Peter Schiff: ‘We Have Been Riding on a Chinese Gravy Train’ — and It’s Over

Noted economist and gold expert Peter Schiff has been saying for quite a while now that the current booming economy is a bubble and the stock market’s upward move in 2019 is nothing more than a bear market rally, a rally he thinks is over due to the trade war with China.

“Long live the bear market,” Schiff said on his latest podcast at SchiffRadio.com. “This bear market rally is dead. We are going a lot lower.”

After the Trump administration announced it was raising tariffs from 10% to 25% on $200 billion worth of Chinese goods, Beijing retaliated with tariffs on $60 billion worth of U.S. goods. The news caused markets to crater and remain extremely volatile until this week, when the Trump administration announced it would hold off for another six months at least on slapping tariffs on auto imports from the EU.

But a U.S.-China trade deal is still hanging over Wall Street’s head, and Schiff doesn’t think a deal is going to get done. And if the world’s two largest economies end up coming to some sort of agreement, Schiff doesn’t think it will be a “win” for the U.S., particularly because of how much President Donald Trump, who is known for speaking in hyperbole, has built it up.

“I’ve been saying for a long time that even if we got a deal, it was going to be a ‘buy the rumor sell the fact.’ But I also said it was becoming obvious that Trump had so over-promised about a great deal that it was almost impossible to have a deal without disappointing the markets,” he said. “So I think Trump made a calculated decision that no deal is better than a deal that disappoints, especially since he had already goosed the market up to new highs. So even if we sold off, Trump could say, ‘Well, this is some short-term pain. It’s necessary for the long-term gain.’ And it may be the catalyst that causes the Fed to cut interest rates and launch QE, which is what Trump wants.”

Schiff then mentioned the strong 3.2% first-quarter GDP numbers in the U.S., which Trump touted on Twitter. The problem, Schiff says, is that the number is unsustainable and more of an aberration due to one-off factors that won’t continue, and that the U.S. will ultimately lose the trade war with China.

“By the second quarter, those factors will not be there and the weakening economy will be laid bare for everybody to see,” he said. “And it is going to be a lot weaker because America is not going to win this trade war. We are going to lose this war and we are going to lose it badly, and the winner is going to be China.

“We have been riding on a Chinese gravy train. We have been relying on China for capital and we have been relying on China for consumer goods. They supply us with the savings we don’t have and they allow us to import the products we consume.”

The “gravy train” Schiff is referring to is namely the U.S. debt, which a big chunk is financed by China, which is threatening to unload U.S. Treasurys. In fact, China reduced its holdings of U.S. debt in March by $20.5 billion, dropping its total U.S. debt ownership to $1.12 trillion, the lowest it’s been in two years.

“We used to save. We used to make capital investments. We don’t do that anymore. We just borrow and spend,” Schiff said. “And where do we get the money that we’re borrowing? From the Chinese and other nations that are doing the saving for us. So they’re saving for us, they’re producing for us and we’re living off their productivity and their under-consumption. And that party — that global gravy train is about to come to an end.

“Anybody can consume. The hard part is to produce.”

Editor’s note: Peter Schiff makes good points about how U.S. debt is financed in large part by China, and it’s never a good idea to fight with your bank. But what do you think about what he says about the trade war, particularly that the U.S. will lose? Is he way off base? Do you think we’re in a bear market rally, or has Peter turned into a permabear? Share your thoughts below.