The Road to Hell
(I sure hope he's wrong, but my gut tells me he's closer to reality than most are predicting.)
Peter Schiff, President and Chief Global Strategist
The mammoth government bailouts of failing home lenders Fannie Mae and Freddie Mac have sparked widespread relief that the worst-case economic scenario has apparently been avoided. Treasury Secretary Paulson, the primary engineer of the avalanche of government guarantees, has even been hailed as the "Hero of Capitalism." However when the history of the rise and fall of the United States of America is finally written, the "housing bailout bill" will be shown to be a seminal event. If the road to hell is paved with good intentions, we just laid down a mile of asphalt.
Markets have responded the way they always do to news that seems positive. Gold is down and the U.S. Dollar and American stocks have staged minor relief rallies. But as the harsh realities of these "bailouts" become clear, in the form of hundreds of billions of new government debt likely to be monetized, the good feelings will vanish and the panic selling will begin. Soon investors will realize that the government has just thrown gasoline on the wild fire it set in the first place. The economy will be torched and what is left of our free market economy burned to a cinder.
Undoubtedly the bailouts will come with a huge price tag, but the costs will not necessarily be borne only by taxpayers. All workers and savers, whose well-being depends on the value of the dollar, will lose as the dollar is debased. This initial bailout bill is merely the camel's nose under the tent. Capitalism can't work when individuals are not held accountable for their actions. When irresponsible behavior is rewarded and responsible behavior punished, the moral hazards will lead to financial ruin. If Americans know that they can borrow without consequences, and if those who resist such temptation get stuck with the bills, our market economy will fall apart.
Fortunately, at the very time that we need to get rid of any remaining dollars still in our possession, not only is there a bounce in the dollar, but many of my favorite foreign stocks are on sale as well. The world is over-reacting to our problems, almost to the extent that we are under-reacting. Investors are over-estimating the global consequences of the collapse of the American consumer. I have long argued that American consumers have been functioning as global economic parasites, feeding off the productivity of the rest of the world. When the parasite is removed, the host will thrive. While those who have loaned us money will finally recognize their losses, the truth (belatedly recognized) will set them free. Once they move on, the world will enjoy enhanced growth, as it reclaims the savings, resources and consumer goods previously sent to America on credit.
The recent weakness in global stocks should be seen as a blessing not a curse. Low prices are an opportunity to capture more non-dollar assets, and lock up an even greater foreign currency denominated dividend stream. Given the recklessness of the current U.S. economic policy, the greenback will likely lose substantial value in the very near future. Though I can understand why many clients may view the recent declines as casting doubt on my overall strategy, I am convinced as ever that it will ultimately be vindicated. In my book Crash Proof I wrote that the initial decline in U.S. stocks might temporarily bring down foreign markets, but that such drops were not to be feared but embraced. Thus far I have seen nothing to alter that forecast. In the end, the race is won at the finish line, not at the starting block or at some arbitrary point in between.
Often doing the right thing flies in the face of conventional wisdom. Just remember the very 'experts" who are assuring us that the government has saved the day, were those who assured us all was well. The same geniuses who are convinced the subprime problem has been solved are those who devised the loans in the first place. The key is to have the courage to stand by your convictions and not be swayed by the mob. If you have not yet done so, watch these YouTube clips of my presentation back in 2006 at the Western Regional Mortgage Bankers Conference. The same people who thought my forecasts were nuts then are the ones who now insist that my current forecast is just as crazy.
Link to clips