Mish has composed a detailed post on the many ways in which the vociferous Peter Schiff has been dead wrong on just about everything in this crash (the two actually had a little debate in December 2007). Mish’s post is essential reading for anyone who is considering following Schiff’s investment advice. In his own way, the man is usually just as wrong as the Pollyannas that he challenges on bubblevision.
Here is an excerpt:
Schiff’s Investment Thesis
- 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.
12 Ways Schiff Was Wrong in 2008
- Wrong about hyperinflation
- Wrong about the dollar
- Wrong about commodities except for gold
- Wrong about foreign currencies except for the Yen
- Wrong about foreign equities
- Wrong in timing
- Wrong in risk management
- Wrong in buy and hold thesis
- Wrong on decoupling
- Wrong on China
- Wrong on US treasuries
- Wrong on interest rates, both foreign and domestic
That’s a lot of things to be wrong about, especially given all the “Peter Schiff Was Right” videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.
I will admit that I was nearly taken in by Schiff’s thesis back in 2006 when I first became bearish on the economy and stock market. I even opened an account for someone with his firm, but the only thing I did with it was short the US market — I took none of his brokers’ advice on favored mining juniors.
I owe Mish and Robert Prechter a huge debt of gratitude for beating some sense into me with solid logic. Readers can easily check my archives to see my pre-crash stances on commodities, gold stocks, Treasuries, the dollar, the Swiss Franc and the Euro and the inflation/deflation debate. I can report that things have turned out very well for those who went against the crowd of contrarians, swallowed their fear of the dollar, and shorted not just US stocks but almost everything else in sight. All the world was a bubble.
On the need to stay nimble
Yes, the deflationists were right and hopefully all made some money or at least avoided terrible losses, but nobody can afford to get cocky. The markets do not trade on fundamentals on anything but the longest time-frames, so the ability to read the prevailing mood and adjust accordingly is a critical part of asset management. So is the willingness to contradict yourself and change your mind.
I see now that this deflation can last even longer than I had suspected, and that there may be even ways to avoid hyperinflation, such as negotiated Treasury debt forgiveness, but there is no need to try to guess about outcomes that are years away when you know how to read the signs as they come and remain humble and liquid enough to change your stance as needed.
By the way, Mish manages client accounts
Mish is an investment advisor representative with Sitka Pacific (not Euro Pacific!), a firm that manages private accounts on a percent of assets fee basis. I am not a client, but I would not hesitate to suggest giving them a call. I am working on setting up my own firm of this type, which offers many advantages over hedge or mutual funds, especially when set up with the protections that Sitka Pacific has included. My own style of trading is somewhat different from any of the strategies Mish uses (for example, I am willing to go net short or to a majority cash position), and of course I am not always in agreement with Mish on every aspect of the markets.
Suppose it takes a trillion dollars to make Citi solvent? Suppose it takes another 1-2 trillion to make B of A solvent? Do you think the US Gov’t will just let them default and go under?
I know that would be the right and sensible thing to do, let the defaults flush out all of the unsound institutions. But I don’t think that is going to happen….I think they will create the money out of thin air to prevent it.
Yes, of course they will keep printing up cash, but lots of it just goes into banks’ black hole balance sheets and doesn’t get lent out. No inflation there.
Deficits are inflationary, but they still pale in comparison to the size and speed of the debt implosion. This is the KEY point to the deflation, and the reason I was able to anticipate it. There is $50 trillion in private debt in the US, and huge swaths of it are defaulting. This amounts to so much more than the newly created money.
You can’t ignore debt and just look at monetary figures. Japan printed away to bail out banks, build bridges to nowhere and monetize debt, and they have had a mild deflation for 20 years now. Ours is of course much more severe, but don’t underestimate it just because we are printing faster than they did. We also have much more debt than they did, so much more that the deflation is still more powerful, despite the printing.
In addition, attitudes have changed towards savings, consumption and debt, not just in the US, but worldwide. Depression is deflationary because it reduces velocity and induces frugality.
I believe that the debt defaults can occur right alongside the destruction of the dollar! I know that seems counter-intuitive, but I believe that is exactly what is going to happen.
Action in the gold market seems to be confirming this. While it is strengthening in dollar terms, it has exploded in terms of Euros, Sterling, AUD NZD, etc.
Here’s where the real problem lies: for the first time in the history of civilization, ALL currencies are fiat. Whither to flee? Do you really want to flee from rapidly deflating assets (housing, stocks, commercial real estate, etc) into government issued toilet paper?
If Mish thinks gold is going to go down in this unprecented environment, then he is as wrong as Peter Schiff.
Read today’s headlines about Iceland for a preview of coming attractions.
Government collapses amid soaring unemployment, a veritable mountain of debt, and RUNAWAY INFLATION!
The higher Krona prices in Iceland are because they have to import everything with a collapsed currency. This is not inflation by my definition of an expansion in money supply and debt. They have suffered a horrible deflation along with a currency collapse.
Gold does trade like a very volatile currency, and those formerly high flying fiat currencies are falling relative to the dollar, yen and gold.
Mish has not expressed an opinion on gold since 740 when he said he liked it.
Yes, fiat is just paper, but that is exactly what you want if housing, stocks, CRE, etc are falling rapidly, since that crappy paper can buy more real stuff all the time. If the dollar were collapsing or we were entering a period of high inflation, you would see it. It would look like the opposite of what is happening now in forex and real estate. If you really think currency failure is around the corner, the best way to play is to lever up with 5% down on real estate. There has never been a hyperinflation in history during which real estate didn’t soar.
By the way, I would start to get out of TBT right here if I were still holding it. I am not. I bought it when the 30-year yield was 2.52% and sold when it was 2.9%. That was my only trade in that security.
I am waiting for a chance to go long bonds again. I almost certainly would if the 30-year yield hit 3.8% again.
First: I called BS on Mish’s real estate argument. All he could do was spaz out like a kid saying if any country was gonna hyperinflate it would be Russia, China, etc. but NEVER NEVER NEVER the good ol’ US of A. Seriously, maximizing nominal gains in terms of a hyperinflating worthless fiat currency is a foolish strategy. And if we assume that maximizing nominal gains IS the strategy (in the hyperinflation, i.e.), then I have a better alternative to real estate – GOLD – because the price of gold will be theoretically infinite (no gold at any price) in the hyperinflating currency, i.e., just as in Z$.
Second:
“This is not inflation by my definition of an expansion in money supply and debt.”
Seems like Iceland got the worst of both worlds, but I guess they’ll be inflating soon enough, if not already. But seriously, who cares if the currency is inflating, deflating or whatever the hell is happening to it if you can’t buy REAL GOODS with it (or have to carry wheelbarrows of it just for a loaf of bread). This just proves what I suspected was wrong with all the deflationistas – they are too tied up thinking in terms of fiat money and nominal gains it. Their potentially FATAL mistake is not paying attention to or realizing the REAL purpose of money, i.e., purchasing power. Lets say you made 100%, 200% or even a 1000% trading treasuries. But if you can’t buy food with it you might as well use it for toilet paper.
The only good strategy right now in my opinion is to be a 100% Gold – no matter what the currency.
Real estate is ideal for hyperinflation because of the leverage. Try to buy gold with 5% down and a 30-year fixed rate loan. If you really think we’re going to hyperinflate, I tripple dog dare you to put your money where your mouth is and lever up. You’ll get the land practically for free if you are right.
You are off base saying that Prechter, Mish and myself are obsessed with nominal gains. Paper is making real gains, so that is why we like it. I have no allegiance to the stuff whatsoever, and would love to go massively into gold and just go fishing for 5 years, if it were only that easy.
I sense some serious emotion here and desperation to hang onto a failing investment thesis. I think you will find you are waiting for Godot.
@hcrosby – you again hit the nail on the head.
“Experience runs an expensive school, but fools will learn in no other” – Benjamin Franklin
Exactly.
My post just disappeared into the ether. Anways, here it goes again -
“I sense some serious emotion here and desperation to hang onto a failing investment thesis” – Agree 100%. Too many Gold bulls out there. Shortage of physical indicates the same thing. A bull market has never started with so many people gunning for it.
I am with you, Mike. Shorted some GDX today.
Mike – I think you will enjoy listening to this guy – Hugh Hendry of Eclectica. Very Knowledgeable and highly entertaining.
*Cant seem to enter links into comments*
Hmm. I’ll look into the link issue.
Is this it?
http://commoditywatch.podbean.com/2008/11/01/hugh-hendry-of-eclectica-and-dr-francis-claessens-of-peers/
Another try:
http://commoditywatch.podbean.com/2008/11/01/hugh-hendry-of-eclectica-and-dr-francis-claessens-of-peers/
Don’t know what the link problem is. Seems to work for me.
Mike -
Can’t seem to post links at all. Any post with links disappears for some reason. Anways, search youtube for Hendry and gold. Worth listening to, IMO.
I have been doing a bit more pondering. As the world economic conditions continue to deteriorate, it is almost certain we will see increasing competing currency devaluations.
Every nation is going to try to stem the unemployment tide by stimulating exports (i.e., trying to weaken their fiat currency relative to other fiat currencies). We are already seeing that in China, Britain, and Europe. The Euro will probably even break apart before too long, as the weaker nations in southern Europe seek to escape the single currency discipline so they can run the presses faster….
Now, amidst all of these competing currency devaluations, what do you suppose gold might do? How is the gold price holding up against the Icelandic Krona?
Yes, it certainly should do well in the long run. I just think there is still too much steam built up in the market, though. Too many people love gold and are counting on it, and this is not a good sign. I love gold too, but I’m trying to be agnostic and keep my cool, so I have to treat it like any other asset.
If currencies really start to fail, almost any hard asset will do. I’d as soon take grain futures, provided the commodities bourses hold up. I don’t see a need for gold to trade so out of whack with all other hard assets — a premium, yes, but almost equal with platinum and 20-25X the oil price?
Trust me, I get it, and I will load up if I’m right and gold falls, but I already have 25% of assets in it!
“I have to treat it like any other asset.” &
“I don’t see a need for gold to trade so out of whack with all other hard assets.”
That’s an enormous level of ignorance we’re dealing with here. Sorry to break this to you Mike – but you don’t nearly know enough to be handling your own money, let alone others’. (BTW, I sense a vested interest in preaching the continuance of the regime of irredeemable currency).
“I already have 25% of assets in it”
That 25%, if physical and NOT in the possession of a third party, is the only thing you may have left. You’re too caught up in the fiat money casino world. The theater is on fire and instead of heading for the exits you’re sitting smack in the middle of it. Time is running out my friend. Unlike you, I am not “hanging on” or hoping or praying for ANYTHING and I don’t have any “thesis” to sell. I just KNOW what’s gonna happen. Saying “I told you so” is one of my favorite pastimes. I made my money, I am fishing and IT IS THAT EASY – only if you REALLY know your stuff.
Dogmatism is one thing, but rudeness is another. If you can’t extend a little respect, you’re going to find yourself blocked. It is clear that you have barely even read this blog, but are just here to fight. If that is the case, you are not welcome.
I gladly debate hyperinflationists and Keynesians, but not jerks.
Just for the record Mike, I find your blog quite well written and have read ALL your posts. In fact, the first time I found your blog, I was so intrigued that I went through all the posts in one go. It is not my intention to engage in uncivil debate and I certainly do not intend to offend anyone.
That said, it was you who started the analyzing my “emotions” so naturally I felt obligated to respond in kind. If you wish to block all conversation not aligned with your line of thinking, please feel free to block me. It is your blog after all.
Gold bugs, and there are not very many of them, love gold, but the rest of the financial world ignores it almost completely. I think that any real student of Austrian economics could have their view about the popularity of gold skewed by our own views. And how many of us are there? 1/10th of 1% of the population?
Remember, the market capitalization of the ten largest gold companies in the whole world doesn’t begin to equal that of MSFT. That hardly seems to me that all kinds of people love gold!
I’ll bet if you walked the streets of any US city and did a random sampling of the populace, and asked the question “what is the world’s most traditional form of money?”, less than two percent of the respondents would give the right answer.
Gold is not only not loved by “too many people”, most people don’t even pay any attention to it! I watched the Saturday mnorning business shows for two hours this week, with probably 30 talking heads, and the word “gold” never passed anyone’s lips even once.
Other than Ron Paul, did any politician this past year ever even mention the term “gold standard”?
Believe me, as this currency debacle completely unravels, the sheeple will not have any gold. This is not 1933. Almost everyone has been completely brainwashed into accepting the fiat paper money schemes and the wisom of the FED.
The sheeple are waiting to be sheared.
Well the Philadelphia Gold and Silver Stock Index Up 90 Percent in 90 Days.
I’ll stick with 80% gold and 20% in silver but I’m one of those bugs you keep talking about.
Mish is right on.
Mark
I’m a gold bug, too, but I’m shorting now precisely because gold and XAU are up that much so fast. Overbought is overbought.
I actually sold a couple of gold stocks yesterday in which I was up over 80% since just before Christmas.
But I still believe gold will be the place to be, especially once it becomes evident that this so called stimulus package Congress is going to pass is just one big tub of lard….
I would have to agree with hcrosby: almost no one is interested in gold. When I talk to neighbors or friends about owning a little gold, they look at me like I am from Mars. I do not believe 1/10th of 1 percent of the population is an exaggeration with respect to gold ownership here in the U.S.
Tom
The most important thing to keep in mind is that we are all playing with a stacked deck in their favor. The Fed determines economic policy. The Fed is NOT a Government agency but a private bank run for profit. The Chairman of the Fed is beholden to stockholders not the American people.
The Fed exists to create profit for it’s stockholders. It also manipulates the economy for it’s own benefit. The finical “crisis” we see around us is a manufactured event and is resulting in a transfer of wealth from the middle/upper classes to the wealthy elite. True wealth is never destroyed, it’s merely transfered.
The more you understand the game, the better decisions you can make with regards to your money. Gold and silver are not mentioned on the evening news for a reason. Glowing reports of the next big cancer drug ARE mentioned for a reason.
In 2002 I asked my finical adviser about owning Gold.. He looked at me cross eyed and advised against it. However, the articles I was reading about Gold and silver made sense and as I researched and became more educated on the topic, I decided to ignore his advice and buy some gold.
Gold was $280 at the time.
My advice is to learn everything you can about whatever it is that interests you understand that the majority of “experts” on any given subject are not necessarily looking out for your interests and even if they are, many of them are so poorly educated on real economics that thier opinions are worthless and often harmful.
Oh and certainly NEVER EVER listen to any expert who makes his living advising you from behind the desk of FOX NEWS or CNN etc.