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Peter Schiff - A Response to My Critics



January 30, 2009 – Comments (10)

My popularity on television and the internet has led a very small money manager to use his popular financial blog to promote his fledgling business by attacking the recent poor performance of my long-term investment strategy. The post is causing quite a stir and compels me to provide some badly needed context.

To achieve his ends, this individual has distorted much of what I have been saying and writing, and has twisted the facts to support his own preconceived conclusion. In essence, his piece is nothing more than an overt advertisement (and a highly deceptive one at that) to use my popularity to advance his career. In so doing he has given my critics, particularly some who have been embarrassed by their roles in the "Peter Schiff was Right" video, their moments of retribution. In addition, some members of the press who have never been among my greatest fans are seizing the opportunity to discredit me as well.

The crux of the blogger's arguments are that my beliefs in "decoupling, hyperinflation, and that the dollar is going to zero" have been completely discredited by the events of 2008, and that the resulting investment losses suffered by my clients last year confirms the fatal flaws in my approach.

In addition to mischaracterizing many of my beliefs, he also is confusing short-term market fluctuations with long-term economic trends.

First of all, the hyper inflation issue is a straw man at best. While I often talk about the possibility of hyper inflation, I have always said that it would be a worse-case scenario that would play out over many years. The fact that it did not appear in the first year of the economic crash (2008) does not invalidate my position. I have always maintained that this worst-case scenario will likely be avoided by what will ultimately be a dramatic shift in policy once our leaders come to their senses. However, until then the dollar will likely lose a substantial portion of its value.

Second, I never said that the dollar would go to zero, either in 2008 or any year thereafter. I have said that in the event of hyper inflation the dollar's value would approach zero. My actual forecast in my book "Crash Proof" was that the Dollar Index would fall to 40 (currently about 85), with a realistic worst case scenario, assuming very high but not hyper inflation, of 20 or lower.

Third, the blogger points out that because the decoupling theory (foreign economies improving while the U.S. falters) that I wrote about in "Crash Proof" has yet to occur, that the theory itself was ridiculous. In my book I wrote that this process would not occur overnight, that initially our creditors would come to our aid, and in so doing our problems would become manifest abroad. I wrote that it would take time for the world to realize that what had been decoupled from the economic train was not the engine but the caboose. In fact, that is precisely the way it is playing out.

Chapter Ten of "Crash Proof" is specifically focused on the need to keep funds liquid to take advantage of the buying opportunity that would initially develop once our stock market began its collapse. I specifically mentioned that when U.S. stocks began to fall, we could expect sympathetic declines overseas. While I did not know the precise timing of those events, I advised readers to prepare.

I did not expect the huge dollar rally of 2008. But to discredit my long-term view of the dollar based on an eight month move is absurd. So while I believed that a weak dollar would cushion the temporary decline I expected in foreign stocks, a strong dollar ended up exacerbating it. In the meantime, I believed that the high dividends these stocks were paying would make it easier to ride out any correction. The problem was that the dollar fell so far leading up to the crisis (in 2005-2007) that by the time the crisis finally erupted the dollar was poised for a bounce.

Central to the argument that my investment thesis is wrong is the belief that the crisis is over or that the recent trends will continue until it is. But the crisis is just beginning and the movements thus far in the dollar, commodities, and foreign stocks, are mere head fakes. Once the speculators have been flushed from the markets, the underlying long-term trends I have been following should return in earnest.

To illustrate the flaws in my investment strategy the blogger has posted a client's statement that shows a loss in excess of 60%. In addition, he claims to know of other Euro Pacific clients who have experienced similar losses. The inference of course is that most, or all, of my clients must have suffered similar losses, and the existence of such losses proves that I am wrong. In fact, some have gone a step further, claiming that such losses prove that I am a fraud.

First let's deal with the one client's account. I have been following several key investment themes for the past ten years. The basis for my strategy is that recent U.S. prosperity has been false, and that the consequences of the bursting of our bubble economy would ultimately play out in a substantial decline in the value of the U.S. dollar, higher commodity prices, the re-monetization of gold, and foreign equities substantially outperforming U.S. markets. From an investment perspective, those themes played out extremely well in the eight years from 2000-2007. Recently we have seen a sharp, and I believe temporary, reversal of these trends. Those that came late to the party (at least based on where we are today) now have to ride out a particularly difficult correction.

For example, the account in question belongs to the son of a long-standing Euro Pacific client, who is still adding funds to his accounts. Without specially commenting on the performance of the father's account, it must have been compelling enough to finally persuade the son to come on board himself in early 2008. However, as is often the case, by the time he came on board, foreign stocks and commodities were about to sell off, and the dollar was about to begin its unexpected rally. Following such a sharp correction, the son now regrets his decision and must blame me for my part in helping him make it.

Perhaps as a stockbroker I should have persuaded the son to wait for a correction. However, while this clearly would have been the right call with the full benefit of hind-sight, it was certainly not as clear given the information I had at the time. However, I never held myself out to be a market timer. My advice was always geared to long-term investors. Given the thousands of clients that I have, and the large number who joined near the recent dollar peak and market tops, it's no wonder that a few have contacted this blogger to complain; especially since he has actively sought them out. Of course, the fact that the overwhelming majority of my clients are not complaining, to him or anyone else for that matter, says a lot more about what is really going on.

To the extent that the long-term trends I have been following continue, I am confident that even those whose short-term timing was bad will still do well in time. This is especially true if they take advantage of this pull back by adding to their accounts, either with new funds or by re-investing their dividends. However, to examine the effectiveness of my investment strategy immediately following a major correction by looking only at those accounts who adopted the strategy at the previous peak is unfair and distortive.

Since I have been advising investors to follow these trends for ten years, I will leave it to the public to draw their own conclusions as to how long-term followers of my strategy have fared. However, for those who only recently adopted my approach in 2007 or 2008, the road has been a lot bumpier than they or I thought it would be when they climbed on board. Yet if these long-term trends re-emerge, though the journey may be different than planned, the ultimate destination will remain the same.

The blogger in question implies that all of my clients are down by levels similar to the account he cites. He has asked me to refute his allegations by providing broader performance figures for more clients. But, since Euro Pacific Capital is a brokerage firm and not a Registered Investment Advisor, I am prohibited by regulators from providing any details on the investment performance achieved by my clients. The blogger in question makes his challenge knowing full well that I am legally prevented from accepting it. He then uses my failure to refute his false claim as validating its accuracy.

In addition, consider that 70% of the account in question happens to be invested in mining and energy stocks. These were the two sectors that got hit the hardest in the recent downturn. This is a very aggressive exposure to those sectors and not typical of Euro Pacific clients. While it is true that many of my clients are interested in these two sectors and specifically seek portfolios heavily weighted in these areas, most take a more balanced approach, with mining and energy typically representing 20% to 30% of their portfolios. I also have clients with minimal or no exposure to these sectors.

All Euro Pacific client accounts are different reflecting the individual objectives of each client. In general the goals of my clients are to get out of the dollar and hedge against inflation. However the way each client chooses to pursue these goals varies. Some choose a relatively conservative approach, consisting mainly of utilities, property trusts and bonds, others choice a more balanced approach, adding exposure to infrastructure, agriculture, energy trusts, and transportation, while some are more aggressive with heavy exposure to resources, junior mining companies, and oil and gas exploration companies. Some clients specifically seek to gain or avoid exposure to certain regions, sectors or currencies. Some are focused more on long-term preservation of purchasing power, while others look to maximize long-term appreciation. Most of our accounts are yield oriented, but many of our clients specially request more aggressive growth oriented portfolios. In a down market to evaluate my investment strategy based solely on the performance of the most aggressive accounts is completely unfair. Doing so ignores the better performance of less aggressive accounts that were not hit nearly as hard.

In addition, to look only at the performance of foreign stocks, while ignoring other aspects of my investment strategy only tells part of the story. What about gold, foreign bonds, short positions in financials, home builders and subprime mortgages (or merely avoiding long exposure to those sectors), or other investments people have made, either at Euro Pacific or elsewhere based on my insights? What about dividends earned, or gains realized on closed positions?

Mainstream economists, journalists, and investment professionals have never liked my message and have never resisted the temptation to shoot the messenger. When my investment strategies were performing well, I got little credit for it. Instead, all the attention was focused on the apparent failure of my dire economic predictions to materialize. Now that the economy is collapsing along the lines that I correctly forecast, criticism is being focused on the recent poor performance of my investment strategy (a fact that I have never tried to hide). Of course by the time my investment strategy is once again in step with my economic forecasts, an event that I believe will occur sooner than most people think, it will likely be too late for most people to do adopt it.

My critics have often referred to me as a stopped clock. I believe that the accusation is best leveled at the accusers. Having been wrong for so long, they are now enjoying their brief moment in the sun. They should enjoy it while it lasts. For now, they are creating fodder for some future "Peter Schiff was Right" piece where those who now criticize my investment performance will look just as foolish as those who once criticized my economic forecasts.

10 Comments – Post Your Own

#1) On January 30, 2009 at 11:30 AM, TDRH (96.93) wrote:

Sounds pretty defensive to me.   

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#2) On January 30, 2009 at 11:42 AM, abitare (30.20) wrote:

Fools, who think Schiff was wrong should watch and decide for themselves. IMO, Schiff is a national hero, who saved millions of people from debt enslavement.

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#3) On January 30, 2009 at 11:52 AM, anchak (99.91) wrote:

It absolutely is defensive and abit..... you are missing the point here - what you say ( like in your case)

(a) Schiffs Views  +

(b) Your own judgement and intellect = Saving your $$$

See a lot of us , if we see someone smart AND think he/she is reliable - and NOT CHARGE and arm or a leg - Would let them at least manage part of our money - like your friend did.

He does this for a living - there's no other option to OWN up - is he?

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#4) On January 30, 2009 at 12:10 PM, givmeabreak (27.55) wrote:

You are missing the point chak. You can't take a short-term view of one client and apply the results to a long-term plan.

He never said "my company will get you rich quick", or "we make money in the short term".

I don't see how people miss the fact, as peter pointed out, that things are being taken way out of context.

If you ever talked to his company, you would know that they are looking at a minimum of 10 years out for their invesments. They do nothing for the short-term trader.

So, in the VERY short term, it is easy to pile on, but that is so, well, short-sighted. I think less than 2 yrs from now there will be Peter Schiff was right Again video.

And think about your own portfolio. You let me see it over the last 5 years, and I can cherry pick any 6 month period to draw whatever my agenda calls for.

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#5) On January 30, 2009 at 12:35 PM, nthought (< 20) wrote:

Take a good look at his eyes.  He's the Jim Jones of investing.  He's a brilliant flock-builder, but his investment advice is Kool-Aid.   I don't need to see a portfolio to know that he's lost people millions in this market predicting inflation.  In this game, where you put money speaks louder than your words.  Now he's saying people are out to get him...right. 


The debt issue can be resolved, and I believe it will be easier than people think once the economy grows again...and it will, in time. 

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#6) On January 30, 2009 at 3:22 PM, Tastylunch (28.72) wrote:

Schiff was right and he was wrong

Rarely is anyone totally correct 

Schiff should be lauded especially for the warnings he sounded in 2006-7 that few Americans understood or saw coming and his basic interpretation of the economy from 2000-2007. He was very right. If you listened to him then (which I did to some degree as I got mostly out of equities) you did really well. And most of it  was good practical advice anyway. 

But if he didn't properly diversify his clients and didn't allow for the possibility of sharp reversals (or even the possibility he could be wrong) then you know what, he was very wrong. No Thesis should allow you to just sit on 40% total portfolio losses even if they are paper losses. That's improper risk management. I don't care what your time horizon is, the odds are against you recovering a good portion of those positions. 

Schiff's overall thesis may prove to be exactly right down the road but he did his clients a great disservice if he didn't adequately give them some protection against the unknowable that can occur in between.

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#7) On January 30, 2009 at 4:09 PM, johnw106 (< 20) wrote:

Mish was unprofessional and unethical in his attack on Schiff and his company.
Schiff has done the same with his counter attack which borders on the childish in its tone.

You can try and hide the fact that Shiff lost truckloads of his clients money. It is what it is. Any of his clients who were not in cash lost their ass. Plain and simple.
But I am certain the same could be said for the clients of Mish, along with dozens of other firms.

If I had money with Mish I would promplty pull it. A company who hires a man with his blatant disregard for professional ethics and questionable moral character can not be trusted with my money.
The response by Schiff was predictable. Its called cover your ass when you screw up. Be a man, admit you blew it and move on.

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#8) On January 31, 2009 at 12:20 AM, DemonDoug (31.17) wrote:

yeah I think Mish should have kept his big mouth shut on that one.  but that's just not mish's style - he's an abrasive guy.  I also agree with shiff that an 8 month correction does not invalidate his position.  But I have changed the tune of my thinking, and I think Schiff would do well to get a little more defensive and be a bit more bearish on foreign equities and currencies.  The krona is dead, the euro is faltering, the remnimbi is going down the tubes, and the british pound and australian and new zealand dollars continue to get hammered.  The yen and the dollar will continue to rise vs. all those currencies for a while, and gold... well, who knows.  It's definitely in a bubble right now by historic metrics.  If we starting handing out million dollar bills on the black market it wouldn't be in a bubble anymore, but like I said who knows.

I think Mish and Schiff should have a pow-wow and agree to disagree and not snipe at each other.

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#9) On January 31, 2009 at 12:43 AM, Ph1sh55 (29.21) wrote:

I've read Schiff's book.  Smart guy, but married to his thesis.  He spent maybe a paragraph justifying his claim that 'deflation is a myth'.  That assumption was the foundation of almost all of his financial advice...and thus massively WRONG.  That hyper inflation would occur after a long deflationary period was not his thesis.

His ego has gone to his head, but it's pretty funny to see him bringing attention to a blogger that just made valid points about him.  He is not used to being the big guy in the question, I guess.

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#10) On January 31, 2009 at 6:05 AM, jester112358 (28.22) wrote:

If Schiff hedged by shorting financials as he seems to indicate in his defensive rebuttal (and why wouldn't he as he predicted correctly the mess banks would be in long before bank stocks took a dive), then any losses on commodities and foreign stocks would be completely offset.  This is what Jim Rodger's did the whole time and I'm guessing he's sitting on some pretty nice  net gains despite losses on commodities in the last year.  If Schiff advised completely unhedged positions for this clients then Mish has a valid point.

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