The Pause That Will Not Refresh
In my opinion, the relative calm created by the long, slow, and utterly predictable series of 1/4 point rate hikes over the past two year has lent primary support for the U.S. dollar and the bond market. Once this prop is removed by a Fed pause, despite a knee-jerk bond rally, I expect both bonds and the dollar to be sold. But what the Fed giveth on the short end, the market will likely taketh away on the long end. Ironically, when the Fed finally stops notching up short-term rates, the market will likely start pushing up long-term rates. This will frustrate the Fed and Wall Street bulls who had hoped that a pause would breathe life into the stagnating economy.
A surge in long-term rates will immediately translate into higher mortgage rates, putting the final nail in real estate's coffin. The bubble is finally dead, may it rest in peace. Unfortunately the same can not be said for those who bought into it, and those who financed the speculation. For them, and the entire nation for that matter, the real estate nightmare is just about to begin.
Despite the strong likelihood that the hoped-for soft landing for the economy will more resemble a crash and burn, consumer price increases will only accelerate. This will come as a shock to most economists and Wall Street strategists who naively expect slower growth to cool inflation. Unfortunately, when it comes to inflation's effects on consumer prices, they ain't seen nothing yet. When the stagflation scenario is finally embraced as fact, things will really start to unravel for the U.S. dollar, bonds, stocks, and real estate.
The dollar fell sharply in reaction to today's data, with the British pound rising to its highest level in fourteen years. Gold prices surged as well, confirming that the rally in U.S. stocks and bonds will likely be short-lived. Ironically, the mythical "strong dollar policy" which Treasury Secretary Paulson reiterated in robotic fashion only last week in an interview on CNBC, may finally be put to the test. As a result, either it, or the pause, will have to be sacrificed. Either way, it's bad new for the U.S. economy, its financial markets, and the dollar itself.
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange