Source – zerohedge.com
– “You have a record number of 50% or excuse me 25% of people who are renting now devote half their income to pay their housing costs. That’s never happened before. You have hardly anything left over for food or other expenditures that you have”:
– Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao, Liesman and Santelli, and now Schiff and Maloney. Peter and Mike join clash of the titan-like to discuss their investment strategies and expose the charts the government doesn’t want you to seeas “people like Bernanke are taken seriously still and the people that did predict [the crisis] are dismissed as lunatics half the time.” The wide-reaching conversation covers everything from gold and stocks to The Fed and The Dollar – Bernanke “took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.” The air is coming out of the bubble, they warn, “Bernanke and Greenspan have absolutely destroyed America. People don’t realize what is coming…”
Full transcript:
Mike: I was in Puerto Rico a little while back and Peter Schiff invited me over to his house and we were just amazed at how we are exactly on the same page when it comes to everything economically. And so he just made a trip out to California near my offices and we decided we’d get together and discuss some of this stuff. So on your travels Peter lately you were just at a show you were speaking. Where were you at?
Peter: I was in Las Vegas. It’s great to see you again Mike. I was speaking to a very main stream audience of hedge fund managers at an annual conference there. And what was very interesting is even though the audience was, as I said, very main stream, and I was on a panel with a lot of very high profile, main stream individuals, the only person that really got applause was me. I also got some laughs because I told a few jokes, but I think people really got what I was saying and I had maybe 50 to 100 people come up to me afterwards and shake my hand. And really appreciate the candor with which I spoke and I really agree with what you had to say and I was saying some things that the mainstream never really hears about the real problem in the US economy and I blamed it all on the Fed and everybody else was a cheerleader there for the Fed. In fact, Ben Bernanke spoke at the same event as me and he was introduced as being the savior of the US economy and I think he damned it.
Mike: I absolutely agree. I saw you had your picture taken with him right?
Peter: Yes, we were at a cocktail party following the event and I thought people would get the irony of the juxtaposition between the two of us kind of having a glass to drink.
Mike: I think that he and Greenspan have absolutely destroyed America. People don’t realize what is coming from the stored up energy from the manipulations that they did.
Peter: And speaking of him, this was really the first chance I had to have a conversation with Ben Bernanke. Speaking of him, I really got the sense that he has no idea of the Fed’s culpability in the housing bubble or the ensuing financial crisis, he really doesn’t know. And he denies that the Fed had anything to do with that, that maybe it was pure happenstance or coincidence that we had a housing bubble and these very low interest rates. And because Ben Bernanke still doesn’t get the connection between the Fed’s mistakes of the past and the last crisis he certainly doesn’t understand the coming crisis, which is going to be far worse because the mistakes the Federal Reserve made in the aftermath of that crisis are far worse than the ones and far bigger than the ones that caused it.
Mike: Right. Ben Bernanke’s overreaction was far bigger than Greeenspan’s reaction to the NASDAQ crash.
Peter: And as a result the crisis in our future unfortunately is going to be far larger than the one that we just experienced.
Mike: I wanted to show you a couple of things because I have a feeling that you and I will be exactly on the same page here. You know how indicators…there’s all these different factors in the economy and they’ll be going up at different rates. Suddenly one or two indicators start to point down when you’re near a top and then more of them start to point down and then things roll over and then there’s a crash and everybody thinks that nobody saw it coming. But there’s a few people that are watching this stuff that do see it coming.
Peter: That’s exactly what they said about the last crash that nobody could have possibly predicted this except there were people who did predict it.
Mike: You predicted that we were in a real estate bubble. I predicted that we were in a real estate bubble.
Peter: Ben Bernanke denied that there was a real estate bubble. Even after it burst, he still couldn’t figure it out.
Mike: And what amazes me is people like Bernanke are taken seriously still and the people that did predict it are dismissed as lunatics half the time. It really burns me up. But this is manufacturing new orders for consumer goods and this is from the Fed’s website and you can see this big plunge that it took in 2008. And there’s a big plunge that’s happening right now. That suggests to me if people aren’t ordering new goods it feels like this could be this summer maybe..
Peter: Remember, the air is coming out of the bubble because the Fed halted or paused it’s quantitative easing program. Most people think they ended it but I think it’s just a pause because now everybody expects the Fed to raise interest rates because they think the recovery finally has enough traction that it no longer needs the emergency life support of 0% yet your chart is showing and a lot of other economic indicators are showing that the economy is already rolled over and is rapidly headed back to recession even though the Fed hasn’t raised them yet. All they’ve done is talk about raising them in the future and we’re already rolling back into recession.
So I believe that the Fed is going to have to do another round of quantitative easing, that they’re not going to raise rates and that’s going to be a shocker. It’s going to send shock waves throughout the currency markets and the bond markets because everybody expects the Fed to raise rates and when they don’t do it because the economy is too fragile because it’s just a bubble, not a legitimate recovery then people are now going to have to second guess their idea that what the Fed worked instead of calling Ben Bernanke a hero a lot more people are going to say, wait a minute he wasn’t a hero what he did wasn’t heroic. He took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.
Mike: Yes the derivatives are bigger instead of smaller. Everything that was put in place to create that bubble that then popped. The two big [inaudible 00:05:36] banks are all bigger. Nothing has been addressed right?
Peter: No. Those banks are now bigger than ever and if it was going to be a problem to let them fail in 2008 it’s going to be much bigger problem to let them fail in 2016. So the government has to do whatever it can unfortunately to keep the bubble from popping and I think the air is already coming out even without a rate hike but…
Mike: So do I, yes.
Peter: But more importantly, the reason that he’s been able to look like he’s succeeded is because of the illusion that it’s all temporary. Everybody believes that the Fed can normalize rates, shrink their balance sheet but when they realize that they can’t do that, that they’ve been lied to then this is going to be a major event for the currency markets or the financial markets when people come to terms with the predict that we’re in. That it’s QE infinity, that rates have to stay at zero in perpetuity. Because the debt is now so enormous that even the slightest increase in interest rates would collapse the system because there is just so much debt.
Mike: I agree. I don’t think that they can raise interest rates. The next thing here is rejection of credit applications. And I wasn’t following this chart before. I just saw it in somebody’s newsletter. I think this is zero hedge maybe, but this is the crisis of ’08 and look at what happened in March for credit application rejections. So there’s something happening in the economy.
Peter: One of it is the big transformation from full time employment to part time jobs. Everybody points to all the jobs that are being created and the low unemployment rate but the problem is that the unemployment rate dropped not because people found jobs but because a) they stopped looking or b) they settled for a part time job. So when people who used to have full time jobs now have part time jobs they don’t have the income to get the credit that they need.
Mike: Right so they apply for a loan and it gets rejected.
Peter: You know you have home ownership rates now at almost 30 year lows, yet rents are rising. I mean, now you have a record number of 50% or excuse me 25% of people who are renting now devote half their income to pay their housing costs. That’s never happened before. You have hardly anything left over for food or other expenditures that you have. And people are loaded up with student loans and unfortunately a lot of these college grads now have student loans and all they can get is minimum wage jobs and a lot of them are just part time. So people are trying to get by.
In fact, a lot of people are actually enrolling in college now, not because they want the education but because they need the loans. They just want to get the money so they can pay their utility bills. They don’t even care and a lot of our college grads when they graduate with lots of debt, they can’t find jobs so they go to grad school to get a master’s degree so now they have even more debt but they still can’t get a job.
Mike: Right, right. The big debt that has been plaguing us lately, the growth in debt. A lot of it is in student loans and auto loans. There are subprime auto loans now.
Peter: As if the government didn’t learn their lesson from the housing bubble, they decided to create an auto bubble because when the governments.. when GM and Chrysler went bankrupt the government also acquired their financing divisions and they still own them. So the government after they bailed out these companies they certainly didn’t want them to fail again. They wanted to make it look like the ballot was a good idea. So they wanted to revive their profits by making it possible for just about anyone to buy a car. And so many people have been able to buy cars with zero down and they’ve been stretching out their payments so that now people are getting six and seven year auto loans.
Mike: Right, the seven year auto loan. The car only lasts maybe that long. So you have no equity ever.
Peter: Well the warranty only lasts for four years. Four or five years tops. And when these cars come out of warranty, try to have it repaired. We don’t have a lot of repair places anymore. It costs a fortune, and of course the value of the cars are plunging. People are going to have much less equity in their car than the remaining payments on their mortgage. And so they end up not making the payments. Now you’ve got to repossess the cars. But there is a huge bubble. But interestingly enough, the first four months of 2015, this was the worst start to a year in auto sales since 2009. So it looks to me like the air is coming out of the auto bubble already. We’ve already saturated the market and so this is just the beginning of the decline.
Mike: Home mortgages, they’re going longer now than 30 years. There’s longer home mortgages being offered too, trying to keep that bubble inflated.
Peter: Well, of course they’re offering 3.5% down payments now too with government guarantees which was part of the problem because 3.5% is not enough down to actually have skin in the game. It costs you more than that just to sell a house. So if you buy a house with 3.5% down, the minute your mortgage closes you’re already under water. But now the problem is you’re giving the homeowner a free gamble on the real estate market. Because if real estate prices go up, he can keep the profits, refinance. If prices go down, he could just walk away but better than that he can just stop making his payments altogether and live rent free for three years before they can kick you out.
That’s really what they set up. I think a lot of the recent home buyers that did put 3.5% down are going to do just that. They’re just going to stop making their payments when they realize that they’re underwater especially when a lot of their repair bills come in. Because a lot of people were lulled into buying homes they couldn’t afford, once they see that it’s just not the mortgage but you also have maintenance and property taxes and some of these people might lose their jobs in this next recession so they no longer even have the income to service. And a lot of these people have adjustable mortgage. Imagine the people that are not even taking out 30 year fixed.
Mike: With rates this low they are still buying an adjustable rate of mortgage.
Peter: Because they couldn’t afford the fixed rate. That’s how stretched they are. You know the real solution to the housing market problem is to let real estate prices come down so that homes are affordable, but the government doesn’t want to do that because it will bankrupt all the banks that loaned on them so what their answer is to keep prices inflated and just make credit available by keeping interest rates low and keep throwing the lending standards out the window so that people can buy houses that they cant afford.
Mike: Ben Bernanke recently commented on the savings glut. He doesn’t think people are spending enough and what is interesting is when you find out what constitutes savings paying down debt is not included in this calculation so any currency that goes to this that is considered savings for some reason. They consider paying down debt savings.
Peter: Well it’s money you haven’t spent but I think when Bernanke is talking about a savings glut..
Mike: That they’re paying for previous consumption basically..
Peter: Right. But when they’re talking about the savings glut they’re referring in other countries, not the United States. We have a savings shortage. There’s maybe a glut of savings in Asia for example but people look at that.. I read an article recently about Chinese have this big savings problem. They have a bad habit of savings. Like smoking or something. Savings is a virtue, but we’re lecturing the Chinese, “You guys are saving too much. You need to spend more money.” One of the criticisms was that they don’t have social security. They expected the Chinese to save for their retirement. Imagine that. Allowing people the freedom to save for their own retirement. And we basically said “No.”
China needs a gigantic Ponzi scheme run by the government. They should adopt social security so that the Chinese people won’t have to save anymore. As if savings are somehow undermining economic growth. But the only problem for China is that they’re squandering savings on US treasuries. They’re loaning the money to us and we’ll never pay it back. So that’s a waste of their savings they need to invest their savings productively in their own economy and I think that is going to happen and when it does the dollar is going to come crashing down.
Mike: Yes, I agree and then the engineering of the entire economy and the illusion. This is interest rates from 1950 to today. And then we have base money as the red line here and then I plotted the Wilshire 5000 Total Market Cap Index so the value of the 5000 largest companies in America and what you see.. I’ll zoom in on this section here. You see that they took rates down to zero and at the same time created all this currency and the correlation between currency creation and the markets is just mind bogglinginly close. It’s a cannot possibly be an accident that the markets..
Peter: Of course not and that’s why they can’t raise rates without bursting that bubble. To not understand how these things are connected the way that they are is one causes the other and I’ve heard people say, “Peter I’ve had 4%, 5% interest rates in the past so why can’t we go back there now?” It didn’t create a problem then because we didn’t have the enormity of the debt that we have now. It’s one thing to have higher interest rates when you don’t have a lot of debt. Sure you can afford it. But when you’re overwhelmed by debt you can’t afford it.
The other thing is when you’ve been on 0% for 6 years you develop an addiction to that. We have built an entire economy around free money. You can’t take that away even if the interest rates are still low, even if they went to just 2% to 3%. Yes that’s still low. But not low enough for an economy addicted to 0%. If you’re a heroin addict and your body is used to a certain amount of heroin then your pusher says “I can only give you half of what I normally give you, but you still have some heroin.” That’s not gonna cut it. You’re already gonna start going through withdrawal.
You know that’s why the Fed… supposedly we’ve been in a recovery for six years. Yet interest rates are still at zero. I mean if it was a real recovery they would have raised rates years ago. But they’re afraid to do it because they know it’s phony. But after a while they had to at least talk about raising interest rates. They have to pretend that there’s an exit strategy somewhere but you know just like someone who’s overweight and talks about going on a diet in the future they don’t go on one in the present. So the Fed wants to maintain the ruse that they can raise rates by talking about their intention to raise rates but they don’t actually do it and they play word games about “well we’re going to be patient” or “we’re going to wait a considerable period.” Now they take away the word patient but we’re not impatient. Now they’re saying “we can’t raise rates until unemployment improves.” Well it’s supposedly been improving. The unemployment rate is 5.5%. They initially said they would raise rates if it got to 6.5%. But the bottom line is that it doesn’t matter where the unemployment rate goes, doesn’t matter how high the inflation rate goes they can never raise rates without precipitating a worse financial crisis than the one we had in ’08.
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