See Through the Headlines
Peter Schiff, President and Chief Global Strategist

December 19, 2009

The good news that everyone has been waiting for apparently came in the form of the recent better than expected jobs report. With the official unemployment rate lowered to 10.0% from 10.2% (Bloomberg, Dec. 2009), investors assume that the economy is improving. As a result, the feeling is that the Fed will accelerate the timetable for its highly anticipated "exit strategy," which will supposedly withdraw the excess liquidly that has driven the dollar lower and gold higher. This belief propelled the U.S. dollar to one of its best days in recent memory and set up gold for a fall of over $100 per ounce. However, the conclusions sparked by the jobs report are wrong on several counts.

First, the economy is not improving. All that has happened is that we have gone deeper into debt by borrowing and spending more money that we don't have. A closer look at the jobs numbers confirms that the areas that showed the greatest strength were those that benefitted the most from federal monetary or fiscal support. The Fed cannot remove the liquidity without cutting the legs out from under this phony “recovery.” The Fed likely knows this, as evidenced by Bernanke's subsequent testimony. As it has shown in countless past episodes, the Fed has no intention of removing the punch bowl.

Even if Bernanke & Co. were to slowly tighten, it would be too little too late to help the dollar or restrain gold. To make a meaningful impact on the trajectory of these mega-trends, the Fed would likely need to pursue aggressive interest rate hikes and sell down its holdings of treasuries and other toxic debt. However, such a sensible, yet politically untenable, policy seems completely off the table. Even if the Fed did pursue such a strategy, the dollar might rise initially, but would likely sell off as the phony economy collapsed as a result of higher interest rates and tighter monetary policy.

We have once again made the same trade-off we did during the last recession. We have decided to defer the pain of an economic rebalancing by adopting aggressive monetary and physical stimulus which merely lays the foundation for an even greater economic disaster down the road. It's shocking how few observers note the repeating pattern.

The vast majority of economists take it on faith that the stimulus can be withdrawn without pushing the economy back into recession. But based on the distortive affect of stimuli and bailouts, our economy has adapted to a climate where cheap credit is plentiful. As a result, our economy is less able than ever to survive in a world in which stimulus is removed. But eventually, the cheap credit will dry up. Not because the Fed decides it should, but because our foreign creditors stop lending. When that happens, our downturn will be even more debilitating in the future than it was in the past.

We will never have a sustainable recovery until all the imbalances are allowed to be worked out, but as long as the government keeps stimulating, this will never happen. Instead, we will have a string of crises escalating in magnitude until a complete collapse of the dollar brings the process to a halt.

In the meantime, I believe pullbacks in the price of gold should be viewed as buying opportunities, and any rallies in the dollar as a chance to add to your foreign investments. Remember that in trending markets, the biggest moves usually occur in the opposite direction, at least until the climactic end. This keeps the speculators in check and the timid on the sidelines. However, those who understand the fundamentals will stay with the trends until the doubters finally throw caution to the wind and join the party -- just as it's getting ready to end.

Peter Schiff is President and Chief Global Strategist of Euro Pacific Capital, a full service registered broker dealer that specializes in foreign securities, Member FINRA/SIPC. He is knowledgeable in foreign securities markets as well as currency and gold markets. Mr. Schiff delivers lectures at major economic and investment conferences, and is quoted often in the print media, including the Wall Street Journal, New York Times, L.A. Times, Barron's, Business Week, Time and Fortune. His broadcast credits include regular guest appearances on CNBC, Fox Business, CNN, MSNBC, and Fox News Channel, as well as hosting a weekly radio show. He is also the author of three bestselling books: "Crash Proof: How to Profit from the Coming Economic Collapse", "The Little Book of Bull Moves in Bear Markets" and the newly released "Crash Proof 2.0: How to Profit from the Economic Collapse."