Many people are relieved that 2020 is over, but for the world economy, things will only start to get worse in 2021. In his final podcast of 2020, Peter Schiff (EuroPac) said the New Year will be better health-wise given that there are now vaccines for COVID-19, but economically, 2021 will be known as the year where the chickens will come home to roost.’
Gazing back at 2020, Peter, the value of the US dollar, is the most significant indicator of where the economy is heading. The dollar index was down about 7% on the preceding year. That may not sound all doom and gloom, but if you look where the dollar index stood at its peak last spring when it soared to about 103, things don’t seem to be so rosy.
As the COVID-19 pandemic spread out, the dollar was bullish, and analysts expected investors would rush in droves into the greenback to hedge their investment against the coronavirus storm. According to Peter, the dollar-rush did occur, but it was a ‘head-fake’ that won’t last long.
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The dollar’s status as a safe-haven, at the time, lasted for about a month, maybe a bit longer, and then it became non-existent. Peter compared this incident to the rally the dollar enjoyed during the financial meltdown of 2008.
“I thought the fact that it was such a small safe-haven bounce was a harbinger of some bad things to come for the dollar if that was the biggest rally it could muster given how bad things looked at the time and how small the rally ultimately ended up being,” he said.
The year ended with the dollar index just under 90. Surprisingly, this should not send investors into panic mode because the dollar index has declined significantly lower than this figure in the past. There’s nothing to be particularly scared of, even if the dollar index sinks to 89. Things will only begin to get precarious if the index goes below 70.
“We’ve never seen the dollar index below 70. In fact, 71, I think, is about the low from 2008, and then we almost touched that low again in 2011. But when we take out that double bottom, and we’re really in no man’s land, and the dollar is set for freefall, that’s when it’s going to get a lot scarier.”
Peter, 57, now the CEO of Westport, Connecticut-based Euro Pacific Capital, also stated that the dollar index to fall below 70 is still a year or two away and won’t worry people too much. Instead, he thinks investors will revel the weak dollar because it will push asset prices like stock up north, at least in the short term. But eventually, all good things will come to an end, and people will start to realize this wasn’t a good thing as there will be a major crisis for the currency.
“We’re already seeing the impacts of a weakening dollar. For instance, import costs have doubled and, in some cases, tripled. Commodity and agricultural prices are up. We are really going to reap the whirlwind of the inflation winds that we have been sowing for years, but particularly ever since COVID.”
In 2020, the dollar weakened against other fiat currencies. Compared to precious metals like gold and silver, the dollar didn’t fare better either. Gold was up about 24%, and silver was up 48% against the greenback the same year. For the average investor, it means that you’ll need more dollars to buy euros, Swiss francs, or Japanese yen. Meanwhile, if you’re more inclined towards precious metals, you’ve to dish out even more dollars or other fiat currencies to buy an ounce of gold or silver. This highlights that most fiat currencies including the dollar are losing value, but the losing streak is faster for the dollar. And there is no sign it’s going to slow down anytime soon in 2021.
Despite the dark shadow that has befallen the dollar, stocks did really good in 2020 despite the COVID-19 turmoil. Peter, who appears on major networks as a financial commentator, argues it’s all because of Fed’s cavalry and their money printing. The NASDAQ witnessed its biggest-ever gain than every stock indexes out there—thanks to the boosts it got from high-profile IPOs.
“Of course, had the Fed’s cavalry not ridden to the rescue with all their printing presses, it would be a much different story for the stock market. But of course, it would be a much better story for the economy. Not that the economy would have just boomed had the Fed not done the wrong thing and bailed everybody out. But at least we would have addressed the problems sooner and prevented them from getting worse.”
Now here’s the caveat. Despite the gains in the stock market, the amount of debt accumulated by the corporations’ stock repurchases programs, and the federal government’s stimulus spending has become even more massive. The national debt surpassed the $27 trillion mark in 2020 and continues to skyrocket. The national debt now stands at a colossal $3.75 trillion in 2020.
Donald Trump has failed to ‘drain the swamp’ and only inflated the economic bubble, and the upcoming new President Joe Biden is highly unlikely to slow down borrowing and spending. This paves the US economy onto an unsustainable and precarious path whose ultimate destination will be its eventual collapse.