This Happened Twice in 100 Years... Both Times, Stocks Fell 49%

The Peter Schiff Show Podcast

Peter Schiff analyzes the extreme lack of market breadth in the S&P 500, noting that 86% of stocks are currently in a bear market. He discus

Key takeaways

• 86% of the S&P 500 is in a bear market, mirroring the conditions seen before the 1973 and 2000 crashes.
• Rising bond yields are increasingly disconnected from oil prices, signaling fundamental weakness in the bond market.

Main topics

• S&P 500 Market Breadth
• Rising Treasury Yields

Notable quotes

The most dangerous words in the investing dictionary are this time it's different.

Conclusion

The episode serves as a stark warning that current market optimism ign

Transcript preview

Speaker 1 (0:00) The breath in the U.S. market has only been this bad. Twice in all of the last 100 years. In both cases, the S &P dropped nearly 50%. 86 % of the S &P 500 is a bear market. Rates are going to hit 8%. I don't know what fantasy world people are in if they think the consumer is in such good shape. This is the type of inflationary psychology that can really spiral because now you have hoarding. The shelves are going to empty out and then the merchants are going to see all of this and they're going to... jack up their prices even faster when they see all of this demand. It's already repeated twice. Why not a third time? Remember, the most dangerous words in the investing dictionary are this time it's different because everybody says this time it's different, but it never is. Speaker 1 (0:59) I'm going to begin today's podcast pretty much in the same way that we began the last podcast, and that's talking about the relentless rise in long-term interest rates as reflected in the bond yields, particularly U.S. Treasuries. Now, again, this is no surprise to my audience. It's not like we didn't see this coming. I've been talking about this for years because I knew that it was inevitable. But what's also amazing about what's happening in the bond market is the fact that it's having no impact on the overall stock market. And it's not that stock market investors aren't noticing what's happening in the bond market. In fact, they talk about it every day. So it's not like it's happening behind the scenes somewhere and people haven't noticed it. They've noticed it. But they just don't seem to care. They keep rationalizing excuses for why this time it's different and why rising bond yields are not bad for stocks. Well, they're not competition for stocks. And so the stock market can keep rising even if interest rates are high or continue to rise. And people believe that the economy is for some reason. immune to the impact of rising interest rates or to the fact that they even think it's going to slow down the economy a bit. They're not concerned that it's going to slow down the stock market. And I think these thoughts are at best just wishful thinking, but more likely it's just a lot of ignorance or people are just talking their books and they're putting a positive spin. on whatever negative news is coming up. If you look at where the yields went, so the 10-year Treasury closed Friday at 5.16%. So this is the highest it's been, the highest on a closing basis, and whether it's at 19 or 20 years, the intraday high on Friday was 5.22%. And that was the high of the week. So bonds pretty much were falling and yields were rising all week. And the only reason that yield stopped rising was that the week came to an end. It was Friday. And I'm sure if the markets were trading on Saturday, which is when I'm recording this podcast, bond yields would be rising again. And they would be higher than the 5.16 that the 10-year closed at. The 30-year closed at 5.49. The intraday high was 5.53. Again, that is about a 22-year high in yields. And in fact, even the five-year now closed out the week with a five handle, exactly at 5%. But intraweek, I saw the yield maybe 5.05. I forget what the exact high was, but it did get some distance above 5 % before there was some pullback. In the afternoon on Friday, the two-year yield got above 4.9. I think I saw 4.91, maybe 4.92. Now, it pulled back to 4.85 on the close, but I don't think it's going to be long before the two-year is also above 5%. So we'll have the two-year, the five-year, the 10-year, and the 30-year all above 5%. If you're serious about preparedness, like I am, you're going to want to head over to preparewithpeter.com right now. Let me tell you why. 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Visit preparewithpeter.com. dot com and build your 90 days of real food security. And again, it's not just U.S. yields that are rising. Yields are rising around the world. Look at Japan again. That is a particularly important market that I have been talking about for years and forecasting that this would happen. The 10 year JGB settled the week above 3 percent, 3.05. That's the highest close that I recall. And the 30-year yield at 4.13, again, that's the highest. And that's an all-time record high because Japan hasn't been issuing 30-year bonds for that long. What is it, 20 years or something? But this is the highest the yield I've ever seen. But these are still low yields. But even the two-year now in Japan is getting close to 2%. It's 1.91. The five-year is 2.38. So yields are rising around the world. And this is a major problem for economies and for the stock market. And of course, the housing market mortgage yields are now above 7 percent. I think about 7.2, 7 and a quarter. And the only reason why they're not substantially higher, the only reason that a 30 year fixed rate mortgage is not already at 8 percent is because the Trump administration. ordered the GSEs, Fannie and Freddie, to buy long-term mortgages. And they've been doing that. And of course, they've been losing money on those purchases because as mortgage rates rise, the value of the mortgages that Fannie and Freddie already bought are coming down. That's one of the reasons that these stocks continue to make new 52-week lows. Look at these things falling apart now. They had a big run-up. When Trump was elected on the promise that he was going to privatize them and all of his buddies had loaded up on these shares before and immediately after the election. And then he talked it up in the first few months to really goose the market. But of course, nothing has happened because nothing can happen for the reasons that I stated early in the Trump presidency, which was that there was no way that he could pull off this trick. And in fact, by ordering the GSEs. to buy up mortgages and basically take a hit in order to prop up the housing market was more indication of why it would be impossible to privatize these companies when they're being used for political purposes, when they're deliberately losing money so that they can influence home prices, which would obviously benefit politicians who are trying to get the votes of homeowners or keep the markets. from collapsing. But rates are going to hit 8%, even with the GSEs buying. And what's also interesting about the rise in bond yields this week is that oil prices fell. They were, remember, about $100 a barrel, and I think they finished around 92. So there was some hope out there that maybe we're going to have some resolution to the war. Maybe we're going to have a peace. Maybe the straits are going to open up. None of that is probably going to happen. But there was a lot of talk that maybe it would happen. Of course, we've had that talk before, but the markets seem to be fooled by it every time. But the interesting thing was, yields on bonds kept rising. For a while, there was a very strong correlation between oil prices and bond yields. They were kind of in lockstep. And so if you saw a fall in oil prices, you would expect a similar fall in bond yields because it was all keyed on what they thought the Fed might do, rising oil prices. will push up the CPI, putting more pressure on the Fed to hike rates, and therefore bond prices were falling and yields were rising. And conversely, if oil prices were going down, oh, the inflationary pressures are subsiding. Maybe they don't have to hike rates. And then bonds were coming down. Well, now the bond market has broken out of that and bond yields are rising regardless of what happens to the price of oil. That's how weak... The bond market is. And remember, before the Fed's last rate hike, the view was that that hike was going to be good for bonds, that that was going to finally convince the bond market that the Fed is serious about fighting inflation. It's not just talking, it's acting. And so by hiking rates, that will solve the problem of rising bond yields. They would start to fall because now they would have confidence that the Fed was going to rein in inflation. Well, that ship sailed. The Fed hiked rates and interest rates continue to rise. Bond yields show no sign that they're going to stop rising, even though the Fed delivered that symbolic rate hike that everybody thought was required. But now if you look at the probabilities, the probabilities of two and three rate hikes have also risen on the week because obviously. It's not one and done because, as I said, one is not nearly enough, especially since it was just 25 basis points. But again, the stock market investors are shrugging all of this off, this profound weakness in the bond market. In fact, some stock market investors have now conceded that yields are probably going to keep rising regardless of what the Fed does. They don't realize just how high they're going to go. Maybe in their minds, they think, all right, maybe five and a half, six percent tops, something like that. I don't think they have a realistic understanding of just how high these rates are going to go. But they concede that they're probably going to go higher and they don't care because they think everything is so good. The economy is so good that we could just afford it. We'll just pay higher rates. No problem. And I even hear talk about how the consumer is in such great shape. You know, the unemployment rate is really low and the consumers have a lot of cash, so they can afford to pay higher interest rates. No problem. I mean, I don't know what fantasy world people are in if they think the consumer is in such good shape. Look at the consumer confidence numbers that came out this week. We got the final numbers for the month for University of Michigan, but consumer sentiment dropped. from 51.7 to 48.1. And the year-over-year inflation expectations, this is one-year expectations, rose from 4 % to 4.6%. And five-year expectations edged up to 3.4%. And one of the interesting things about the survey was that now even Republicans are becoming more pessimistic. In the past, the Democrats were extremely pessimistic, but the Republicans were still holding on to a lot of optimism because of their confidence in President Trump. Well, that confidence is now waning because now even Republicans are starting to get worried. And in fact, one of the interesting things, too, about the Michigan numbers is that it reveals that consumers are now buying stuff because they're worried that if they wait. the prices will be even higher. So spending is being pulled forward that might have normally happened later because consumers are afraid that if they wait and buy stuff when they actually need it, it'll be a lot more expensive. So they're buying stuff before they need it because they're worried about it being more expensive. This is the type of inflationary psychology that can really spiral. Because now you have hoarding. And what have I been recommending that people do on my podcast for years? I have been telling people to do exactly that, to stock up, to buy the things that you need, even if you don't need them, because you know you're going to need them in the future. So as long as they're not going to perish. As long as you can store them and keep them and they're not going to go bad or expire or something. I've been saying load up because I knew that the return on that investment would probably exceed what you're going to get in the stock market, certainly in the bond market. Because if you need to buy something, but you don't need it today, you're going to need it next year. And if next year the price is 10 % higher than it is this year, if you buy it this year, you made a 10 % return on your investment tax-free. You don't have to pay taxes if the toothpaste you bought a year before you use it goes up 10 % between the time you bought it and the time you used it. So that's a tax-free gain. So stocking up on stuff makes a lot of sense. But what happens is it's a self-perpetuating spiral. When just the Peter Schiff podcast listeners do it, it's no big deal. But when the whole country adopts that mentality that I better buy it now, I better just... you know, load up my closets with stuff, the shelves are going to empty out. And then the merchants are going to see all of this and they're going to jack up their prices even faster when they see all of this demand. There is no way to look at these numbers and conclude that the consumer is so flush that he can afford higher prices, in part because the current spending numbers are actually skewed by the... The spending that's being pulled forward by people who are afraid that if they wait, it's going to be too expensive. So they're buying stuff now. But that also means that future buying is going to come down because people have already bought the stuff that they were going to buy later. They bought it sooner. And so future numbers on consumer spending are going to be a lot weaker. And prices, of course, will be a lot higher. But look at what happened to the stock market this week. The S &P, despite this rise in interest rates, the S &P was up 0.63%. The Dow was down 0.15%. But the NASDAQ, with all the tech stocks, NASDAQ was up 1.2%. on the week, despite the route, one of the worst weeks yet in the bond market. Only the Russell 2000 really reacted. That index was down 1.3%, and that's because it doesn't have all these big tech stocks in it. And so these are more regular businesses that are going to be clearly impacted by rising interest rates. Now, of course, gold and silver also got hit on the week by the false belief that rising bond yields are bad for gold and silver. The investors have got it wrong both ways. They think that rising interest rates aren't bad for the overall stock market. They are, but they think they are bad for gold and silver, and they're not. Gold closed down 1.4%, about 4,284. Silver down about 3 % at 64.17 on the close. The reason... Again, and this is very important that you understand this, rising bond yields are good for gold and silver. They will harm the economy. They will lead to bigger budget deficits. They will lead to more money printing and more inflation. And that is good for gold and silver. And of course, if you are a sovereign and you have a bunch of U.S. treasuries in reserve. and you want to sell those treasuries and sell the dollars, what are you going to buy to replace that asset in your reserves? You're going to buy gold. So if people are losing money in treasuries, and central banks are losing money, and they want to get rid of their treasuries to avoid losing more, what are they going to do as an alternative? They are going to buy gold. Gold is how you hedge. a weak bond market, because gold is an ultimate inflation hedge. Inflation is the destroyer of fixed income. It's a destroyer of bonds. Gold is your savior in that environment. I've always been saying that gold will be the last safe haven standing because treasuries are not a safe haven if what you're afraid of is inflation. Because when it comes to inflation, treasuries are right in the crosshairs. That's what is going to get hit the hardest. So if you want to save haven from inflation, you can't buy U.S. Treasuries. You have to buy gold if you're a central bank. You can buy stocks, you know, as long as they're not really overpriced. You could buy real estate, but foreign central banks aren't going to buy real estate. They're not going to be loading up on U.S. stocks. No. What are they going to buy? Their only real alternative is to buy gold, and they are going to continue to do that. So this is all very bullish. for gold and silver. Traders will figure that out eventually. But in the meantime, it's an opportunity for investors who understand it to accumulate more. Fool's gold also dropped a bit on the week, but it's about 84,000. So Bitcoin is still holding on to a big chunk of the big gain that it got the prior week. And again, on Monday, it was up. But look at MicroStrategy giving up a lot of the gains down 5.6%. By the way, Stretch, even though they've been buying shares of Stretch every week, it's still not par. It closed at 98.54, down 0.3 % on the week. And so the yield is 12.2%. But... Every investor understands counterparty risk. When you deposit money in a bank, it's not really your money anymore. It's a claim on the bank. Most people never apply that logic to their passwords. They reuse the same one everywhere. They trust some company's server to keep it safe, and then that company gets hacked. Now their