in Europe. In fact, not just Europe; President Obama went over there and was trying to persuade the British not to leave, which that actually might have backfired. Maybe he should have gone over there and urged them not to remain; maybe that would have had a better reverse psychological effect, because nobody likes to be lectured to by somebody else.
James West: Yeah. Especially by an American in the case of Europe.
Do you think that this Brexit vote is going to risk catalyzing countries that are deep in debt to the ECB to sort of suddenly manifest a referendum on political grounds, but seeing it as a sort of covert way to wiggle out of paying a debt?
Peter Schiff: Well, you know, I don’t know how that’s going to play out as far as, are other countries more likely to want to leave and follow Britain, or do they want to toe the line? I think that is part of the problem, and I think the EU is going to obviously try to make membership more appealing. You think about it from this perspective: if it’s this difficult to leave the EU, why would any nation want to join in the future? That is another PR problem; if they really try to make it very hard on Britain to make an example so that nobody else wants to leave, then nobody else is going to want to join.
So you think at the end of the day, they try to scare everybody into voting Remain, but now that Britain is gone, they might want to soften their stance and just try to have it not be Armageddon and try to have decent negotiations and trading agreements with an independent Britain that’s outside the EU, just like a Switzerland or a Norway or anybody else in Europe that still trades, but just didn’t join the European Union.
James West: Right. So do you think the macro bias against the investment thesis for sovereign debt, for example, the negativization of interest rates, is sort of reasserting itself as the central theme in global markets at this point? So you know, Brexit is kind of already a footnote in some regard if you were to look at what gold in the markets are doing generally. So do you think that’s because, in the grand scheme of things really, Brexit is a symptom rather than a major problem, and it is the major problem that we’re actually back to facing already?
Peter Schiff: Well, the problem obviously in Europe is big government, lots of regulation and lots of taxes. That’s the problem with the EU, that’s always the problem with government. I mean, the European Union initially was a noble idea – hey, let’s have freer trade, let’s not have tariffs, let’s make it easier for goods and humans to move about within the European nations the way Americans can go from state to state and goods can move from state to state without tariffs – that was the idea. But you know, like all good ideas, the road to hell is paved with good intentions.
James West: It’s the execution.
Peter Schiff: Over the years, though, government grows like a cancer. So they started this small government in Brussels, and then it did what governments do: it just grew and grew and grew to the point where now, whatever noble purpose the project began with, it’s been lost decades ago or years ago, and now it’s doing much more harm than good, and every nation would be better off to leave the EU, not just Britain.
But again, the bigger problem that’s being exposed here is these bubble markets. Things are starting to pop. Look at the banks, look at these European banks; I mean, the European banks are imploding now to a greater degree than they did in the 2008 financial crisis. Now why is that? Is this really a bigger event than that? Probably not, but it just shows you how much worse off the financial system is today after all these years of QE and negative interest rates.
The same thing is true here in the United States. If you listen to Janet Yellen or President Obama or Hillary Clinton, everything is great, all the problems have been solved – they haven’t. The problems are looming larger than ever, and this is what Brexit is exposing, because now you have something going wrong, a catalyst, and you’re starting to see everything implode.
James West: Okay. So what are you telling clients to do in terms of investing?
Peter Schiff: Well, I’m just saying the same thing I’ve been saying, and you know, finally this year is making sense for us. Everybody else is blowing up and this is our best year so far since ’09, and of course, the last couple of days were our best relative performance probably since 2009 as well, maybe ever, as far as – because our accounts were down a little bit in the last couple of days, Friday and Monday. They’re up a lot today, but they were down on Friday-Monday, but nothing compared to the overall market, and of course our gold stocks were all way up and our gold fund, I have a gold mutual fund that’s more than doubled so far this year.
So I think this is going to continue. People are losing money because they don’t understand what’s going on, they’ve been preparing for the wrong outcome. I read an article yesterday that says that now for the first time, people think the Fed is more likely to cut rates than raise them. Well, I was saying that in December! The minute the Fed raised rates, I said the next move was likely to be cutting them, not raising them again. And I was right. And it’s not because of Brexit; I mean, Brexit is just a convenient excuse that the Fed’s been waiting for. But the problem is the U.S. economy. That’s why the Fed doesn’t want to raise rates; that’s why they’re going to cut them and do QE4.
But everybody’s been positioning themselves for a real recovery and a stronger dollar and higher rates, and I’m one of the only people in the financial community that’s positioned for the opposite: a relapse into recession, going back to zero, more QE. And I think that’s what’s going to happen, and I think the fantastic performance that we’ve seen thus far in 2016 is going to continue in the second half of 2016 and throughout the balance of the decade, and so anybody who is still positioned improperly, there’s still time to make the necessary changes. And this rally in the dollar is a gift horse, because this is not a sustainable dollar rally. The dollar is going to crash. This move is a trading-related move; it’s not a flight to safety. I mean, look, the yen is even stronger than the dollar. What’s so safe about Japan? This is all about trading and risk-on, risk-off and leverage carry traders unwinding positions. But when the fundamentals reassert themselves, the dollar is going to tank.
So you’ve got this small window of opportunity to use your dollars to buy investments in Singapore or Switzerland or New Zealand, or Hong Kong or Norway or places like that.
And certainly gold has gone down a lot on anticipation of a normal rate hike/tightening cycle and a real recovery, and none of that was true. So gold needs to reverse all the losses that never should have occurred; same thing for silver. So there’s still a lot of opportunity there for people to get back into these trades, if you’re not in gold or silver.
James West: All right, Peter, that’s great. Very enlightening as usual. Thank you very much for your time today.
Peter Schiff: Oh, my pleasure.
James West is an investor and the author of the Midas Letter, an investing research report focused on Canadian markets.The views expressed on this podcast — edited for clarity, brevity and compliance with securities laws — are his own and are presented for general informational purposes only. They should not be construed as advice to invest in any securities mentioned.
James West and/or associated funds do not own shares in any securities mentioned in this article. For the full Midas Letter disclosure policy, click here. Postmedia and Midas Letter have a revenue sharing arrangement.