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Peter Schiff: 1987-Style Crash Coming But in Currency and Bond Markets

Wednesday, 24 Oct 2012 07:43 AM

A stock market meltdown similar to the one that rocked the market in October 1987 is on the way, but this time around it will roil bond and currency markets, sending investors seeking safety in hard assets like gold, said broker, author and financial commentator Peter Schiff.

While technical factors played a role in the famed stock-market crash in October 1987, trade and budget deficits spooked investors then just as they are doing today.

Today, however, twin deficits add up to more than 13 percent of current gross domestic product, twice the level of 1987, Schiff, CEO of Euro Pacific Capital, writes in an economic commentary.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Loose monetary policies — including the Federal Reserve’s bond-purchasing programs that flood the market with liquidity (known as quantitative easing) — and fiscal stimulus measures have weakened the dollar and cut interest rates to the point that investors continue to buy stocks despite a sluggish economy.

“I believe that we have arrived at a point where money printing and government stimulus has replaced manufacturing and private sector productivity as the foundation of our economy,” Schiff wrote.

“As a result, most investors are now blind to the dangers of deficits. But that does not mean that they don’t exist.”

Foreign creditors won’t keep lending to the United States at such attractive terms forever, and eventually, will demand more for their money.

When that happens, expect a market meltdown that will bruise the dollar and U.S. government debt.

“Given the relative size of our imbalances, the manner in which they are being financed and the diminished state of our manufacturing sector, higher interest rates and a weaker dollar will exact a much greater toll,” Schiff said.

“I do not believe that the stock market is as vulnerable to another Black Monday. With the Federal Reserve so committed to its current course of quantitative easing, it seems to me unlikely that they will allow such a steep one-day drop,” Schiff wrote.

However, low bond yields present domestic investors with few attractive options, which will boost gold prices.

“If anything, the next Black Monday is more likely to occur in the currency and/or bond markets, with safe haven flows moving into gold not Treasurys,” Schiff added.

Other experts agree that gold is a good bet, especially if President Barack Obama is reelected.

An Obama victory would likely allow the Fed to continue with its loose monetary policies such as quantitative easing, under which the Fed buys bonds held by banks, pumping them full of liquidity in a way that drives down interest rates to encourage investing and hiring.

Such a policy, also known as money-printing, weakens the dollar and pushes up stock prices, though inflationary pressures rise as well, and gold tends to shine when inflation rates rise.

“I think in terms of gold I think President Obama is much better for gold because I think that he brings a fair amount of, I would have to say, almost uncertainty,” Al Korelin, a market analyst and chairman of AB Korelin and Associates, told Newsmax TV in a recent interview.

“I wouldn’t call the current president, necessarily, a capitalist. I would say that he is very definitely a big government guy. I think he is a big regulations guy and I think that is good for gold personally,” Korelin added.

“If you want to look at the inflationary aspects of it if the president is re-elected, you are going to see a significant amount of dollar printing, for lack of better terms, and ultimately, that’s got to be good for gold.”

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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