Peter Schiff, the divisive investor and commentator that predicted the subprime/real-estate bubble, is forecasting a U.S. dollar and bond crisis over the next couple of years. Schiff blames intervened bond markets, where rates are artificially and excessively low, and expects the coming crisis to blow the 2008-9 financial crisis out of the water.
There is little doubt that the Federal Reserve, with Chairman Ben Bernanke at the helm, is holding markets by the hand. Bernanke, himself a divisive figure, has done all he can to push interest rates lower, using quantitative easing and Operation Twist once nominal rates had hit the zero-range. While many believe ultra-loose monetary policy is dangerous, Schiff thinks it will lead to a catastrophic correction.
“The more you delay it, the bigger it will be,” Schiff tells Forbes in a phone interview Tuesday, “so we need to raise interest rates during the recession to confront the inefficiencies.” Schiff, who runs Euro Pacific Capital and is seen by many as permanently bearish, argues that government-intervened bond markets are leading to massive distortions in capital allocation that have only been exacerbated as the Fed reacted to the last couple of recessions.
Recent market behavior supports his thesis that massive dislocations in bond yields distort reality. Ten-year Treasury yields had traded in a narrow-range for about four months, on the presumption that a weak economy would continue to count on Bernanke’s monetary support (particularly of the bond market). On March 13, the policy-setting Federal Open Market Committee (FOMC) acknowledged an improved recovery, but did not mention more quantitative easing, or bond purchases, were on the way, sparking a violent sell-off in Treasuries (exacerbated by JPMorgan’s dividend announcement the same day, which triggered a rally in financial stocks) as market players fled a bond rally they considered fixed by the Fed.
While Bernanke delivered calm to bond markets on Monday in a speech that promised “continued accommodative policies,” the violence of the sell-off speaks to Schiff’s argument. “We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back,” says Schiff.
Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse. His latest book is How an Economy Grows and Why It Crashes.