Chris Lau - Seeking Alpha

Monday, February 02, 2009

Peter Schiff Responds

Mish wrote a piece entitled "Schiff was Wrong." Schiff responded.

The full response is here.

I have taken parts of his response, below. In bold are points that are pertinent for investors.

<... ... >

"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."

..."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."

..."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. "

..."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."

Comments and Additional Notes:

US Bonds & US Dollar
So far, the US dollar has shown remarkable resilience. Why? The currency is simply more attractive than the other currencies, most notably the Euro and the British pound. On a relative basis, however, the massive money flow from Asia to US is showing up in the currency market. The US dollar has weakened against the Yen since the numerous bailouts have been announced since August. One trend that can be forecast with confidence is that the size of the US debt (and especially debt as a percentage of GDP) will continue to balloon.

Investors may benefit from this by buying TBT or short selling TLT.

Many traders have been calling for a "bottom" for this sector, but it has not happened yet. Investors should know that such calls are impossible, for a bottom won't be known until after it has occurred. One might want to use the currency market as a guide of any sort in this matter. The US/Canadian exchange rate has favored the US currency. Remember, the world sees Canada as a resource market. Fundamentally, the sector should be avoided. More specifically, certain companies should be avoided for now, especially those who made massive purchases based on higher commodity prices. Rio Tinto, for example, purchased Alcan Aluminum, and has lost 80% of its value from its peak.

Even without the weight of expensive takeovers, the commodity prices have hampered earnings. Aloca, for example, reported poor earnings due to a 35% decline in the price of aluminium in the past quarter.

General Investing Strategy
I have written frequently that a defensive strategy involves actively doing nothing. There will be nice trading days due to "Obamerama," but if the value of assets is shrinking, investors still need to put in the work to determine the best sectors, and stocks, to invest in.