Is The Wealth Effect In The US Already Tapering?

In his latest video update, Peter Schiff discussed three important evolutions of this week. It gives an insight about the wealth effect, particularly in the US. The wealth effect is undoubtedly very high on the agenda of central planners.

1. Weak retail sales, increased credit card usage

Two retail chains (Macy’s and Walmart) came with lower than expected earnings. Those results came right after credit card companies announced better than expected earnings.

Peter Schiff interprets this as a bad evolution. He thinks people are using debt to pay for necessities at grocery stores and gasoline stations, ending up with less purchasing power in total.

2. Phony housing recovery

The housing numbers came out a bit better than anticipated. But Peter Schiff points to the data “under the hood” which reveal a worse situation. It appears that the demand for rental units has increased which goes with a decrease in new mortgages. No coincidence that housing stocks have been among the weakest lately.

Moreover, the latest data show that 60% of home buyers are paying all cash. It can only be investors or speculators buying new homes; the average American can’t afford buying a new property by paying cash.

Data clearly point to a phony housing recovery. Peter Schiff concludes that the housing market is already tapering before Fed is tapering. The reasonable question to ask is what will happen when the speculators are going to unwind if the Fed starts the real taper? Who will be left buying when investors and speculators start selling?

3. Consumer confidence is down

The latest consumer confidence figures from the Michigan University have dropped compared to the previous month. Consumers appear to be less confident. The most likely explanation is that they have only been hearing about an economic recovery, but they have not experienced it. At one point in time, the experience takes over expectations.

The wealth effect already tapering

The above data show that the wealth effect is working in reverse already. Peter Schiff compares it with a “house of cards recovery” which is already collapsing before the real taper starts.

Now the remarkable thing is that the Fed has only been talking about a slight easing of their asset purchases. They are not even talking about a significant taper or even about unwounding previous purchases.

The gold price rising

There was a lot of speculation by market watchers about the recent gold price rally. The real predicament, according to Schiff, is related to the failure of the latest bond auction. In fact, the bond auction saw its weakest demand since March 2009. On top of that, private investors from abroad (China, Singapore, etc) have been selling treasuries, according to recent data. So with less demand for bonds by the Fed and private investors abroad, it means that interest in the dollar is going down as well. That is what shapes the prospects for gold and explains recent price action.


Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing