Peter Schiff Was Wrong

There are numerous YouTube videos, articles, and references to Peter Schiff being "right" rapidly circulating the globe. While Schiff was indeed correct about the US imploding, most of the praise heaped on Schiff is simply unwarranted, and I can prove it.

First, let's start with a look at the claim being made. Peter Schiff concludes many of his articles, books, etc. with the following statement.

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly.

I would like to see some proof of that statement. Specifically I would like to see the average returns posted by EuroPacific clients for 2008.

I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff's investment thesis was flat out wrong.

I have an actual portfolio statement from one of Schiff's clients at the end to discuss, for now let's discuss the main points of Schiff's thesis.

US Equity Markets Will Crash. US Dollar Will Go To Zero (Hyperinflation). Decoupling (The rest of the world would be immune to a US slowdown. Buy foreign equities and commodities and hold them with no exit strategy.

Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.

Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.

Everyone should note that I am a fan of Schiff, but that everyone makes mistakes. For that reason, one should generally not rely exclusively on one or two investment "gurus." That being said, Mike/Mish Shedlock is one of the few who is almost always right, in the big picture, macroeconomic sense.

For more of an explanation of why not to rely too much one person, read another brilliant analyst, Karl Denninger, at this site: http://market-ticker.org/archives/748-Why-I-Run-My-Own-Money-And-You-Should-Too.html

US Dollar Will Go To Zero.

First, Schiff never predicted the dollar would go to zero (don't overstate, it undermines your point)....though he does predict hyperinflation. He never said that it would happen by now. Just because it hasn't happened yet doesn't mean that it won't happen.

There is always a lag between Fed policy and price increases. The Fed only started to pump things up a few months ago. It is early yet and people are now de-leveraging. If your friends have lost money with Schiff, they would have lost even more money had they stayed in the market.

I believe the whol reason it is called Euro Pacific is that he believes these are "emergin economies". I read a post from an expat living in China the other day that said that CHina will be hurt but will recover quickly because they save so much. I don't know if this is really ture, it seems to me you ight be a sucker for saving a bunch that decreases in value as you hold it. That said I suspect that as China falls it won't hit so hard as it "doesn't have as far to fall" so to speak. Bottom for them isn't a great distance from where they have been. Bottom for us has been a long way off for decades. In this I suspect that Schiff is still right, if you want to invest now it may be easier for those Pcific Asian countries to pick themselves up and get ack to work. I suspect we are going to hve some serious issues to work out before we can get back on our feet once we hit bottom. It may be quite some time before we can get back to work. Μολὼν λάβε

I didn't say that he said the $ would go to zero, Mish Shedlock did; however, saying that there will be a hyperinflation pretty much is the same thing. How much is a Zimbabwean dollar worth now, when $100 trillion of them was worth about $30 yesterday? No, not literally zero, but close enough for government work.

No one that I know invested with Schiff, so they're not my friends. However, according to Mish's article, a simple S&P 500 fund would've done better than Schiff last year. That's not to say he won't do well for his clients this year, but facts are facts.

As for the hyperinflation: we're in a deflation - debt is massively defaulting and asset values are imploding. There's no wage inflation. You want to bet on inflation? Good luck. As the saying goes, "sold to you."

Honestly, I just posted the article to try to help people understand that no one guru has all of the answers, not to pick on Schiff exclusively (though this article WAS about him) - EVERYONE screws up, because NO ONE has a working crystal ball. Even Buffett has gotten his ass handed to him.

"Μολὼν λάβε" Given that the economy worldwide is royally screwed (we are a long way from the worst of this thing - we're in a financial panic, it mostly hasn't hit main street yet), and that the Obamessiah wants our guns when we may need them the most, then I cannot agree with you more. Μολὼν λάβε !!! Oh, just to lift the mood, celebrate that men such as this once lived and fought (albeit very indirectly) for us: http://moviesonline.ca/TheFeed/index.php?id=300-laydownyourweapons

Since you are a fan of Schiff it was gutsy of you to post this counter-analysis.

Shedlock’s analysis of Schiff’s past predictions is a devastating deconstruction of Schiff’s ideologically-driven analysis. I felt sorry for Schiff after reading this.

The lesson to be drawn from this is identify and use a data-driven rather than ideology-driven analyst with a documented track record.

Everyone should try to remember the previously discredited “perma-bears” Robert Prechter and Ravi Batra before jumping on the bandwagon with a new guru.

Why do you assume that he has “screwed up” just because the prediction had not yet come to pass? When did Schiff give a date certain? The current “deflation” (better described as temporary price stability not steep price decreases) is a matter of de-leveraging. That can’t last. Schiff admits his mistakes. He did predict gold would be higher by now...so he doesn’t claim perfection. In any case, had you invested in gold in early 2008, rather than the stock market, you would come out ahead. If we don’t have heavy inflation, a year from now, then we can both say that Schiff “screwed up” big time. Deal?

BTW, as I said if you want to see true deflation look at the steep decreases in the CPI/PPI that occured in 1930-1933. We ain’t seen nothing like that yet. If the Fed hadn’t pumped in money, we would be seeing that now. Better enjoy the relatively low (but not deflationary) prices we have now...because they won’t last.

Since you are a fan of Schiff it was gutsy of you to post this counter-analysis.

Well, not a huge fan, and less so after seeing this article.

As I mentioned before, I'm interested in helping people. You can't be willingly mis- or under-informed and hope to do well in ANYTHING, and this is certainly some very important information. To me, the biggest thing is that his own clients got burned worse by using him than by being in a no-brainer S&P 500 fund (which did pretty crappy all by itself).

I’ll bet you $100 trillion Zimbabwean dollars than in a year we will NOT have a huge inflation. You’ll probably see oil & gasoline go up a bit, but the overall level won’t. With all of the defaults and deleveraging, not to mention complete lack of wage pressure, plus all of the competition we have overseas, there is simply no way that we’ll have inflation. Quite to the contrary.

Question: since there’s never been a serious inflation without a large rise in real estate prices, are you forecasting a big rise in the real estate market?

BTW, if Schiff & you turn out to be right, I’ll not only eat crow here, but I’ll lose a bunch of money (like everyone else in society not positioned to take advantage of inflation by owning gold, etc.).

Again, I posted this story to help others, not to bash anyone. I sincerely wish you and everyone else on this site the very best of luck in this economic $hitstorm that we’re in.

We'll see. Simply no way? Disagree. If Bernanke prints enough money, it will happen. Mugabe, and a host of Latin Ameircan leaders, have proved repeatedly that inflation is fundamentally a monetary phenonomen. Most of those inflations had little to nothing to do with wage pressures or real estate prices. The question then becomes: with a trillion dollar additional stimulus what is going to stop the printing presses?

No doubt that a lot of money will be printed (via the Fed buying Treasuries). However, $1 trillion simply won’t do it. You’ve had many times the $2 trillion or so already injected into the economy destroyed, so printing another $1 trillion or 2 won’t do the trick.

Also, there’s a limit. Right now interest rates are low - the lowest in history, except for a few weeks ago. The market set those rates, not the Fed, and as talk of an exceptionally large stimulus (on top of our already huge $1.2 trillion deficit) has increased, bond yields have crept upwards. At a certain point, rates will skyrocket (i.e. the bond market craps out), multiplying the cost of the Treasury borrowing by 2 or 3 times. You think that the Fed, which is a privately-owned bank, is going to continue using its assets to buy debt that the taxpayers simply cannot ever pay back? Nope, it won’t happen. Besides, if rates go up too much, what’s left of the economy will be destroyed. A devastated economy - lots of unemployment, too many goods sitting around collecting dust, lots of competition - is NOT going to support inflation.

You think that the Fed, which is a privately-owned bank, is going to continue using its assets to buy debt that the taxpayers simply cannot ever pay back?

The Fed is not a privately owned back. That is a fiction. No other private bank, at least not yet, has its CEO appointed by the president. It is an arm of the federal government (or at best a quasi-governmental fascist/corporatist entity) and always been. It ultimately will back up the politicians....because ultimately it depends on them, not the market, for survival. The Fed, for example, was instrumental in printing the money to finance the Vietnam War.

In answer to your question, I think that Bernanke has shown eery willingness to accomodoate the needs of his political masters and will do so again.

The Federal Reserve is owned by its members, all of which are private banks. It has powers far above that of any bank and is, for that reason, chartered and governed by the Federal Reserve Act. Yes, the President appoints its top leaders, and yes, it is far more involved in politics than a “normal” bank, but it is, nonetheless, obligated to serve its owners.

Do you really think that the politicians rule the pigmen??? No chance. The pols are temporary, have diverse interests and largely don’t understand the banking business. The bankers stay for a long time, have similar interests and certainly understand their own business. But don’t believe me. Here’s what one of the most powerful bankers in world history stated:

“Give me control of a nation’s money
and I care not who makes the laws.”

Mayer Amschel Rothschild

FYI, here’s another article on Mish vs. Schiff: http://www.ritholtz.com/blog/2009/01/mish-vs-peter-schiff/

It is beginning to look like Schiff is getting shredded.

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