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Peter Schiff - Don't be Fooled by the Market

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December 11, 2008 – Comments (7)

With the dollar rallying, foreign stocks swooning, and commodity prices plummeting, many have concluded that the trends that I have been championing over the past decade have reversed. However, as is often the case over the short term, market behavior can easily fool the majority of investors. I am convinced that this is just one of those occasions.

For most of this decade, while my investment recommendations were benefitting from the trends I had forecast, critics erroneously suggested that my dire view of the U.S. economy was costing my clients money. More recently, as the U.S. economy has begun to collapse like the house of cards that I always said it was, my investment thesis has not performed as I would have expected. The panic unleashed by the magnitude of America's troubles has caused global stock and currency markets to behave senselessly. For the moment, fundamentals are not driving valuations.

I must confess that when many of the bulls I had been debating for years finally adopted my investment strategy, I was a bit worried that the trades were getting crowed. In hindsight, one can argue that I should have been more concerned that the accelerated fall in the dollar and the rise in commodities in late 2007 and early 2008 had brought in so many short term speculators that reversals were likely. But the fundamentals for the dollar remained so horrendous to me that those concerns could never gain the upper hand.

But with so many dilettante investors (who had jumped belatedly onto the foreign stock and commodity bandwagon in 2006 and 2007) now flushed from the market, the stage is set for huge rallies in both sectors. Since many of these investors were chasing trends they never really understood, they have fled at the first sign of trouble. This is par for the course in bull markets, as corrections are designed to shake loose the weakest players. This particularly includes leveraged speculators, who typically over-extend themselves on the rallies.

Just as they dismissed my economic forecasts for years, my critics are now making the same mistakes with respect to my investment strategy. Their justifications are recycled. Most investment analysts can only see what is happening in the present. As a result, they draw long-term conclusions from short-run events.

However, it should be obvious by now that doing the right thing often means going against the crowd. As this massive recession gets underway it's important to recall just how many people allowed this elephant to sneak up on them. The delusion was shocking, and it still is. What are the chances that these visionaries finally have it right?

There were also those who joined me in warning of a pending economic collapse, but advised investors to remain in cash (usually defined as U.S. dollars). For years, while the dollar tanked and foreign markets soared, these individuals appeared wrong on the economy and wrong on investments. While at the moment they can now claim complete vindication, if they stay in dollars too long, their victory will be hollow. While U.S. Treasuries are set to win the gold, silver and bronze in the 2008 investment Olympics, I do not expect a repeat performance in 2009. This is just another example of short-term movements incorrectly being given long-term significance.

However, most who saw this disaster coming now foresee a deflationary spiral, where the world economy crumbles, commodity and consumer goods prices collapse, and the dollar reigns supreme. This group is just as wrong now as was the Goldilocks crowd with respect to the U.S. economy a few years ago.

Based on the recent poor performance of my investment recommendations, many claim that I had been blinded by arrogance. They said the same in years past about my views on internet stocks, housing, and the U.S. economy. The fact that my conviction has not been shaken by short-term market action or popular sentiment is not a sin of arrogance but of confidence. The difference is crucial. Arrogance is confidence without knowledge. But if you know the facts, and understand the dynamics, then knowledge justifies confidence.

Now, I certainly admit that with the benefit of hindsight, it would have been better to have sold our foreign stocks and sidestepped this correction. However, I do not accept that my failure to do so invalidates my strategy. While I certainly warned that both foreign stocks and commodity prices could correct as the severity of America's economic problems became more evident (and I clearly advised that investors hold some cash reserves and physical gold to profit from such a correction), the only thing I truly missed was the sharp bear market rally in the dollar. This has made the short-term correction in foreign stocks much more severe then I had anticipated.

My take was that U.S. government's response to the crises would be so inflationary and so detrimental to the long-term health of our economy, that it would overwhelm any temporary boost the dollar would get from deleveraging. Here my error was my overestimation of the market's ability to comprehend the long term inflationary effects of a massive expansion of money supply. The irony here is that while the government is acting even more irresponsibly than I had forecast, the dollar has managed to rally in the face of it!

However, the case for foreign stocks has never been better. Not only are valuations at historic lows, but given the recent fall in global interest rates, relative values are more compelling than ever. In the final analysis only time will tell if I am correct, and investors need to study the facts and draw their own conclusions on the best way to apply them. Both the good and the bad news is that I do not believe we will be waiting too much longer for the answer.

7 Comments – Post Your Own

#1) On December 11, 2008 at 7:52 PM, DemonDoug (92.48) wrote:

I love Schiff, but I do believe he is being blinded by a theory of decoupling which has been pretty much debased, on a fundamental level.  I heard him on local LA radio advocating buying Euros.  Not a chance.  The easiest way to protect oneself from hyperinflation is to buy silver.  Yes, gold is the standard, but silver will protect you just as well, and you are less likely to be fearful carrying a few silver coins around (10 coins worth about 100 bucks) than carrying a few gold coins (same amount of coins would be currently worth 8000 bucks - and even with the devalued dollar, I hardly know anyone who carries around that kind of cheese.

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#2) On December 11, 2008 at 8:21 PM, Harold71 (22.68) wrote:

I also appreciate Schiff's view...but I'm still not quite sure of the foreign stock thesis...it is a worldwide recession...but it looks to me like if much of the world is going to go into a competitive currency devaluation phase, gold, silver, and possibly some commodities like oil and grain will rise.  Foreign stocks seem like more of a question mark to me.  Buying Euros, simply to try to get out of USD, also seems odd.  They have a lot of problems in the Euro zone.  A person could buy a few Euros...but I'm not going there.

Oil price could rise even as demand continues to sink, providing that the currency falls faster.  Also, new oil supply is not coming online like gangbusters here in the $40 range...I live near an oil patch...$100+ is quite exciting...this is not.

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#3) On December 11, 2008 at 9:06 PM, jgseattle (32.68) wrote:

I called and talked to Europac and they sent me a model portfolio.  It was more or less oil and utilities with no miners.  I found this very interesting considering their idea on gold and silver.

The also operate with the Perth Mint.  The Perth Mint has recently had some questions raised about the gold being held and the accounts of clients.

I was not sold and did not invest with them.  I think if you look yourself you can purchase most of the things he recommends without paying his 3.5% frontend load/transaction fee.

I agree with his ideas 100% but I think he need to get a better value proposition for his clients.

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#4) On December 11, 2008 at 9:31 PM, Ph1sh55 (28.68) wrote:

He's definitely married to his thesis.  I did end up reading one of his books and in laying the groundwork for his macro perspective he basically dismissed deflation as something that just wouldn't happen.  It was not backed up with rational arguments, and his lack of consideration that deflation could and would occur with the housing market collapsing is a big mistake on his part. 

I don't discount that we'll ultimately get jerked to hyper inflation if the current policies continue, eventually proving him 'right', but he missed that call very badly.  If you followed 80% of the advice in his book you'd be broke.  At one point in his book he was even suggesting leveraging against your homes value to invest in foreign equities...!

 

 

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#5) On December 12, 2008 at 12:07 AM, SideShowMel0329 (54.44) wrote:

I can't stand all this Peter Schiff hype. He got the housing collapse right, he's probably right about the massive inflation, but that's it. Seriously, this guy is a doomsayer who will soon fade off the face of the Earth once the U.S. economy rebounds in 3-5 years.

I'm glad that CAPS users aren't as enamored with him as most of the internet.

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#6) On December 12, 2008 at 12:29 AM, BradAllenton (31.38) wrote:

 Sideshowmel ---->" He got the housing collapse right" but that's it. ???? WTF?? I'm pretty sure  that is a huge  call seeing as it could destroy the whole system we operate under.

Where I feel Schiff is incorrect is the concept that you could hide in the silvers, golds, and Chinas of the world. When times are tough we all fall down. There is no place to hide. I will share a proverb from a book of traditional Chinese proverbs that speaks to my point.   

"When fortune flees even gold looses its luster, when fortune returns ever iron shines bright"

That quote is all you ever need to know about asset bubbles.

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#7) On December 12, 2008 at 2:58 AM, DemonDoug (92.48) wrote:

Schiff's biggest problem right now is that he is wedded to non-US assets.  I can't see that point of view as being true right now - the housing and credit bubble was an international event, and while I think in the end the US will be hurt more than most, I'm starting to come around to mish's way of thinking - that we will have inflation, but it's much further down the road.

I still think you need to hedge against the possibility of hyperinflation however.

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