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Stimulus Plan...
February 11, 2009
Pelosi Stimulus Casts Shadow Over Obama, America, World
http://www.europac.net/externalframeset.asp?from=home&id=15417
In a sign that may reveal much about the current deal-making environment in Washington, House speaker Nancy Pelosi has outmaneuvered the Obama Administration in the design of the massive $827 billion so-called Economic Stimulus Package. With the collusion of three moderate Republican Senators - Collins, Snowe and Specter - Pelosi may succeed in steering President Obama into supporting a package with which he may secretly disagree.
Despite the Presidential rhetoric of change, the Pelosi plan is Washington at its most habitual. Her version is a massive, pork-laden monster. Tilted heavily towards consumption, only 10 percent of the bill is allocated toward the infrastructure spending that the President talked about so frequently during the campaign. President Obama initially favored a middle-way. It was to be based on massive public spending, but specifically on infrastructure.
Far from restoring the economy to health, the 'pork-barrel' Pelosi plan will likely force the U.S. economy into the catastrophe of acute stagflation and decline, with grave long-term repercussions at home and abroad.
It is clear that we are now headed into an abnormally severe recession, and we may be face-to-face with Second Great Depression. Tell-tale symptoms of Depression include competitive currency devaluations and protective trade measures. Of even greater concern is the historic fact that trade wars too often lead to hot wars. The times of peace and unprecedented prosperity that we have enjoyed for decades are now under threat.
With the stakes this high, Pelosi should have restrained her urge to flex political muscle.
Most economists agree that America has enjoyed unprecedented prosperity, based primarily on excessive U.S. dollar liquidity and unmanageable levels of debt. Thus, any healthy correction would necessarily involve serious deleveraging and a severe recession. After a lot of pain, the economy would rebuild with healthier fundamentals. Infrastructure improvement would aid, but not cause, the eventual recovery.
Recession is the natural cure for the politically inspired profligacy that America has enjoyed for almost 40 years. Unfortunately, the side effects of this medicine, namely the rapid reallocation of labor resources and deflationary damage to debtors, are still unpalatable to pandering politicians.
The Washington regime, particularly members of the Democrat persuasion, leans towards a socialist solution of avoiding recession at any cost. After all, the bills are paid by others, such as taxpayers and holders of U.S. dollars. This results in an increasing amount of other peoples' money being spent on 'public' works that would in other times carry the label 'pork barrel.'
Washington is choosing to pursue the policy of continued and ever-increasing false prosperity, financed eventually by hyper-taxation, hyper-debt and hyper-inflation accompanied by a gradually eroded standard of living. The jobs created by the Bill are by and large non-productive, and will divert resources from the private sector and rob consumers of their power to make free choices in the marketplace.
America's infrastructure is in great need of restoration. By some estimates, for every $1 billion spent on infrastructure, some 35,000 real, wealth-creating jobs are born in the private sphere. For 'just' $100 billion, 3.5 million jobs would result. Furthermore, this middle-way of Obama's likely would have commanded much greater bi-partisan support than the lonely Republican trio which attached their names to Pelosi's bill.
Unfortunately for American and international investors, Speaker Pelosi pressured the President into the worst of all plans. It will likely bring on a economic catastrophe, characterized by depression followed by hyper-stagflation and civil unrest. Pelosi's power-play may buy her political status, but the entire world will pay the price.
Schiff - February 11, 2009
Our Investing Plan Is Right, if Slightly Ahead of the Times: Peter Schiff's Editorial in The Wall Street Journal
The year 2008 produced horrific investment returns for nearly every investor. Although I have never made any assertions that Euro Pacific Capital clients avoided the pain, the Journal took it as newsworthy that some who had adopted my more aggressive strategies early last year had losses that outpaced the drop in the Dow ("Right Forecast by Schiff, Wrong Plan?," Money & Investing, Jan. 30).
My central investing premise, a weakening dollar and safety in gold, commodities and foreign stocks, didn't materialize in 2008. But all the ingredients were (and remain) present for those movements to occur. Over the past year, market reactions that I didn't foresee -- massive global deleveraging, a knee-jerk "flight to quality" into U.S. Treasurys and a sharp countertrend rally in the U.S. dollar -- have kept the scenario from playing out.
Throughout my career, I have never claimed great ability to time markets. I was against tech stocks in 1998, and homebuilders and financials in 2004. These stands cost me (and my clients) short-term profits. In contrast, my record of long-term forecasts is well above par and has produced solid long-term results. My clients understand this and, backing their belief with their dollars, have largely remained invested.
It isn't insignificant that while U.S. markets are testing new lows, the dollar is no longer rallying, gold and other commodities are rising, and many foreign exchanges are well off their 2008 lows
Faber on the Stimulus Package-Feb 11, 2009
The U.S. stimulus package under consideration in the US will backfire because the government will grow.
"With the stimulus package the government is proposing, I think the depression will last longer, and the unproductive government will continue to grow at the expense of the private sector" MARC FABER in MoneyNews
Marc Faber also said that "If you never have a recession, it's like someone who never sleeps" and that "If you have a stimulus package, fiscal deficits go up, and eventually you end up with higher interest rates and inflation. There is no free lunch. Someone has to pay"
Marc Faber is quite pessimistic on the government actions to sort this crisis. Follow Marc Faber latest interviews, stock pickings and market opinions on Marc Faber`s Blog.
just spill the beans and share...
the jist of what they said - lol.
Own of enough of this to maybe make that call myself.
SST (a.k.a., SVRCF) is the silver stock...
I chose after looking at more than 30 silver stocks a few months ago - it's silver with some gold. Also bought some SLV and has order in for SLW at 2.50 that never filled.
Own the most of SVRCF by along shot.
thanks - added it to the ibox...
and to my list of potential funds. Have been accumulating RJI and a little IEA - if dollar crashes MEAFX should pay off quite well.
Dr. Doom - Marc Faber...
from Feb. 6th - http://www.cnbc.com/id/29045187
Schiff continues to respond...
February 6, 2009
Just the Beginning
The intense scrutiny recently paid to my investment strategy in the immediate wake of the financial crisis of the last six months has unfortunately obscured the central element of my larger economic forecast. The standard line has been that although I was able to predict the crash, in the form of the housing collapse and the credit crunch, my expected fallout of a weaker dollar and global decoupling has been proven false. However, this assumes that the crash has fully played out. In reality, all we have heard thus far is the overture.
In 2008, the bubble economy that I had meticulously described years ago finally hit the pin that I knew was out there. The corporate losses, frozen credit markets and plunging home prices were the opening salvo in the unfolding economic crisis. However, the vast majority of air has yet to leak out of the bubble. As it does, the U.S. economic crisis will kick into a much higher gear. I have positioned my clients to withstand the full fury of the gale, and when it finally comes, the question "was Peter Schiff right?" will finally be answered.
Thus far, our economy has actually been spared the worst due to the temporary strength in the dollar and the recent desirability of our Government's debt. These movements derailed the short-term performance of many of my investment recommendations (though clearly not to the extent alleged by my critics) and threw a life-line to the downing U.S. economy. The demand for U.S. Treasuries has led to one of the sharpest dollar rallies on record, which has helped bring about just as pronounced a decline in commodity prices. As a result, although consumer income has fallen, so too have prices and interest rates.
The stronger dollar gives the Federal Government plenty of cover to a pursue a policy of rampant monetary inflation in order to re-inflate the collapsing bubble. Even though the Federal Reserve has thrown trillions of new dollars into circulation, those dollars have actually gained purchasing power - contrary to economic law. This, along with inventory liquidations and going-out-of-business sales, has kept a lid on consumer prices. The continued, although misguided, appeal of U.S. debt has also made it possible for the government to garner cheap financing for its equally misguided and massive bails-outs and stimulus packages.
In addition to cushioning the blow for us, the dollar rally has exacerbated the pain abroad. As money has rushed to our aid it has created a global credit crunch. The rest of the world is not only dealing with losses on toxic U.S. credit instruments but is also shouldering the burden of financing our new borrowing as well. As foreign currencies have fallen, foreign consumers have not received as large a windfall as Americans have from falling commodity prices.
In effect, Americans have been using these life-lines to pull the rest of the world into the stormy seas. However, there are signs that those holding the lines are about to cast them adrift. The dollar rally has run out of steam, gold has clearly broken out, and commodity prices are moving back up. 2009 is already the worst year ever for US. Treasury bonds and foreign stock markets are once again outperforming ours.
This week President Obama claimed that failure to pass his economic stimulus bill will have catastrophic consequences for the U.S economy. The reality is the catastrophe will be far greater with his plan then without it. If the trends of January and early February of 2009 continue, the rug will be completely pulled out from beneath the U.S. economy, and the full cost of the President's "economic depressant package" will be apparent to all.
If foreign capital does not continue to pour into Treasuries, interest rates and consumer prices in the U.S. will soar. At that point, we will finally be confronted with the real crises that I have long predicted. When the day of reckoning arrives our policy response will be critical. If we continue on the course our new President has mapped out, the catastrophe will far exceed the scope of any he hoped to avoid.
Why Juniors, Why Now...
http://news.goldseek.com/CliveMaund/1233845570.php
NXG getting back near...
where I bought a ton in the $1.40 range - of course also picked up quite a bit in $.70 so overall am up - it's been an emotional ride with NXG and I plan to hold.
KGC and DROOY making me money. SMC, TRGD, DGP and few other gold buys also in green for me now. Gold and Silver are leading my portfolio back from depressing levels and into recovery levels. I have no sell orders in on anything related to gold and silver and no plans to sell.
Gold breakout confirmed...
http://www.europac.net/voicesframeset.asp?id=23
added list of foreign stocks with...
high dividens to ibox:
Foreign Stocks with High Dividends: HIMX, SIN: A17U, ASX:DUE, SIN: S99, HKG: 0751[SWDHF], HKG:0345 [VTSYF
Schiff responds - January 30, 2009
http://www.europac.net/#
A Response to My Critics
My popularity on television and the internet has led a very small money manager to use his popular financial blog to promote his fledgling business by attacking the recent poor performance of my long-term investment strategy. The post is causing quite a stir and compels me to provide some badly needed context.
To achieve his ends, this individual has distorted much of what I have been saying and writing, and has twisted the facts to support his own preconceived conclusion. In essence, his piece is nothing more than an overt advertisement (and a highly deceptive one at that) to use my popularity to advance his career. In so doing he has given my critics, particularly some who have been embarrassed by their roles in the "Peter Schiff was Right" video, their moments of retribution. In addition, some members of the press who have never been among my greatest fans are seizing the opportunity to discredit me as well.
The crux of the blogger's arguments are that my beliefs in "decoupling, hyperinflation, and that the dollar is going to zero" have been completely discredited by the events of 2008, and that the resulting investment losses suffered by my clients last year confirms the fatal flaws in my approach.
In addition to mischaracterizing many of my beliefs, he also is confusing short-term market fluctuations with long-term economic trends.
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.
Second, I never said that the dollar would go to zero, either in 2008 or any year thereafter. I have said that in the event of hyper inflation the dollar's value would approach zero. 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.
Chapter Ten of "Crash Proof" is specifically focused on the need to keep funds liquid to take advantage of the buying opportunity that would initially develop once our stock market began its collapse. I specifically mentioned that when U.S. stocks began to fall, we could expect sympathetic declines overseas. While I did not know the precise timing of those events, I advised readers to prepare.
I did not expect the huge dollar rally of 2008. But to discredit my long-term view of the dollar based on an eight month move is absurd. So while I believed that a weak dollar would cushion the temporary decline I expected in foreign stocks, a strong dollar ended up exacerbating it. In the meantime, I believed that the high dividends these stocks were paying would make it easier to ride out any correction. The problem was that the dollar fell so far leading up to the crisis (in 2005-2007) that by the time the crisis finally erupted the dollar was poised for a bounce.
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. Once the speculators have been flushed from the markets, the underlying long-term trends I have been following should return in earnest.
To illustrate the flaws in my investment strategy the blogger has posted a client's statement that shows a loss in excess of 60%. In addition, he claims to know of other Euro Pacific clients who have experienced similar losses. The inference of course is that most, or all, of my clients must have suffered similar losses, and the existence of such losses proves that I am wrong. In fact, some have gone a step further, claiming that such losses prove that I am a fraud.
First let's deal with the one client's account. I have been following several key investment themes for the past ten years. The basis for my strategy is that recent U.S. prosperity has been false, and that the consequences of the bursting of our bubble economy would ultimately play out in a substantial decline in the value of the U.S. dollar, higher commodity prices, the re-monetization of gold, and foreign equities substantially outperforming U.S. markets. From an investment perspective, those themes played out extremely well in the eight years from 2000-2007. Recently we have seen a sharp, and I believe temporary, reversal of these trends. Those that came late to the party (at least based on where we are today) now have to ride out a particularly difficult correction.
For example, the account in question belongs to the son of a long-standing Euro Pacific client, who is still adding funds to his accounts. Without specially commenting on the performance of the father's account, it must have been compelling enough to finally persuade the son to come on board himself in early 2008. However, as is often the case, by the time he came on board, foreign stocks and commodities were about to sell off, and the dollar was about to begin its unexpected rally. Following such a sharp correction, the son now regrets his decision and must blame me for my part in helping him make it.
Perhaps as a stockbroker I should have persuaded the son to wait for a correction. However, while this clearly would have been the right call with the full benefit of hind-sight, it was certainly not as clear given the information I had at the time. However, I never held myself out to be a market timer. My advice was always geared to long-term investors. Given the thousands of clients that I have, and the large number who joined near the recent dollar peak and market tops, it's no wonder that a few have contacted this blogger to complain; especially since he has actively sought them out. Of course, the fact that the overwhelming majority of my clients are not complaining, to him or anyone else for that matter, says a lot more about what is really going on.
To the extent that the long-term trends I have been following continue, I am confident that even those whose short-term timing was bad will still do well in time. This is especially true if they take advantage of this pull back by adding to their accounts, either with new funds or by re-investing their dividends. However, to examine the effectiveness of my investment strategy immediately following a major correction by looking only at those accounts who adopted the strategy at the previous peak is unfair and distortive.
Since I have been advising investors to follow these trends for ten years, I will leave it to the public to draw their own conclusions as to how long-term followers of my strategy have fared. However, for those who only recently adopted my approach in 2007 or 2008, the road has been a lot bumpier than they or I thought it would be when they climbed on board. Yet if these long-term trends re-emerge, though the journey may be different than planned, the ultimate destination will remain the same.
The blogger in question implies that all of my clients are down by levels similar to the account he cites. He has asked me to refute his allegations by providing broader performance figures for more clients. But, since Euro Pacific Capital is a brokerage firm and not a Registered Investment Advisor, I am prohibited by regulators from providing any details on the investment performance achieved by my clients. The blogger in question makes his challenge knowing full well that I am legally prevented from accepting it. He then uses my failure to refute his false claim as validating its accuracy.
In addition, consider that 70% of the account in question happens to be invested in mining and energy stocks. These were the two sectors that got hit the hardest in the recent downturn. This is a very aggressive exposure to those sectors and not typical of Euro Pacific clients. While it is true that many of my clients are interested in these two sectors and specifically seek portfolios heavily weighted in these areas, most take a more balanced approach, with mining and energy typically representing 20% to 30% of their portfolios. I also have clients with minimal or no exposure to these sectors.
All Euro Pacific client accounts are different reflecting the individual objectives of each client. In general the goals of my clients are to get out of the dollar and hedge against inflation. However the way each client chooses to pursue these goals varies. Some choose a relatively conservative approach, consisting mainly of utilities, property trusts and bonds, others choice a more balanced approach, adding exposure to infrastructure, agriculture, energy trusts, and transportation, while some are more aggressive with heavy exposure to resources, junior mining companies, and oil and gas exploration companies. Some clients specifically seek to gain or avoid exposure to certain regions, sectors or currencies. Some are focused more on long-term preservation of purchasing power, while others look to maximize long-term appreciation. Most of our accounts are yield oriented, but many of our clients specially request more aggressive growth oriented portfolios. In a down market to evaluate my investment strategy based solely on the performance of the most aggressive accounts is completely unfair. Doing so ignores the better performance of less aggressive accounts that were not hit nearly as hard.
In addition, 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.
My critics have often referred to me as a stopped clock. I believe that the accusation is best leveled at the accusers. Having been wrong for so long, they are now enjoying their brief moment in the sun. They should enjoy it while it lasts. For now, they are creating fodder for some future "Peter Schiff was Right" piece where those who now criticize my investment performance will look just as foolish as those who once criticized my economic forecasts.
Gold at $921 - Silver $12.5...
this is getting interesting. Heavy into both gold and silver miners - and making a comeback with overall portfolio because of it - still a ways to go though.
Schiff Still Has One Thing Right
By: Rick Ackerman, Rick's Picks
http://news.goldseek.com/RickAckerman/1233212460.php
Thursday, January 29, 2009
“Phenomenally accurate forecasts”
Our colleague Mish Shedlock did quite a hatchet job on hyperinflationist Peter Schiff the other day – much of it deserved, if the evidence that Mish presented is to be believed. The two have never seen eye to eye, since Mish, like us, is an unreconstructed deflationist. But his indictments against Schiff have less to do with the Inflation vs. Hyperinflation argument than with allegations that Schiff’s actual performance as an investment advisor has not been so stellar as one might have inferred from his high-profile exposure as a doomsdayer. Mish says that while Schiff has been essentially correct about doomsday, his actual investment portfolio got the details completely wrong, especially in its short-dollar orientation. (The same could probably be said of another world-class self-promoter, Jimmy Rogers.)
We won’t go into Mish’s case against Schiff, since it is quite detailed and can speak for itself. (You can access it at your leisure by clicking on the link at the bottom of this commentary.) However, we would like to say a few things about hyperinflation, since, on this score, we think Schiff got it right. He believes that the Fed, having explicitly committed itself to holding interest rates down by purchasing unlimited quantities of Treasury debt, has put the U.S. on a hyperinflationary course. We agree. In fact, and as we noted in an earlier commentary here, Schiff has laid out such a strong case that it is hard to see how he could be wrong. That said, however, we stand solidly with Mish, who notes: “I called for deflation and it is here right now. I do not have to wait for it. The only debate is how long it lasts.”
Hey, Bozo!
We have been calling for deflation ourselves since the early 1990s – in fact had the topic entirely to ourselves for many years in writing about it for Barron’s, The San Francisco Examiner and other mainstream publications. During that time, we had just one question for inflationists: “What the heck are you smoking, bozo?” We even stopped responding to one well-known inflationist’s calls for debate, since we believed that anyone who took that side of the argument did not know his ass from his elbow. But there came a time when we had to acknowledge that any issue that could fool the World’s Smartest Economist, Gary North, was trickier than it seemed on the surface.
As indeed it was. For here were the world’s central banks, pumping like crazy; and yet, none of the asset inflation they had hoped to catalyze occurred. In fact, the opposite obtains: real estate values continue to sink, and financial assets remain on life support. We believe, as Mish evidently does, that this will continue for at least a few more years. One reason we see deflation dragging on for so long is that Obama, in his approach to “saving” the economy, is using fiscal, rather than monetary, stimulus. That is like using gunpowder instead of fissionable uranium. Not that uranium would have worked anyway, since money velocity is too, too dead – and will remain so for at least another 30 years -- to bring banking reserves to an inflationary boil. In the end, we have no serious disagreements with Mish, although we do think that Schiff’s hyperinflationary scenario absolutely must play out at some point.
Obama’s Non-Choice
Meanwhile, for reasons that we have spelled out here before, Obama’s nostrums do not have even the remotest chance of success. Perhaps in a decade, when they are seen to have failed conclusively, Keynes will finally be buried forever, a stake through his heart. We would have thought the experience of the 1930s was clear enough to refute Keynesian quackery forever. In any case, urgency and expediency have impelled Obama’s WPA plan forward, and it is politically understandable why neither he nor his advisors has taken the only possible route that would guarantee success – i.e., letting the banks fail (and doing away with the Federal Reserve while this golden opportunity presents itself).
With the economy certain to keep sinking, those who have been hoarding gold have less to fear than investors who have diversified, since clarity has finally come to the Inflation/Deflation question. Whichever side of the debate one took, there was broad agreement about the end result: a Second Great Depression. We are very nearly there now, and nothing can stop it. But there is no longer uncertainty about how well gold might perform, since, as anyone can see, gold has done brilliantly in the midst of a global asset collapse. If the tide should turn, and hyperinflation plays out, it seems highly unlikely that gold would fare any worse, relatively speaking, than it has in these deflationary times. And here’s the link to Mish’s exposé.
Schiff firm: Shedlock exaggerates our clients' losses
http://weblogs.baltimoresun.com/business/hancock/blog/2009/01/schiff_firm_shedlock_exaggerat.html
Andrew Schiff, Peter Schiff's brother, responds to the Shedlock piece. He notes Shedlock is trying to attract clients. He says Shedlock exaggerates the losses of clients of Euro Pacific Capital, Schiff's broker-dealer firm. (Not a hedge fund.) But he doesn't refute anything Shedlock said. The Schiffs say the dollar is overvalued, just as the housing market was three years ago, and will fall. Bottom line: Even prescient people, such as Peter Schiff and Nouriel Roubini, who both called the housing bubble, are not omniscient. But you knew that. (Or should have.)
Jay,
It is disappointing that you would choose to raise the profile on Mr. Shedlock’s attack on our firm. In particular, his posting on Market Oracle is primarily an attempt to attract business to his own firm (Sitka Capital Management), by bashing a much larger and better known firm. However, the strategies employed by the two firms are completely different and make a direct comparison useless.
While it is true, that our accounts have suffered badly in 2008, a fact that we have never disputed or ran from, his estimates for the size our of typical client losses are exaggerated and unfair. We have thousands of clients, and since all of our accounts are run individually, holding up the performance of one client is not representative of our firm as a whole. In choosing to characterize our performance he considers only that time frame which he knows was the worst period for our clients. The biggest impediment to our performance in 2008 has been the rally in the dollar, which we did not predict. However, we believe that the rally is as illogical as it is transitory. We still believe that for many fundamental reasons the dollar will fall dramatically. Shedlocks’ criticism is similar to jabs peter got in 2005 when housing market experts were ridiculing him for making gloomy predictions about home prices which at that point were still strong. It didn’t mean that he was wrong then about a housing bubble.
Also, as a broker dealer (not a Registered Investment Advisor as Mr. Shedlock’s firm), it would be illegal for us to publish or to otherwise make claims as to past or expected investment performance. Mr. Shedlock knows this, but sees a chance to gain credibility as a result of our lack of response to his challenge.
I would ask that you mention that commercial interest rather than journalistic objectivity informs Mr. Shedlock’s posting. Please feel free to contact me with any questions.
In defense of Peter Schiff...
http://seekingalpha.com/article/116668-in-defense-of-peter-schiff-a-response-to-mish
Last night, one of the best and most well read investment bloggers, Mish of Mish’s Global Economic Trend Analysis, ripped into Peter Schiff in a lengthy tirade on his blog titled, “Peter Schiff Was Wrong.”
One thing that Mish gets right and many Schiff fans might not know is that Schiff’s portfolios did not perform well in 2008. EuroPacific doesn’t post performance data but the anecdotal evidence suggests that many of Schiff’s clients were down substantially last year. Fortune Magazine substantiated this in an article from Friday writing:
Ironically, though, the year that Schiff became a star prognosticator on TV was also one of the worst periods ever for his clients. In most cases the foreign markets he likes got hit even harder than the U.S. in 2008 (Australia’s ASX 200, for instance, fell 41.3%, vs. 38.5% for the S&P 500), and even more surprising to Schiff, the U.S. dollar rallied strongly as investors rushed to the perceived safety of Treasuries.
The reason is pretty obvious. Schiff subscribed to the decoupling theory, which is the idea that emerging markets like China and Latin America, would be somewhat immune to the problems in the U.S. As we all know now, this was dead wrong.
I said it was wrong in my “How to Invest in the Coming Bear Market” Report (Jan 9, 2008) post and noted the beginning of its unraveling back in January: “Recoupling: The Real Significance of This Week’s Action,” Top Gun FP, Jan 24, 2008. So did Mish in this post: “Global Decoupling Myth Shattered in Equity Selloff,” Global Economic Trend Analysis, Jan 22, 2008.
Schiff recommended large exposures to foreign equities, with a particular emphasis on commodity stocks linked to global economic growth, and these got crushed even worse than U.S. equities overall.
Mish also rips into Schiff for his hyperinflation call. Mish points out that the dollar has recently been one of the best performing currencies. Mish is also in the school calling for deflation rather than inflation, so he says Schiff was wrong, big-time on this score as well.
Here, I’m going to have to side with Schiff. The dollar is benefitting for now as a safe haven in a time of fear and crisis. (Even so, gold, which Schiff recommends, continues to perform well and this dissonance will likely be resolved at some point). But I do believe Schiff is right about the long-term trends. The Fed is printing so much money and the Federal government running such huge deficits that serious inflation is almost surely going to be the long-term result.
In the Fortune piece, Schiff himself makes this same argument, that he is early, not wrong:
None of this shocks me. Oftentimes in the short run, markets are irrational. And my problem has always been that I see things too clearly and too far in advance. Other people don’t understand what I do, so the markets might not validate what I’m saying right away. But they will eventually. In the end, the fundamentals are going to prevail, just as they did in the housing market.
I also believe that, longer term, the decoupling thesis is correct. The big trend is economic vibrancy and growth moving away from the U.S. and Western Europe and towards Asia, Latin America and other emerging markets. The timing is important for investment performance, but longer term, I do think Schiff has this one right as well. (On this see, for example, “American Power Is On The Wane” (subscription required), Paul Kennedy, The Wall Street Journal, January 14, 2009 - anyone who wants to read this e-mail me and I’ll send you a link).
That’s why I think that even though it’s useful to point out that Schiff’s clients have been hammered in 2008 and he has gotten some things wrong, for the most part, he’s been on the money and he deserves most of the praise and recognition he’s been receiving. He made his points loud and clear, and in a very public way when very few others shared his sentiments and some even went so far as to laugh and mock him on public television (see the YouTube Video “Peter Schiff Was Right”). Peter Schiff never backed down and the course of events has proven him right.
I believe that's likely how it goes....
and how I'm betting. Hope Schiff responds directly over next week or so - would rather see well thought out response than a quick reactionary one.
TARP 3 and 4 Are on the Way
January 26, 2008
By John Mauldin
http://www.europac.net/voicesframeset.asp?id=22
There are a lot of complaints about the use of the first $350 billion in TARP money. How could (now) former Merrill Lynch Chief John Thain have been so tone deaf as to spend $1.2 million on decorating his office with the company clearly in financial trouble? And some of it apparently after the government was kicking in money? Large bonuses for select managers at the last minute before the merger and subsequent major losses? The list could go on and on. The Obama administration has plans to keep such abuses from happening. I wish them l uck, because the next round of $350 billion is just a down payment.
(By the way, we should remember the TARP money is intended to be a loan and not a subsidy. Taxpayers should at least have the chance to come out whole. We will see.)
Professor Nouriel Roubini and his team at RGE Monitor (www.rgemonitor.com) have been noting in speeches in various venues around the world that they estimate that losses from the financial world could be as high as $3.6 trillion. That is composed of $1.6 trillion in loan losses and another $2 trillion in mark-to-market losses of securitized assets.
"U.S. banks and broker dealers are estimated to incur about half of these losses, or $1.8 trillion ($1-1.1 trillion loan losses and $600-700bn in securities writedowns) as 40% of securitizations are assumed to be held abroad. The $1.8 trillion figure compares to banks and broker dealers capital of $1.4 trillion as of Q3 of 2008, leaving the banking system borderline insolvent even if writedowns on securitizations are excluded."
Roubini argues that banks will need an additional $1-1.4 trillion dollars in private- and public-sector investments. Then he and colleague Elisa Parisi-Capone lay o ut in detail how they come up with their numbers. They argue:
"Thus, even the release of TARP 2 (another $350 billion) and its use to recapitalize banks only would not be sufficient to restore the capital of banks and broker dealers to internationally accepted capital ratios. A TARP 3 and 4 of up to $1.05 trillion (assuming generously that all of TARP 2 goes to banks and broker dealers) may be needed to restore capital ratios to adequate levels."
Even with all the government money added to the banking system, net capitalization of US financial institutions may fall to as low as $30 billion, from around $1.4 trillion before the credit crisis. Let's think about what that means. This same exercise in principal works for England and other European countries. England may be down $2 trillion pounds, which is relatively much larger than the US losses.
Senators at the Banking Committee hearings which looked into the appointment of Tim Geithner as Treasury Secretary (and kudos to the five who voted against approving him) were outraged at the problem of giving banks all that TARP money and other Fed commitments, and now they were not lending that money and indeed it looks like they want more! I know this will shock some of my foreign readers, but most of the Senators on the banking committee don't really understand the banking system.
Here's the problem. The banks are lending. If you look at bank lending numbers, there is growth. The banks, per se, are not the real problem with the lack of lending. The real problem is that we vaporized an entire Shadow Banking System that bought securitized debt in a wide variety of forms: autos, homes, student loans, credit cards, etc. That industry exists no more.
Banks over the last ten years became originators of loans, and not actual lenders. They would make the loans and then package them up for other institutions to buy. A pension fund in Norway (or wherever) would look at the rating from Moody's, see AAA, and buy it. Or banks would create off-balance-sheet vehicles (SIVs) to buy their debt and leverage it up, and book some nice profits. In any event, the debt did not end up on the banks' balance sheets for very long.
That process was responsible for the majority of debt that was extended over the last decade. Now that process is broken, and it will not be fixed this year or next year or the year after that. We are going to have to come up with new ways of credit creation and debt processing. You can't go to Goldman and tell them to start making auto loans. They simply don't have the people20to do that. Now, they used to be able to take auto loans from other actual originators and package them and sell them, but they did not make the loans. And the buyers for much of that securitized auto loan paper are gone. And they are not coming back any time soon without greater transparency and real capital guarantees and higher returns. A Moody's (or any rating agency) rating is not worth the paper, as far as the markets are concerned.
In essence, we are asking the banking system, with greatly reduced capital, to do the heavy lifting that all the buyers of securitized debt did a few years ago. And if Roubini is remotely right, they simply do not have the capital to do it. Further, the banks are in a bind. The regulators, properly so, are making sure that banks have adequate capitalization and are marking assets to real market prices. But they simply have less capital to make loans, even with TARP.
And the loans that many banks have made are showing higher losses than normal. Maine fishing buddy and bank maven Chris Whalen of Institutional Risk Analytics thinks that loan charge-offs will be twice the 1990 level, or around $800 billion, not far off from Roubini's number. That will force banks to loan less money and raise capital. Not exactly what the Senators want.
And it will force banks to tighten lending standards. Look at this chart from Binit Patel, Senior Global Economist for Goldman Sachs. It tells the story of a banking industry in crisis:
Notice that the standards for commercial real estate are the highest of all lending standards? And why wouldn't they be, as the banks watch the deals they have done lose value?
Think what a Senate hearing in 2010 would be like if they lowered lending standards and their balance sheets got worse. Senators would be asking how they could put taxpayer money (FDIC) at risk by making risky loans that had now gone bad. And where were the regulators?
(It would be helpful if Senator Schumer in particular stopped grandstanding and actually thought before he made some of the statements he does. People assume he knows something because he represents New York and the large money center banks, and accept his pronouncements at face value.)
Bottom line? It is going to take a lot more TARP and private money to capitalize the banks. A whole lot more. And that is before any of the other stimulus. And all that next $1 trillion does is get the banks back to where they were two years ago. Further, it does not give them the capital they need to make up for the loss of the Shadow Banking System. It is going to take some time to build what I call the new private credit system. (See my e-letters of August 1 and 8, 2008 in the archives at www.frontlinethoughts.com for an explanation of private credit and how it will be the next big thing in finance.)
We are going to get what Federal Deposit Insurance Corp. chairman Sheila Bair calls an "aggregator bank," which will buy bad loans from banks. In an interview with the Wall Street Journal, she commented:
"The idea here is that the aggregator bank would buy the assets at fair value. Some are concerned that you'd have to mark the assets down to purchase them, but I think it could help provide some rational pricing, actually, for the market in some of these assets, because we don't have really any rational pricing ri ght now for some of these asset categories.
"The idea would be to set up a facility, it could be structured as a bank, to capitalize it with some portion of the TARP funds. Financial institutions that wanted to sell assets into the bank could also perhaps take part of their payment as an equity interest in the aggregator bank to provide an additional cushion. If you sold $1 of assets into the bank, you would get 80 cents in cash and you would get 20 cents in an equity interest in the bank. So that would be an additional cushion against loss.
"With a combination of private equity contributions plus TARP capital, I think you could leverage that into some fairly significant volume to purchase assets."
This is an idea that she calls "... beyond hypothetical. I think all of the agencies are committed to coming up with a program for troubled asset relief. We're vetting the various different structures, the pros and cons of those. I think we would all like to have something in place in the not too distant future. I'm hoping the decision making on it would be fairly quick. It has been discussed for some time. So I think we are nearing the point to make a decision. But it's complicated. We want to make sure we get it right."
(Interestingly, Prieur du Plessis, my South African partner, writes me at midnight tonite as I am writing this letter: "... have tried registering the domain www.aggregatorbank.com last night, but no luck as somebody has already done this. The price? $100,000.")
An aggregator bank (the so-called "bad bank") is going to happen. So, for what it's worth, let me make a few suggestions. Banks that are technically insolvent and which will need to put taxpayer money at risk should just be "put down." The shareholders and bond holders need to be wiped out before taxpayer money is spent. And the banks should be put back in strong private hands as soon as feasibly possible. We do NOT want government agencies subject to political manipulation making decisions about lending. But deals should be structured which give taxpayers a real chance to get their investments back.
And please, no more deals that are not on the same terms that Warren Buffett or other private investors get. That was simply embarrassing for Paulson and team, or should have been.
In closing, let me quote two paragraphs from Bridgewater Associates that I think sum up the problem in a rather brilliant and clear way, and which I wholeheartedly agree with :
"The root problem is that debts that were incurred to finance assets at high price levels remain in place at their original amounts even though the assets that they financed are now worth far less. Debt that was incurred to finance extrapolated high incomes remains in place at its original amount even though incomes are now much lower. And, debts that were incurred to finance loans remain in place at their original values even though the loans that were made cannot be repaid. Until the debts are brought in line with the assets and the income, there is no moving forward no matter how much liquidity is provided or how eloquent the speech. And, until this happens, the self-reinforcing nature of the debt squeeze will only reduce incomes and asset values further.
"There is no easy way out of a debt restructuring. Someone will have to bear the cost of prior bad decisions. The people who should bear the cost are those who made the bad decisions to make the loans or those who financed the people who made the loans. They intended to profit and would have profited if they were right. But they were wrong, so they should lose. The government needs to allow the losers to lose and focus their actions on minimizing the knock-on effects of their failure on people who didn't do anything wrong (to minimize systemic risk). They should then take action to20minimize the future exposure of the innocent to the future dumb decisions of the small minority, because no amount of regulation will ever eliminate dumb decisions, so you have to plan for them (through much lower bank leverage limits to cushion losses, bank size limits and non-bank entities playing bank-like roles to improve diversification, safety nets to prevent losers from poisoning the whole system, etc.)."
Hear, hear!
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
Peter Schiff Was Wrong
http://globaleconomicanalysis.blogspot.com/2009/01/peter-schiff-was-wrong.html
[my take is that Mish has some good points and some bad - overall I believe he is more off base than on. For one, he seems to assume what Schiff's investment advice would be and simply does not portray it accurately.]
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.
Highlight in red is mine.
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.
Schiff's Overall 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.
Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. 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.
What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.
In other words, Schiff failed where it matters most: Peter Schiff did not protect his client's assets. Let's take a look how, and more importantly why, starting with charts of various foreign indices.
click on any chart in this post for a sharper image
$SSEC Shanghai Stock Exchange Weekly
$NIKK Tokyo Nikkei Weekly Chart
$TSX - Canada TSX Weekly Chart
$AORD Australia ASX Weekly Chart
$SPX S&P 500 Weekly
2008 Equities Bloodbath
2008 was a global equities bloodbath. Clearly there was no decoupling. The Shanghai index (China), Nikkei (Japan), TSX (Canada), AORD (Australia), and virtually every world equity index collapsed along with the S&P 500, the DOW, and Nasdaq in the US.
Many, if indeed not most, foreign equity markets did worse than the US indices. The Shanghai index fell from 6124 to 1665, a whopping 72.8% decline top to bottom.
Let's investigate why this happened, starting with the decoupling thesis itself.
Global Decoupling Thesis
Please consider this excerpt from the Little Book of Bull Moves in Bear Markets, page 41:
"I'm rather fond of the word decoupling, in fact, because it fits two of my favorite analogies. The first is that America is no longer the engine of economic growth but the caboose. [The second] When China divorces us, the Chinese will keep 100% of their property and their factories, use their products themselves, and enjoy a dramatically improved lifestyle."
I mentioned decoupling many times previously but declared it officially dead on January 22, 2008 in Global Decoupling Myth Shattered In Equity Selloff. There are some interesting charts on currencies in that post as well.
Here is a snip from Tail Wags Dog Theory Blows Up written November 1, 2008.
Tail Wags Dog Theory Blows Up
At every peak there are always ridiculous predictions. In the dotcom bust, it was all about the "gorilla game", the "new economy" and "click counts". When the Shanghai Stock Index rose from 998 to 6124 in about two years, we heard the same sort of thing about growth in China. Instead of click counts, the theory in vogue was called decoupling. China was supposed to be the 800 lb gorilla with insatiable demand for commodities and perpetual growth for the next decade.
That decoupling theory was based on the belief that the US no longer mattered, that China demand was self-sustaining, that China could grow forever with no problems, etc. Such beliefs eventually became a religion.
The tail does not wag the dog no matter how many people think otherwise.
Let's explore decoupling by looking at manufacturing, employment, and capital flows.
Global Manufacturing Contracts
Please consider US Manufacturing Orders at 60 Year Low, China Contracts 5th Straight Month.
China’s manufacturing contracted for a fifth month.
European Manufacturing Contracts At Fastest Pace On Record.
Russian Manufacturing PMI Shrank the Most on Record.
U.S. Manufacturing Shrinks as Orders Hit 60-Year Low.
That's not decoupling, that's a worldwide recession.
Millions of Chinese Struggle to Find Jobs
In the wake of a global slowdown, Chinese export shrink, civil unrest is a worry, and unemployment is rising as noted in Xinhua says there will be more unemployment and social revolts in 2009.
State council adviser Chen Quansheng, warns that unemployment is much more serious than portrayed by the official statistics. According to Chen, so far at least 670,000 small industries have been closed, leaving 6.7 million people unemployed, but this number refers only to registered workers. But there are millions of people working in the underground economy, coming from the countryside, who are being fired and are forced to return to their villages without any unemployment benefits.
The academy of social sciences is also warning about the worrisome number of firings. In 2009, the government will have to create work for at least 33 million people, including migrants, young people seeking their first jobs, and new graduates.
The odds of China finding work for 33 million workers without printing vast amounts of money are slim.
Hot Money Outflows Exacerbate Chinese Problems
Inquiring minds are reading Monetary conditions might exacerbate the Chinese adjustment by Prof. Michael Pettis.
Synopsis: Chinese monetary policy has locked the country into a dangerously pro-cyclical trap. Hot money flowed into China and pushed the economy into overheating. Those inflows have reversed sharply, perhaps by as much as $100bn last quarter, equivalent to around 8% of Q4 GDP. These outflows are causing a credit contraction and an even sharper economic slowdown at exactly the worst possible moment.
One Tail Cannot Wag Six Dogs
Those hot money inflows were all part of the global credit boom that is now unwinding. Much of China's boom centered on exports. Now that the US consumer has thrown in the towel, a key question arises:
Can China expand enough to make up for the contraction in US and European demand given that the two economies are more than six times the size of China?
The answer to that last question is an emphatic no. One tail cannot wag six dogs.
Here is another way to look at it. The US is the world's largest economy. Housing had already weakened but commercial real estate had not. US retail stores and malls were being built at an unsustainable blowoff pace and those stores were crammed with goods coming from China and Japan.
The decoupling theory was that loss of the US consumer would not matter to the commodity producers like Canada and Australia or the manufacturers like China and Japan. How could any economist have thought that? Many did. Schiff was one of them.
Peter Schiff on 2009-2010 USA Hyperinflation
Here is a partial transcript of a Schiff Audio On US Hyperinflation
The whole idea is to get out of the US Dollar. It is on the verge of collapse. The people who don't get out of the US dollar are going to be completely broke and that is obvious. Look at what Ben Bernanke did. Interest rates are zero. Money is free.
Bernanke is going to run up printing presses as fast as he can. This is pure inflation Latin American style. This is hyperinflation; this is Zimbabwe; this is the identical monetary policy of the Weimar Republic.
I am just as convinced that people who have their money in US dollars are going to be just as broke as people who have their money with Madoff.
I do not know how much time you have. With the dollar dropping 5% a week at this point, could it snap back? But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? and another 10%? At some point a year from now the dollar could be dropping 5% a day.
The inflation rate in Zimbabwe is over 100 million percent a year.
Hyperinflation or Hyperventilation?
Schiff asks "But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? ...."
That was quite some rant, enough to scare many who listened. Schiff is indeed very charismatic.
He never bothers to ask, "What if it doesn't?" The answer was not so pretty for his clients. The simple fact of the matter is Schiff was wrong where it mattered.
Schiff has been ranting about hyperinflation for years. The dollar is substantially higher now than it was at the start of 2005. His explanation for the recent rally is there is no "real demand" for dollars, it's just deleveraging.
I agree that deleveraging is indeed happening.
But why is deleveraging happening? The answer is everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out. Those trades are now being forcibly unwound. The bulk of the carnage is likely over but the losses have been immense.
Unlike Schiff, I called for this US dollar rally.
August 8 : Trichet Puts Spotlight on the Euro, Dollar
August 9 : Marc Faber - Bullish On The US$, Bearish On Commodities
August 11 : Currency Intervention And Other Conspiracies
August 18 : Steve Saville On The US Dollar And Gold
September 4 : Telling Action In Euro, Dollar As ECB Holds Rates
September 15 : US Dollar Rally Not Over Yet
October 2 : U.S. Dollar Bulls Still Right, Here's Why
On November 9th, I went neutral on the dollar as the US dollar index came close to hitting my target.
In 2001-2002 the US$ index peaked at 121. Since then there was a massive flight out of US dollars into anything else. That flight continued into 2008 even though the fundamentals were changing.
The fundamentals of China and the commodity producers were simply not very good once the US consumer threw in the towel.
Schiff simply did not see this coming.
US the Next Zimbabwe?
Schiff continually compares the US to Zimbabwe. Such comparisons are silly. Please consider Zimbabwe to launch 100 trillion dollar note.
Zimbabwe's central bank will issue a 100 trillion Zimbabwe dollar banknote, worth about $33 (22 pounds) on the black market, to try to ease desperate cash shortages, state-run media said Friday.
Prices are doubling every day and food and fuel are in short supply. A cholera epidemic has killed more than 2,000 people and a deadlock between President Robert Mugabe and the opposition over power sharing has dampened hopes of ending the crisis.
Hyperinflation has forced the central bank to keep issuing new banknotes which quickly become almost worthless. There is an official exchange rate, but most Zimbabweans resort to the informal market for currency transactions.
Does that sound like anything that is happening or is going to happen in the US? I think not.
However, let's assume for a moment that hyperinflation is going to happen. Where then could one get the most bangs for their buck to take advantage? The answer to that question is in real estate, where one can buy on 5% down. Nowhere else can one easily get such leverage.
Note that there has never been hyperinflation in history where real property declined in value. Therefore, if Schiff really believes in hyperinflation, he ought to be suggesting that his clients buy houses.
However, Schiff thinks housing prices will continue to crash. So do I. And if they do, you can kiss hyperinflation theories goodbye.
EuroPacific Thoughts on the Financial Crisis
I do not expect every advisor at every company to think alike, but I did find these Thoughts on the Financial Crisis by Andre Sharon, Consulting Research Analyst for Euro Pacific Capital rather interesting.
What Now?
Only three possible outcomes:
1. We inflate to the level of the debt, i.e. we "fulfill" debt obligations, but in mini-dollars
2. We take the hit, cleanse the system of excesses and move on. Result: deflation, bankruptcies, high unemployment, etc...
3. We disinflate veeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeery slowly, like Japan. Won't happen: the American psyche won't take 16-odd years of no growth. Different cultural mindset: you can't prick a balloon slowly here.
My guess: combination of 1 and 2. I would hope for a bias towards 2. Terrible for many, but healthier for the system long-term. Schumpeter's concept of creative destruction trumps Keynes, in my book. That's life, and progress, with all its faults and flaws.
My pick is a combination of 2 and 3 (2 is not by choice but rather by force) for reasons explained in Brink of Debt Disaster.
But what I find interesting is that a Europacific advisor believes that Keyensian economics can be trumped (I do as well, Japan proved it), but also that Andre Sharon at least in part is calling for "Result: deflation, bankruptcies, high unemployment, etc..."
I would advise Schiff to toss his hyperinflation theories out the window and listen more to his research analyst. However, Schiff cannot and will not change because he has two books calling for hyperinflation.
On the other hand, I can change. I called for deflation and it is here right now. I do not have to wait for it. The only debate is how long it lasts.
At the appropriate time, I expect to transition my stance towards a stagnant slow growth period in which there will be inflation but not by a lot. In such a scenario, the US would hop in and out of recessions for up to a decade, much like Japan.
Time will tell whose model is correct. I reserve the right to change my model. It's too late for Schiff to change his. The damage has already been done.
Closer Look At Currency Fundamentals
The US economy is clearly in shambles. However, when the US dollar index crashed to 70 the dollar was priced as if the US alone was in trouble. That was hardly the case. Europe, China, Australia, Canada, the UK, are in shambles as well.
On August 8 2008, Trichet Put the Spotlight on the Euro, Dollar by saying economic growth in Europe would be "particularly weak". That was a clear signal all was not well in the Eurozone. Most, including Schiff ignored the signal.
Although the US had a massive housing bubble, so did Spain, Ireland, and other parts of Europe. Also note that European banks invested in US mortgage debt.
Finally, European banks invested heavily in Latin America and the Baltic states. The US did not make those mistakes.
The credit crunch now threatens the sacrosanct
On January 19 2009, New Europe reported The credit crunch now threatens the sacrosanct.
Last October, the ECB signed a currency swap agreement with the Swiss National Bank. The obvious purpose was to support the solvency of the Swiss Franc. The reason why the franc needed support was that the country’s banks had undertaken huge obligations in foreign currencies, which exceed the Swiss national income, probably by many times. Who knows how many? Last week this agreement was renewed and extended in volume.
The case is similar with Iceland. That tiny country was one of the richest and most reliable in the world, a kind of small Switzerland. But Iceland’s banks were found at the beginning of credit crisis to have huge obligations in foreign currency. When the banks started to go insolvent the government of Iceland stepped in and nationalised them.
In the case of Switzerland - along with the ECB - came the American central bank, the Fed, to support the solvency of the franc with foreign swap agreements. Who on earth wants the Swiss banks to fail? In short, nothing has been settled in the credit crunch crisis and the entire world continues to support those who created the problems in the first place.
Think the Swiss Franc is a safe haven? I don't.
So what about the Euro? Here are a few headlines to ponder.
Germany Faces Worst Post-War Economic Decline
Synopsis:
Germany is facing its biggest economic downturn since the Second World War with Chancellor Angela Merkel's government saying Wednesday it expects Europe's largest economy to contract by 2.25 per cent this year.Germany's Economics Minister Michael Glos and Finance Minister Peer Steinbrueck released the latest data on Wednesday, revising their prior 2009 forecast down sharply from last October's prediction of 0.2 percent growth.Since then, German exports have declined precipitously and are expected to be down 8.9 percent for the year.
Berlin Sees No Limits to Economic Intervention
Synopsis:
As part of her efforts to combat the economic crisis, German Chancellor Angela Merkel is increasing the state's influence in the market, buying holdings in banks and bailing out individual industries and companies.Is Germany turning into a planned economy? Only a few weeks ago, Chancellor Angela Merkel spoke out against "arbitrary, unfocussed economic stimulus programs" and large-scale government intervention in the real economy.
Trichet Vision Unravels as Italy, Spain Debt Shunned
On January 16, 2009 Bloomberg reported Trichet Vision Unravels as Italy, Spain Debt Shunned
European Central Bank President Jean-Claude Trichet’s vision of economies converging behind the shield of a shared currency may be unraveling.
The gap between the interest rates Spain, Italy, Greece and Portugal must pay investors to borrow for 10 years and the rate charged to Germany has ballooned to the widest since before they joined the euro. The difference may grow further as Europe’s worst recession since World War II hurts budgets and credit ratings across the region.
Diverging bond yields hurt Trichet’s argument that the ECB’s inflation-fighting mandate ushered in an era of stability for nations that once suffered rampant price growth.
They also make it tougher for the ECB, which cut its key rate to a record yesterday, to set one benchmark for all 16 euro nations. That may delay recovery as governments try to fund stimulus plans.
Monetary union has left half of Europe trapped in depression
Ambrose Evans-Pritchard at The Telegraph is writing Monetary union has left half of Europe trapped in depression.
Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.
Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.
A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling before the pain begins, which bodes ill.
Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped.
In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday.
Latvia's property group Balsts says Riga flat prices have fallen 56pc since mid-2007. The economy contracted 18pc annualised over the last six months. Leaked documents reveal – despite a blizzard of lies by EU and Latvian officials – that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. This was blocked by Brussels – purportedly because mortgage debt in euros and Swiss francs precluded that option.
Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year's end.
Private economists fear 25pc before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible.
Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist.
On page 157 of Little Book of Bull Moves in Bear Markets, Peter Schiff writes "The Euro could possibly replace the United States dollar as the world's reserve currency."
I suggest a breakup of the Eurozone has a greater chance than that. While I agree that US dollar hegemony will end eventually, ideas that the Euro will replace the US dollar as the world's reserve currency are farfetched.
Looking far ahead, there may not be any one reserve currency per se. Ideally we will return to a gold standard but at the moment that does not seem particularly likely either.
So what about Australia? Can it decouple?
Australia is one of Peter Schiff's favorite countries for investing. Please consider Aussies hit by 50yr record wealth decline.
CommSec equities economist Savanth Sebastian says that is the worst fall in records dating back to 1960.
"It's no doubt that it will have a big impact on consumer spending going forward adding further downward pressure after we saw those job losses in terms of full-time employment," he said.
"So it suggests that for the Reserve Bank and for the government further stimulus will need to be on the agenda."
That additional "stimulus" is the same thing Schiff rails about in the US every time he speaks. The whole world is stimulating now.
Australia Won't Hesitate To Stimulate
Australia Treasurer Wayne Swan says Australia’s government won’t hesitate to stimulate the economy further should the need arise amid the global recession.
“We will not hesitate to take whatever further action is necessary to support growth and jobs,” Swan, 54, said in speech notes received via e-mail. “Major financial institutions, some of which have withstood world wars and the Great Depression, have either collapsed or been bailed out.”
Australian Dollar Monthly Chart
The Australian dollar is one of Schiff's favorites. "While other countries are creating inflation, Australia's central bank is raising interest rates to keep inflation in check." page 161
Australia May Cut Interest Rate Below 2%
Former Reserve Bank Governor Fraser suggests Australia May Cut Interest Rate Below 2%.
Fraser, Reserve Bank of Australia chief during the nation’s last recession in 1991, said policy makers may reduce the overnight cash rate target to less than 2 percent from 4.25 percent now. The bank’s board gathers for the first time this year on Feb. 3.
“This recession will be deeper and longer than the last recession in 1991,” Fraser said in a phone interview today from his home near Canberra. “The Reserve Bank could go below 2 percent; they will go as low as they need to and a further stimulus from the government will be required.”
Australia started reducing rates at the fastest rate ever in 2008, culminating with a surprise cut of 100 basis points in December. More rate cuts are coming.
One of the biggest drivers for currencies is relative differentials in interest rates, as well as expectations of future increases in interest rates differentials. The Fed is not cutting any more so future rates cuts in Australia may increase the unwinding of various carry trades (borrowing in dollars or Yen, and investing in Australian dollars or Euros).
Peter Schiff did not see or simply ignored the ramifications of the unwinding of various carry trades. All gains in the Australian dollar have been wiped out since 2003.
US$ Trading Range Theory
China, the UK, the Eurozone, Canada, Australia, and Japan are all slashing interest rates. And every country above is printing like mad. Finally, European banks are in dire straits because of bad loans to the Baltic states and Latin America on top of bad investments in US mortgage backed securities.
Schiff simply ignores those problems, or worse yet is not even aware of them.
Given the severe stress everywhere, and given the race to zero interest rates by all, the odds favor a wide trading range rather than a collapse of the dollar. Hyperinflation is simply not in the cards, at least for the US. Ironically, China or Russia is at far greater risk.
What About Commodities?
The following is from a chapter in his book called "Hot Stuff" on page 105.
Schiff writes: "What I want you to take away from this chapter is the knowledge that there is extraordinary excitement in commodities, which are in the early stages of a historic secular bull market." ...
$CRB Commodities Monthly Index
"There is extraordinary excitement in commodities."
Indeed there was. However, the time to invest in anything is not when there is extraordinary excitement but rather when there is no excitement at all.
When there is no excitement, the likelihood of investing safely for a long period increases. The above chart shows what happens when you invest for the long haul during periods of high excitement.
The Little Book of Bull Moves in Bear Markets nailed the exact cyclical peak in the commodities boom. Ironically, the subtitle to his book is "How to Keep Your Portfolio Up When the Market Is Down".
Peter Schiff was wrong about deflation.
There is no debate (at least there should not be a debate) that the US is in deflation. The conditions in the US are exactly what one would expect to see in deflation. The score is a perfect 15 out of 15. Please see Humpty Dumpty On Inflation for details.
I believe I know Schiff's rebuttal. He will talk about soaring money supply. Yes, money supply is indeed soaring, but destruction of bank balance sheets is happening faster. He will counter that it is money that matters, not credit.
History proves otherwise, but I willing to debate on the basis of money supply alone.
Base Money Percentage Change From A Year Ago
Using monetary expansion alone, one would conclude there was massive inflation during the great depression, starting in 1931!
Any definition that suggests that there was inflation in 1931 is silly. Some might counter, as one person recently did "It's not silly. When gold was confiscated by FDR and then revalued 70% higher in dollar terms, was this not inflation?"
My reply is "During the Great Depression, the purchasing power of the dollar went up vs. everything but gold. If the purchasing power of gold vs. the dollar is the sole judge of the inflation-deflation debate, then deflation ruled from 1980 to 2000, a ridiculous proposition."
It is important to pick definitions of inflation carefully. A definition based on money supply and credit successfully predicted interest rate trends, stock prices, the price of gold, housing, and numerous other things.
A definition of inflation based on the CPI failed miserably in predicting interest rates.
A definition based solely on an increase in money supply failed miserably in predicting interest rates, the recent strengthening of the US dollar, gold's decline from 850 to to 250 between 1980 and 2000, and numerous other things.
Soaring money supply simply is not proof "Big Inflation Is Coming" just as it was not proof that "Big Inflation" was coming in 1931. There cannot possibly be any other logical conclusion when confronted with the data.
Is Peter Schiff Early?
Some will claim that Schiff is simply "early". However, from the perspective of the Little Book of Bull Moves In Bear Markets, Schiff was 5 years too late.
To be fair, he was talking about commodities and foreign equities long before that, but as is often the case, such books come out at a time of "Peak Excitement". Schiff's book was the ultimate contrarian indicator.
Let's Return to Schiff's Investment Thesis.
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.
Peter Schiff concludes many of his articles, books, etc. with the claim he saw this coming and "positioned his clients accordingly".
Fortune Magazine Examined The Hype
Peter Schiff: Oh, he saw it coming
'Dr. Doom' became a star by predicting last year's market meltdown. And now his 2009 forecast is even scarier.
Schiff did not invest for doom; he invested for a bull market that did not exist. He was wrong where it mattered most, protecting client assets. For this amazing feat, people think of him as a star.
An Actual Schiff Portfolio
click on chart for sharper image
The above statement is from a person who claims to have additional portfolios invested with Schiff over the past 2 years. In total (not just this portfolio), my contact says he invested $70,000 and is now down to $27,000. That is a loss of 61%.
I have talked with another person who claims to be down 72%, and many others who claim 40% or more.
Schiff's entire invest thesis seems to boil down to "Buy and hold foreign stocks, foreign currencies, and commodities, come hell or high water, and hold on to them." Hell has arrived for those following Peter Schiff's philosophy.
Perhaps I have stumbled on the worst of Schiff's portfolios. There is one way to find out.
I challenge Schiff to post the average returns for his clients on a year-by-year basis, just as Sitka Pacific does. That is the only way to see just how right (or wrong) his investment thesis is.
Sitka Pacific vs. Europacific Philosophies
Rather than take a rigid position as to what the market "should do", Sitka Pacific Capital Management tries to position itself for what the market is doing. At times we may like a particular stock group, commodity, or currency, and at other times not.
We do not think this is a good time for buy and hold strategies for either foreign or domestic stocks or currencies. Moreover, we certainly do not think it was prudent to put 100% on foreign stocks and currencies, with virtually no exit strategy if wrong.
We do feel a long-term position in gold on a percentage of assets is a reasonable proposition.
Schiff's slogan is "Because There's A Bull Market Somewhere. TM" but for a year he failed to find one with the exception of physical gold. Ironically, one of his most hated asset classes (US treasuries), had one of their best years in history.
Sitka Pacific Strategies
The two key strategies at Sitka Pacific are called Hedged Growth (a long-short, primarily domestic strategy), and Absolute Return (a global strategy that can invest in domestic stocks, foreign stocks, gold, and currencies, hedged at times with inverse index ETFs).
Absolute Return may at times bear some resemble to Schiff's strategy but we are not dogmatic about it. If we do not like market action in stocks and commodities, we are on the sidelines and heavy in cash or treasuries.
Absolute Return had a 34% position in long dated treasury ETFs in 2008, now well less than half that after cashing out.
Chart of Hedged Growth Since Inception
click on chart for sharper image
Note the .17 correlation to the S&P 500 in Hedged Growth.
Correlations run from -1 (perfect inverse, think inverse ETF) to +1 (think buying every stock in the S&P). Zero is no correlation. A correlation of .17 is very low. What it means is the strategy is not dependent on market direction. Many hedge funds make that claim, but the average hedge fund got lost well over 20% in 2008.
Hedged Growth achieves its performance by picking a basket of stocks long and a basket of stocks short. Market direction, inflation-deflation debates, interest rates, etc., simply are not a concern for this strategy. The idea is to pick a winning basket of good stocks vs. poor stocks on a relative basis.
The most we ever put on a short position is 1.7%, and we only take a position in liquid issues. We never add to short positions. This is for risk management purposes.
Absolute Return Since Inception
click on chart for sharper image
The chart shows a monthly correlation to the S&P at .36. That is a low number, which is a good thing.
The chart also shows we had a significant drawdown between June and October. That drawdown was based primarily on an expectation that gold and gold miners would diverge from the market on a seasonal trend. That seasonal pattern did not happen. We are not going to get everything correct, but no one else will either. We made much of that drawdown back in late November and December while hedged growth was flat.
One additional thing I would like point out is that none of our strategies was net short in 2008. Our most cautious stance is market neutral. Thus, we were neutral to long the whole year, and our two key strategies finished solidly in the green even though the S&P finished down 38.5%.
90+% of Sitka Pacific accounts are either Hedged Growth or Absolute Return.
To lay everything out in the open, we also offer Commodities Focus (a portfolio of commodity related stocks and ETFs). Commodities Focus does not hedge and will tend to track a blend of energy stocks and mining stocks. It was down 34.5% on the year. Only 2% of our clients are in this strategy, approximately ½% by total asset value.
Commodities Focus is best suited for those who want anti-dollar plays for a hedge or for those with a very long time horizon as opposed to boomers headed into retirement with their nest egg.
We also offer Dividend Growth for IRA clients who cannot short. Dividend Growth is similar to Hedged Growth, except it may or may not hedge. When it does hedge, it uses inverse ETFs as opposed to shorts. Dividend Growth was down 4.6% for the year, a good achievement compared to the S&P 500 which was down 38.5%.
Gains Needed To Get Even
10% - 11%
50% - 100%
70% - 233%
If you are down 10% you need to gain 11% to get back to where you were, at 50% down you need a 100% gain to get back to even, and at 70% down you need a 233% gain to get even. This is why risk management and capital preservation is paramount.
Boomers significantly down hoping to get back to even may find it will take a decade or more. Those close to, or already in retirement, simply do not have a decade to make up for losses. That is the problem with buy and hold strategies.
Buy and hold was wrong nearly everywhere, but especially for those in or approaching retirement.
Client Letters
We post our client letters online, on a 2 month delayed basis. The letters come out sooner if you subscribe. Subscription is free. Interested parties may Register For Sitka Pacific Monthly Newsletters. Subscribe at the bottom of the linked-to page.
In the wake of various scandals, a certain question invariably comes up.
How Sitka Pacific differs from Madoff, hedge funds, and mutual funds.
We are not a hedge fund.
We offer managed accounts.
The accounts are in investors names.
Statements are from a brokerage house not us.
We cannot manipulate earnings because we do not produce the statements.
We have no access to investor funds.
If someone sends us a check made out to us, we send it back. As a strict rule, we never handle client money.
We have no exit penalties and no exit restrictions.
Someone can close their account for any reason at any time and can even do it without telling us. If you do not like how we are trading your account, you can close it.
We do not use leverage.
We often have high cash positions.
Clients can see every trade we make. This is unlike hedge funds where you typically cannot see anything, or mutual funds where all you see is a snapshot at the end of the month.
We have trading rights to accounts; all other aspects of the account belong to the client.
Your account is not commingled with any other account.
We are the very opposite of hedge funds or mutual funds.
High Risk, High Reward Strategies
Placing everything one has on anti-dollar bets is a type of high risk, high reward strategy. There is little room for error, especially if there are no risk management controls, which Schiff does not seem to have. "The whole idea is to get out of the US Dollar. It is on the verge of collapse. The people who don't get out of the US dollar are going to be completely broke and that is obvious. ...people who have their money in US dollars are going to be just as broke as people who have their money with Madoff."
Such arguments can easily be construed as "fear tactics". Listen to the previously mentioned Schiff Audio On US Hyperinflation and make your own determination. While it is certainly prudent to have some diversification, it is not prudent, in my opinion, to bet the farm on a complete hyperinflationary collapse of the US dollar that did not occur and in my estimation won't, at least for a long time.
Undiversified, unhedged portfolios may succeed spectacularly. They also risk catastrophic loss. Many who rolled the dice on Schiff's philosophy came up snake eyes: a catastrophic loss that depending on the exact portfolio, may take a decade or longer to recover.
Where To In 2009?
The question as to where the market is headed comes up all the time. The truth is, no one really knows. However, we see no real value here. Fundamentally stocks are not cheap. Earnings are sinking, unemployment is rising, and this was the biggest debt bubble in history. Logic dictates the biggest bubble should be followed by the biggest crash.
To pick a range for a bottom something like 450-600 on the S&P 500 would seem about right. If so, that is quite a drop from here, and one would certainly want to be hedged if that happens.
However, if the market starts to behave like there is some value now, we will change our tune.
We strongly doubt the dollar will crash, but we will take notice if it breaks out of its trading range. We do like gold here but that can change. Commodities may have bottomed. We doubt stocks have. Foreign stocks may outperform but remember they were clobbered more in 2008.
We are not permabears or permabulls, nor do we daytrade. We review and reposition our strategies monthly, but if something noticeable happens mid-month, we try to react to it.
Unlike Schiff, we attempt to position our clients for what the market is actually doing, not what we think it ought to be doing. The distinction is paramount, especially when such thinking just might be wrong.
I would say Schiff recommends gold...
and silver above all - that's what I walked away from his books with - so can't ignore gold and silver when speaking of Schiff.
Gold around $905 this AM - nearing all time highs and was up for 2008.
also, Schiff said keep...
some money dry for future buys and strongly recommended buying gold bullion and silver coins. Diversification was/is pretty big with him.
Bit of a Schiff, defense having followed him closely and even more closely examined and followed his investment advice. I am up since following his advice beginning around mid 2008.
on Schiff - just started reading...
and found key error from Mish - Schiff did not recommend shorting the dollar as Mish starts out with (have read both his books and know he says it's very dangerous to short and does not recommend it). And he mostly recommends only foreign high dividend stocks - and Schiff has argued that those dividends are still coming in and most have not been reduced - Mish seems to overlook this. So Mish off to a bad start.
Schiff also contends that we are early in the "story" and that he is on the verge of being very right - I tend to agree with this.
Lower Energy Prices Will Fuel Gold Miner Profits
By: Peter Cooper, Arabian Money
http://news.goldseek.com/PeterCooper/1232940608.php
-- Posted Sunday, 25 January 2009
With gold prices back above $900 and silver at $12 an ounce, gold producers have reason to be cheerful about the outlook as a flight from all paper currencies to one of fixed supply gathers pace.
However, gold and silver mining is an energy intensive business, with up to 25 per cent of costs going on fuel. Thus falling energy costs will feed straight through to the bottom line for gold and silver producers this year.
Dollar bonus
It gets better. Gold and silver are priced in dollars but most mining companies have operations in non-dollar countries. Therefore, local costs are falling at a time when precious metal prices are rising.
Could precious metal stocks be one of the few to rise this year? Certainly when you have consumer manufacturers like Samsung or Toyota producing losses, it is notable that precious metal producers are among the only industries to be guaranteed rising profits this year.
This is a win-win environment for gold and silver stocks with falling production costs and rising precious metal prices. Needless to say the latter increases the leverage of owning stocks relative to the precious metals.
Now buyers can point to last year’s huge underperformance by precious metal stocks as a reason for caution. But surely this just makes the upside greater in what looks like a no-lose investment opportunity.
Of course, you should spread your risk and do your due diligence before buying any stock. And yet, again, in a rising market all ships tend to rise and those now perceived as most risky may do best.
Which explorers?
That might mean a second coming for the explorer stocks which have been savagely beaten down, and surely the trick here is to buy those which have achieved some degree of public notoriety as investors are more likely to buy something of which they have already heard.
This is perhaps a bit late for those who staked their last cent on exploration stocks two years ago. But precious metal claims are sure to soar in value as gold and silver prices head upwards, and lest we forget the explorers hold those claims and that is the real value of these stocks.
Bonds, Stocks, Real Estate Down, Gold Up!
Since the start of the year 30-year US Treasury bonds have fallen by 10 per cent, the Dow Jones Index 7.5 per cent and real estate continues on its downward track. Gold is up by almost seven per cent.
Is 2009 the year gold finally come into its own as a safe haven asset? Certainly everything is pointing the way of precious metals, and now it looks as if the bond market is failing as a competitor as a safe haven.
Falling bond prices
The last shoe to drop in financial markets is the biggest of the lot. Bond markets are huge and critically impact on currencies, government borrowing and by implication precious metal prices.
At the fundamental level it is very easy to see why a Saudi investor or Gulf State might today buy gold or silver above US treasury bonds. The tiny yield on treasuries assumes zero inflation at a time when government spending is soaring and all history suggest that this will mean inflation.
If nothing else this has undermined the argument that gold does not pay interest. Moreover, investors can see that governments can inflate the supply of bonds - but not the supply of gold and silver.
Perhaps that is why the price of gold and its cheaper-cousin silver is up since the start of the year. There are some big physical buyers out there, and the price is responding to increased demand and almost fixed supply.
That could be a disappointment to the gold bug conspiracy theorists who have spent the past decade coming up with ever more elaborate arguments about who is fixing what, where and when.
This is like President Obama complaining that China manipulates the yuan, just as if the US does not manipulate the dollar - this is what central banks do, for better or worse. Yes they might pull gold down for a few hours on Monday but this is short term and less and less effective.
Systemic failure
The problem now is that we face systemic financial failure. The central banks have made massive policy errors and more and more investors are beginning to realize the obvious truth: they do not know what they are doing, and will have no more success in solving these problems than they did in avoiding them in the first place.
It is always my beef with conspiracy theorists that the cock-up theory of history - with random actions by idiots - holds up much better to analysis.
But when financial systems come crashing down it is gold and silver - the only true money - that you want to be holding. Bonds, shares and real estate are going down in 2009 - and don’t forget that bonds will ultimately take the US dollar down too.
Holders of a diversified portfolio of precious metal assets will make a fortune as this narrow market becomes the object of incredible demand. It is a historic opportunity for those who move quickly. Save yourself, why go down with the crowd!
thanks - needed a way to track...
those who track the crisis and keep up on all the latest development - so this helps me as I check the listed websites daily - in truth - many times throughout the day and night.
Very educational and, unfortunately, about the only way to get the Austrian view of what's happening - unless catch Schiff or a few others for brief segments on TV. I've become quite the Goldbug, and it's paying off.
A 'fire sale' on small foreign stocks
All the best values are overseas, says Peter Schiff. He picks five foreign stocks with low prices and big dividends.
By Brian O'Keefe, senior editor
January 23, 2009: 10:13 AM ET
(Fortune Magazine) -- Peter Schiff believes the dramatic selloff in foreign markets last year has created tremendous opportunities.
"There's a fire sale going on right now in assets that have been thrown out over the past several months by people who believe there's going to be a global depression," he says.
But following his advice means wading into unfamiliar waters. His favorite stocks right now are all small - or very small - issues traded on foreign exchanges; he avoids big global players that trade on U.S. exchanges because they tend to be well-known and thus fully valued, and have too much exposure to the troubled U.S. economy. (If you're up for the adventure, some brokerages, such as Charles Schwab, allow U.S. investors to buy stocks directly on foreign exchanges.)
Here are five of Schiff's current choices.
Ascendas-REIT (SIN : A17U)
* Price on Jan 12: $0.95
* 52-week range: $0.75-$2.00
* Dividend yield: 11.4%
* Market cap: $1,382 million
This Singapore-based real estate investment trust owns some 90 office properties, with a focus on industrial and research parks. Schiff believes it is well structured to survive a recession.
Duet Group (ASX: DUE )
* Price on Jan 12: $1.35
* 52-week range: $1.07-$3.29
* Dividend yield: 14.0%
* Market cap: $852 million
Schiff says that this Australian utility has been growing its dividend distribution faster than the industry overall. An expansion of its natural-gas properties last year should allow that to continue.
Singapore Petroleum (SIN : S99)
* Price on Jan 12: $1.58
* 52-week range: $1.25-$6.01
* Dividend yield: 25.5%
* Market cap: $816 million
The collapse in oil prices has slammed this refiner: It trades at less than five times 2009 estimated earnings and for just 70% of book value. Should be a big winner in a recovering Asian economy.
Skyworth Digital (HKG: 0751)
* Price on Jan 12: $0.06
* 52-week range: $0.04-$0.13
* Dividend yield: 11.8%
* Market cap: $137 million
Pointing to forecasts that Chinese flat-screen TV demand will grow to 28 million units in 2010, Schiff says this tiny Hong Kong manufacturer is set to profit in the mainland's mid-price market.
Vitasoy International (HKG: 0345)
* Price on Jan 12: $0.41
* 52-week range: $0.34-$0.51
* Dividend yield: 3.6%
* Market cap: $420 million
Schiff is excited about this Hong Kong soy-beverage maker's strong cash flow as well as its post-melamine market opportunity in China, where it grew sales by 60% in its last financial year.
Track the Crisis:
All these key links on "Economic Crisis Survival Board" http://investorshub.advfn.com/boards/board.aspx?board_id=14567
Schiff (Austrian economics): http://www.europac.net/ & http://www.peter-schiff.com/
Gold: http://goldnews.bullionvault.com/ & http://www.goldseek.com/ & http://www.kitco.com/charts/livegold.html
Silver: www.silverseek.com/
Mish: http://globaleconomicanalysis.blogspot.com/
Roubini: http://www.rgemonitor.com/
Reich (Keynesian economics): http://robertreich.blogspot.com/
Janszen: http://itulip.com/
Jim Rogers: http://jimrogers-investments.blogspot.com/
Jim Sinclair (leaning towards the fringe): http://www.jsmineset.com/
Marc Faber: http://marcfaberblog.blogspot.com/
Infectious Greed: http://paul.kedrosky.com/
Angry Bear: http://angrybear.blogspot.com/
Baseline Scenario: http://BaselineScenario.com
The Big Picture - Ritholz: http://www.ritholtz.com/blog/
Seeking Alpha: http://seekingalpha.com/
Clusterstock: http://clusterstock.alleyinsider.com/
Calculated Risk: http://www.calculatedriskblog.com/
Econ Browser: http://www.econbrowser.com/
$900 !!! there she blows...em
gold popped 890...
900 could come today - watching.
This just in - Peter Schiff...
January 23, 2009
The World Won't Buy Unlimited U.S. Debt: Peter Schiff's Editorial in The Wall Street Journal
Barack Obama has spoken often of sacrifice. And as recently as a week ago, he said that to stave off the deepening recession Americans should be prepared to face "trillion dollar deficits for years to come."
But apart from a stirring call for volunteerism in his inaugural address, the only specific sacrifices the president has outlined thus far include lower taxes, millions of federally funded jobs, expanded corporate bailouts, and direct stimulus checks to consumers. Could this be described as sacrificial?
What he might have said was that the nations funding the majority of America's public debt -- most notably the Chinese, Japanese and the Saudis -- need to be prepared to sacrifice. They have to fund America's annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.
These nations, in other words, must never use the money to buy other assets or fund domestic spending initiatives for their own people. When the old Treasury bills mature, they can do nothing with the money except buy new ones. To do otherwise would implode the market for U.S. Treasurys (sending U.S. interest rates much higher) and start a run on the dollar. (If foreign central banks become net sellers of Treasurys, the demand for dollars needed to buy them would plummet.)
In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.
As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.
But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. Thanks to projected huge deficits, the U.S. government is severely raising the stakes. At the same time, the global economic contraction will make larger Treasury purchases by foreign central banks both economically and politically more difficult.
The root problem is not that America may have difficulty borrowing enough from abroad to maintain our GDP, but that our economy was too large in the first place. America's GDP is composed of more than 70% consumer spending. For many years, much of that spending has been a function of voracious consumer borrowing through home equity extractions (averaging more than $850 billion annually in 2005 and 2006, according to the Federal Reserve) and rapid expansion of credit card and other consumer debt. Now that credit is scarce, it is inevitable that GDP will fall.
Neither the left nor the right of the American political spectrum has shown any willingness to tolerate such a contraction. Recently, for example, Nobel Prize-winning economist Paul Krugman estimated that a 6.8% contraction in GDP will result in $2.1 trillion in "lost output," which the government should redeem through fiscal stimulation. In his view, the $775 billion announced in Mr. Obama's plan is two-thirds too small.
Although Mr. Krugman may not get all that he wishes, it is clear that Mr. Obama's opening bid will likely move north considerably before any legislation is passed. It is also clear from the political chatter that the policies most favored will be those that encourage rapid consumer spending, not lasting or sustainable economic change. So when the effects of this stimulus dissipate, the same unbalanced economy will remain -- only now with a far higher debt load.
If any other country were to face these conditions, unpalatable measures such as severe government austerity or currency devaluation would be the only options. But with our currency's reserve status, we have much more attractive alternatives. We are planning to spend as much as we like, for as long as we like, and we will let the rest of the world pick up the tab.
Currently, U.S. citizens comprise less than 5% of world population, but account for more than 25% of global GDP. Given our debts and weakening economy, this disproportionate advantage should narrow. Yet the U.S. is asking much poorer foreign nations to maintain the status quo, and incredibly, they are complying. At least for now.
You can't blame the Obama administration for choosing to go down this path. If these other nations are giving, it becomes very easy to take. However, given his supposedly post-ideological pragmatic gifts, one would hope that Mr. Obama can see that, just like all other bubbles in world history, the U.S. debt bubble will end badly. Taking on more debt to maintain spending is neither sacrificial nor beneficial.
went to all of the 25 sites...
and added several links in iBox above for the tracking the crisis.
PBS Interview with Warren Buffett
by CalculatedRisk on 1/22/2009 02:01:00 PM
Here is a partial transcript from Susie Gharib’s interview with Warren Buffett airing tonight on Nightly Business Report. You can check your local listings here
SUSIE GHARIB, ANCHOR, NIGHTLY BUSINESS REPORT: Are we overly optimistic about what President Obama can do?
WARREN BUFFETT, CHAIRMAN, BERKSHIRE HATHAWAY: Well I think if you think that he can turn things around in a month or three months or six months and there’s going to be some magical transformation since he took office on the 20th that can’t happen and wouldn’t happen. So you don’t want to get into Superman-type expectations. On the other hand, I don’t think there’s anybody better than you could have had; have in the presidency than Barack Obama at this time. He understands economics. He’s a very smart guy. He’s a cool rational-type thinker. He will work with the right kind of people. So you’ve got the right person in the operating room, but it doesn’t mean the patient is going to leave the hospital tomorrow.
...
SG: But I know that during the election that you were one of his economic advisors, what were you telling him?
WB: I was telling him business was going to be awful during the election period and that we were coming up in November to a terrible economic scene which would be even worse probably when he got inaugurated. So far I’ve been either lucky or right on that. But he’s got the right ideas. He believes in the same things I believe in. America ’s best days are ahead and that we’ve got a great economic machine, its sputtering now. And he believes there could be a more equitable job done in distributing the rewards of this great machine. But he doesn’t need my advice on anything.
...
SG: What’s the most important thing you think he needs to fix?
WB: Well the most important thing to fix right now is the economy. We have a business slowdown particularly after October 1st it was sort of on a glide path downward up til roughly October 1st and then it went into a real nosedive. In fact in September I said we were in an economic Pearl Harbor and I’ve never used that phrase before. So he really has a tough economic situation and that’s his number one job. Now his number one job always is to keep America safe that goes without saying.
SG: But when you look at the economy, what do you think is the most important thing he needs to fix in the economy?
WB: Well we’ve had to get the credit system partially fixed in order for the economy to have a chance of starting to turn around. But there’s no magic bullet on this. They’re going to throw everything from the government they can in. As I said, the Treasury is going all in, the Fed and they have to and that isn’t necessarily going to produce anything dramatic in the short term at all. Over time the American economy is going to work fine.
SG: There is considerable debate as you know about whether President Obama is taking the right steps so we don’t get in this kind of economic mess again, where do you stand on that debate?
WB: Well I don’t think the worry right now should be about the next one, the worry should be about the present one. Let’s get this fire out and then we’ll figure out fire prevention for the future. But really the important thing to do now is to figure out how we get the American economy restarted and that’s not going to be easy and its not going to be soon, but its going to get done.
SG: But there is debate about whether there should be fiscal stimulus, whether tax cuts work or not. There is all of this academic debate among economists. What do you think? Is that the right way to go with stimulus and tax cuts?
WB: The answer is nobody knows. The economists don’t know. All you know is you throw everything at it and whether it’s more effective if you’re fighting a fire to be concentrating the water flow on this part or that part. You’re going to use every weapon you have in fighting it. And people, they do not know exactly what the effects are. Economists like to talk about it, but in the end they’ve been very, very wrong and most of them in recent years on this. We don’t know the perfect answers on it. What we do know is to stand by and do nothing is a terrible mistake or to follow Hoover-like policies would be a mistake and we don’t know how effective in the short run we don’t know how effective this will be and how quickly things will right themselves. We do know over time the American machine works wonderfully and it will work wonderfully again.
SG: But are we creating new problems?
WB: Always
There is much more including a discussion of Madoff.
Time Magazines Best 25 Financial Blogs...
http://www.time.com/time/business/article/0,8599,1873144-1,00.html
Oil traders blog...
http://oiltradersblog.blogspot.com/
1.20.2009
Oil Reverses Trend
Crude oil prices recovered Tuesday, after falling to their lowest level in more than a month, amid volatility on the last day of trading for the current active contract.
U.S. crude for February delivery ended the day in the black, rising $2.23, or 6.1%, to $38.74 a barrel in New York.
Prices recovered after plummeting by as much as 10% to $32.70 earlier, the lowest level for crude since Dec. 19, as the dollar soared against the pound and euro on continued European economic turbulence.
Tuesday is the final day of trading for the February contract. Oil for March delivery, which begins its front-month run Wednesday, settled down $1.73, or 4.1%, to $40.84 a barrel. The price of the February contract rose as the difference between the two contracts equalized.
Contango has diminished violently and the rise in oil prices has began. I bet on a long term trend change here.
Smaller Stimulus Leaves Room For Restructuring
January 21, 2009
http://www.europac.net/externalframeset.asp?from=home&id=15222
As all recovery hopes are now pinned on the efficacy of Washington’s next stimulus package, President Obama has opened the bidding at $825 billion. Most Republicans see this number as too big, and many Democrats see it as too small. If the question is one purely of impact, then under these circumstances, the Democrats are probably correct.
Measured against the underlying problem, the erosion of some $20 trillion from American household wealth in just two years and the waste of some $3 trillion (including long tail medical liabilities) on a fruitless war in Iraq, populists and democrats will label Obama’s planed expenditure as relatively small. They will argue that to affect a noticeable change in America’s $14 trillion economy, a much larger stimulus is needed. However, this would be the sort of change that would paralyze the economy for years, perhaps decades.
From my perspective, the size of Obama’s proposed stimulus may be just large enough to prevent widespread dissatisfaction with government inaction but small enough to leave room for a great opportunity — the genuine restructuring of the American economy.
For the past 30 years, an increasingly socialist U.S. Congress has drastically overspent in its errant attempt to ‘help’ everyone. In so doing, it has depleted the wealth of a hugely productive economy by consistently encouraging citizens to consume more than they produce. Today, America’s standard of living is financed largely by depreciation of the U.S. dollar, high taxation and by massive borrowing, from citizens, foreigners and from future generations.
The natural cure for such over consumption is a cutback in consumer spending, or a recession. But recessions, by nature, involve high unemployment. They are socially painful and therefore carry a distinct political cost if leaders cannot quickly bring recovery. Politicians fear recessions and are loath to accept them as a natural cure of excessive spending. They are tempted therefore to keep exorbitant consumerism alive, by a progressive and unsustainable combination of taxation, inflation, currency depreciation and borrowing. What is happening today is a classic example of this unfortunate political/economic dynamic.
The tragedy is that this reaction prevents necessary restructuring and sustains failed systems. While claiming the converse, the vast sums spent by government have actually prevented the vital but painful restructuring of the American economy.
Some argue that Obama’s proposed stimulus package is not only too small, but also too late. Ironically, this may be a benefit. If it does come too late, it will prevent American politicians from ‘saving’ individual industries and companies that have no hope of sustainability. By force of circumstance, it will allow a recession to do the hard and unpleasant job of restructuring the American economy.
In short, the political or financial inability of Congress to fund a larger stimulus package could be a major blessing in disguise. It may not help the current office holders, but it could benefit greatly America’s economy, its citizens and non-U.S. citizens who trade with America.
If President Obama sticks to his expressed intent to spend on ‘real’ job creating enterprises, there will be less and less money available for Congress to spend on ‘rescuing’ defunct industries, companies and jobs. All this presages a possible major restructuring and turn-around in America’s economic fortunes. At long last, it’s possible to see such events unfolding. However, it will only be possible by a firm stance with no deviations.
This may mean that Obama’s policies may more likely be supported more by Republicans than by those in his own Party.
In order to survive against a Democrat dominated Congress, President Obama must be able to speak over the heads of Congress directly to the American people in order to inspire them to accept the short-term pain of recession in return for the long-term gain of economic revival and the return to America of genuine wealth creation. For those listening, there was a whiff of support for capitalism in his inauguration speech. Let’s hope his words were not merely fig leaves.
Therefore, as strange as it may seem, a stimulus package which is both too late and too small, may be just the blessing that America needs to restructure its economy and return to the generation of long-term wealth creation.
appears to be nice win for SMC...
and a material development. Maybe get a PR next week - couldn't hurt.
Schiff on 1/14/09 on gold...
Economic Stimulus - where the $'s are going...
here's the link for the house bill - can see where the money is going and where some good investments may be:
http://appropriations.house.gov/
Economic Stimulus - where the $'s are going...
here's the link for the house bill - can see where the money is going and where some good investments may be:
http://appropriations.house.gov/
Schiff - today's wisdom...
January 16, 2009
http://www.europac.net/externalframeset.asp?from=home&id=15192
Credit Where Credit is Due
This week, in a speech before the London School of Economics, Fed Chairman Ben Bernanke offered a perverse economic theory in his quest to gather support for never-ending Wall Street bailouts; “This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt.” In other words, credit is the lifeblood of our economy, and the continued operation of credit providers is an issue of national security.
In truth, not all economies run on credit. But over the last decade, the United States became a bubble economy that needed unlimited credit to keep from collapsing. In a legitimate economy, it is not credit that fuels spending and investment, but simply income and savings. It’s too bad our Fed chairman does not understand the difference.
That American families now routinely rely on credit to make every-day purchases is a habit that needs to be broken and not encouraged. What we need in America is more restraint and less indulgence. For example, Americans in the current economy should not go into debt to buy new cars. Given the level of debt that weighs down the typical family, Americans should defer such purchases until they have paid down existing debt, or replenished their savings to the point where they can afford to pay cash. Until that time, Americans should continue driving their old cars. In the meantime, the untapped savings could be made available to local businesses that would use it to finance badly needed capital investments.
But such a drastic reversal in financial culture represents the kind of change that no one in the outgoing or incoming Administrations appears willing to consider. By providing perpetual support to lenders who have bankrupted themselves through bad loans, the government merely guarantees that bad economic behavior will continue.
Credit is indeed vital to an economy, but it does not constitute an economy within itself. The important thing to remember is that credit is scarce, and is limited by the stock of savings. Savings loaned to one individual is not available to be loaned to another until it is repaid. If it is never repaid, the savings are lost. Loans to consumers not only crowd out more productive loans that might have been made to business, but they have a far greater likelihood of ending in default. In addition, while business loans increase our capital stock and lead to greater productivity, loans made to consumers are merely spent, and do not create conditions that will make repayment easier. When businesses borrow to fund capital investments, the extra cash flows that result are used to repay the loans. When individuals borrow to spend, loans can only be repaid out of reduced future consumption.
One of the reasons we are in such dire straits is that consumers have already borrowed and spent too much. Many did so based on the false belief that ever-appreciating real estate would ultimately provide the means to repay their debts and finance their lifestyles. Now that reality has finally set in, why should the spending spree continue? The fact that a GDP comprised of 70 percent of consumption is currently contracting should not surprise anyone. In fact, such a contraction is long overdue and the government should not do anything to interfere.
In trying to perpetuate the illusion, the government wants to revive the spending spree that has led us to this disaster. But how can such actions possibly help? How will more debt improve the economy? Wouldn’t our circumstances be vastly improved if we paid off some of our debts and replenished our savings? Wouldn’t we be in better shape if instead of buying more stuff we concentrated on producing it?
The unpleasant reality is that years of bad monetary and fiscal policy have over encumbered our economy with debt and undermined our industrial capacity. The sooner we can begin to repair the damages, the sooner we can right the ship. If instead we merely administer more of the same, the ship will sink in a sea of inflation.