The Cult of Peter Schiff - Is It Deserved?

It’s hard to look at Peter Schiff with anything other than awe.

After all, the 44 year-old president of Euro Pacific Capital was mocked on networks like CNBC and Fox for predicting “wild” things like a real estate bust, a credit crunch, and a deep recession. Two years later, and Schiff’s original prophecies have come true.

That validation has been earning Schiff some much-deserved credibility in the financial world, where until now he’s been dismissed as overly pessimistic. “Schiff has suddenly emerged as a cult hero and something of a minor celebrity,” said Fortune’s Brian O’Keefe in a recent article.

According to the article, Schiff, a broker, even recently applied to become, “a licensed investment advisor so that he can actively manage clients' money for the first time.”

Schiff’s Painful Performance in 2008

But does Schiff really deserve the acclaim he’s gotten found recently?

While Schiff has proved himself as an economist, his ability to parlay those predictions into profits for his clients was questionable for 2008. For the last few years, he’s been betting big on overseas investments and precious metals – two areas that got hit as hard or harder than the S&P last year.

According to Morningstar, the average international equity fund performed 7% worse than the average U.S. stock fund in the last year.

Just look at the iShares MSCI Belgium (EWK), the worst performing ETF last year according to SmartMoney.com, or the iShares FTSE/Xinhua China 25 ETF (FXI), which lost 49% in 2008.

Another of Schiff’s investment strategies has been to exit the U.S. dollar in favor of more fundamentally sound currencies. This too has proved untimely since anxious treasury investors have driven up the dollar in the last year.

And some, like Seeking Alpha contributor Todd Sullivan, are quick to remind investors that Peter Schiff has been bearish on the market since at least 2002, when the S&P was poised to move up 48% over the next five years.

Follow the Money Trail

Just because Schiff’s favored investments didn’t do well doesn’t mean that others’ investments didn’t. Just look at former hedge fund manager Andrew Lahde, whose real estate fund made 866% last year by betting that defaults would rise (Note: Lahde’s anti-industry farewell polemic is definitely worth reading).

Likewise, a lot of individual investors did well in 2008 by betting against the market – the ProShares UltraShort S&P (SDS) and Direxion Financial Bear 3X ETF (FAZ) are a couple examples of exchange traded funds that returned deep in the double digits.

Making Money in 2009

If you’re still trying to decide where to put your money in 2009, you’re not alone. While the market’s a lot less volatile than it was six months ago, it’s still wild enough to give pause to even the most decisive investors right now.

That said, I think Warren Buffett’s on the money buying undervalued American stocks (though I don’t agree with some of his recent choices). It’s a strategy that made these subscribers 15% in 2008, after all.

Now, I don’t think Schiff should be written off – he took a risky stance against CNBC’s perpetual bulls, and it paid off. He’s also helped to bring attention to some of our country’s very real financial problems. That’s something he should be congratulated for.

We’ll see where his investments go in the future, but it doesn’t look like his opinions are wavering for the time being.

He said in the Fortune article:

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.

Disclosure: SDS is a long position in the Rhino Stock Report’s model portfolio.

Comments

[investor88:]

Peter Schiff holds the right views on the market but timing the markets is tricky even for Peter.

Jan 26 07:25 AM

[Peter Schiff:]

Why do you guys keep picking 2002 as the first year I became bearish on U.S. stocks? I was also bearish in 1999, so why not pick that date? It is unfair to say I first got bearish in 2002 simply because that year marked a significant market bottom. However, it is important that the markets that I was bullish on in 2002, foreign stocks, commodities, oil, gold, foreign currencies, etc all outperformed the U.S. market until 2008.

Also you mentioned the Lahde fund without mentioning that I gave Andy the seed capital to start his fund when no one else would. The original investors in that fund were all Euro Pacific clients.

Jan 26 07:27 AM

[Jonas Elmer...:]

Peter –
2002 comes straight from the article that's referenced in that paragraph. I think that the ensuing comments do a good enough job of arguing timeline. This article is more about 2008 performance.

Jan 26 08:37 AM

[Elaine Supkis:]

Understanding and predicting downturns is a complicated business. First, you have to understand international central banking policies which are all tied in ribbons of red to TRADE policies. Then, you figure out how much lending these central banks will allow while playing international trade games and from that, you can figure out where markets will go, up or down.

For everything hinges on interest rates. The queer ZIRP system set up in Japan has unbalanced everything in strange and horrible ways. This created the Japanese carry trade. The unwinding of this 'carry trade' is now monumental. It began in July, 2007. Each year, as one central bank after another falls into the Japanese ZIRP system, the unwinding gets worse and worse.

Making money off of this unwinding is very difficult since it is DESTROYING WEALTH. ZIRP won't retrieve wealth. Why is this?

The Derivatives Beast: this insurance/hedging system unwittingly hooked itself into the central bank interest rate manipulation system [derivatives are openly based on this system] and since the central banks openly manipulate interest rates, this means, all the people who are 'inside' the system have utterly warped it. That is, Citigroup's people, the guys running JP Morgan, Goldman Sachs, etc.

Their insider knowledge coupled with their wild attempts to always make profits even when wealth is being destroyed has so unbalanced the systems, it is all now crashing down like a house built on a solid foundation and then the residents dig out the foundation and put it on the roof! Picture that!

There is no way to stop this crash. Only after all the illicit wealth built up by previous speculation vanishes, will this crash end. Then, we must build a BALANCED TRADE system, not the grossly unbalanced one with the US sucking up nearly a trillion in trade overruns. Right now, we are far, far from fixing the fundamental problems of free trade.

This is Elaine Supkis of emsnews. Thank you.

Jan 26 08:57 AM

[Truefire:]

Perhaps I'm a little biased as I am a Europac client, Peter was not only correct in his analysis but he is one of the few prognosticators that actually gives you the "why" things are going to happen.

Thanks to Peter & his brokers I have a porfolio in place that is performing quite well (up approx 11% with dividends rolling in) and great exposure to precious metals.

When the dust settles, I like my chances.

Jan 26 09:05 AM

[prudentinve...:]

Many members of the investing public have, over the years, been subjected to a continuous "buy" recommendations by the mainstream media sources. This is not surprising, because the media earns advertising dollars from the financial services community, and the latter make higher profits as the markets go up, since many charge a percentage of a portfolio's value each year.

This inherent bias, even conflict of interest, by the mainstream media has contributed to the stock bubbles of the late 90's and 2006/2007. Many innocent people were sucked in and lost much of their savings.

The public needs to hear all points of view, and the way Peter Schiff was being ridiculed in 2006/2007 on mainstream TV was apalling. I don't personally agree with all of Peter Schiff's bearish views, but the investing public need to hear all points of view to be able to reach their own conclusions.

Jan 26 09:06 AM

[perki's:]

Eventually, all predictions come true and everyone is a prophet. Just make predictions often, and over a long period of time, for best results.

Jan 26 09:21 AM

[PearlCreek:]

Mr. Schiff needs a vehicle, either a managed pool of assets in which he is responsible for, or a newsletter or some type of index tracking his recommendations. Direction, timing, and selection of assets do matter and shouldn't have to be defended with blog posts or youtube videos. They should be reflected in measured performance numbers over time.

Jan 26 09:37 AM

[Stock Marke...:]

Schiff is a great theme based idea guy, but like all of us, no one can time these events. It is like "we all know that inflation is coming with gov't around the world printing money.." but when? 6 months? 1 year? 3 years? Seeing the future isn't super hard, but timing it certainly is.

Jan 26 10:25 AM

[Glen L.:]

I think it would be instructive for the author to quote the predictions of all of Peter Schiff's antagonists and compare the predictive value side-by-side. If investors followed their advice (as millions did!), how have their portfolios fared? Never mind, it would be too painful to too many.

I distinctly remember watching Tout TV, as Gary North calls it, in 2005-07, even into '08, and hearing predictions of Dow 20000 and up, that real estate was still tremendously undervalued, etc. But Peter is a follower of Austrian economics and understood that the whole thing was a speculative bubble, while his detractors laughed and sneered. The fact that Peter is not clairvoyant about market time should not now detract from his ability to correctly call macro trends.

Were his predictions about the emergence of Asia really that far off? If the central banks of China etc. ever wise up and stop buying American debt, as they may be doing now, all of the predictions in Crash Proof may become reality much faster than most people could imagine.

Jan 26 10:28 AM

[Pat Shuff:]

globaleconomicanalysis...

Jan 26 10:57 AM

[tajitj:]

I am a huge fan because of his warning of the housing crisis and Ron Paul connections. He does not seem to be a good stock pick guy, more of a macro analyzer.
This best picks a person could have made in 07 was not to pick what people on TV told you to.
There is even a website dedicated to getting him to run for Senate.
schiff2010.com/

Jan 26 11:36 AM

[carey_jim:]

'It’s hard to look at Peter Schiff with anything other than awe.'

Don't look at Peter Schiff or any other financial economist with awe. Read his (their) books and articles and try to understand them.

Nobody has a crystal ball for reading the future, unless they are wearing a pointed hat with stars on in. And anyone who finds him/herself looked on with awe should run for the exit.

Jan 26 11:48 AM

[Tony Daltorio:]

Comparing Peter Schiff to the Dimbulbs that regularly appear on CNBC air is liking comparing brilliant sunlight to the light of a distant star many, many light-years away. No comparison. Peter Schiff is actually right a good bit of the time, unlike most CNBC guests who are wrong most of the time.

Jan 26 12:55 PM

[MGA_1:]

I'm a huge fan of Schiff. I also like Roger's, but Schiff has provided an excellent framework for why things are falling apart - it makes sense. He even admits he called the dollar rally wrong, and I think he might be a little overly optimistic about china's shorterm prospects, but long term I think you're gonna make a lot of money sticking with his philosophy (and if you invest with europac). He provides a solution - it's not pretty, but it's a solution to our problems (saving -> manufacturing -> healthy US). Better than debt.

Jan 26 01:18 PM

[rjm51a:]

I am very partial to Mr. Schiff's economic views. However, I have read where his accounts did very poorly in 2008. To be so right on so many economic predictions, and so wrong on his investment decisions shows a definite lack of experience in the discipline of money management. I would have no problem opening an account at his firm but I would have a real problem letting him manage the money.

Jan 26 02:51 PM

[Rob Viglione:]

Peter Schiff is one of the few who stands out against the big-government crowd strangling this nation. If only we had more people like him we might have a shot at retaining our liberties and prosperity.

Jan 27 12:11 AM

[You're Kidding:]

There was a guy named Joe Grandville, I believe, who was a big investment Guru in the '70s. He did really, really well...for awhile, then started being wrong...and bingo, lost his Guru crown.

He was just one of many who have come and gone, who will be followed by many more. They appear to be prescient and attract droves of followers, but alas, it turns out that they are "soothsayers" but for a limited time only, and not always. Bummer.

Why is it that they always fade out? Well, obviously, because they weren't really Gurus at all. They were just lucky for awhile.

There are even some around today, and if you were to get into a time machine and jump into the future, you would find them there. They would have predicted, for example, say... the bottom of the Great Recession in late 2008 (or 2009, or 2010, or...whenever it was.) There they are...the Gurus..and they were right!

Except they weren't. They were lucky. How they saw the future happened to be somewhat correct. You think this correlation means something?

Well, lets say it does. The question now becomes how do I find a Guru before
we all discover he was right, which will too late to take advantage of his "predictions." There are lots of Gurus around making their prognostacations; but which one is going to be right? If you think about this for awhile, you'll realize you can't ever know. How can you possibly know ahead of time which "Guru" will be right in the future, unless... you are a Guru, too! In that case you don't need one, do you? Just listen to yourself. But you know you're not a Guru. So, its impossible to pick one out ahead of time, unless you are lucky, of course.

So after their "predictions" come true, we know who they are, but not before. Bummer.

The problem is, if we then follow what they say, are they going to be right again? Jo Grandville was "right" for awhile, and then he wasn't. Peter Schiff was right, it seems, for awhile, if you give him a lot of leeway time wise, and now recently has been wrong again. But in there for awhile he just knew that future...didn't he?

Well, I've got great news for all. Here's a way to find a Guru who can pick the direction of the DOW 10 times in a row! So he's got to be right on the 11th, too, right?

Get a thousand people in a big room (or web site, maybe) to pick whether the Dow will be up or down tomorrow. The next day we will find that about half will be right. Keep only those in the group who were correct. Then repeat for nine more days. One or two people will be left who will have been correct for ten days in a row!

This is what pure chance gives us: people who stand out and appear to "know something" and methods which appear to "predict." But its all just a coincidence. And you have to have a strong desire for the truth in order to be objective enough to see past you're own rose colored glasses, which gives us a view of reality that really says far more about us in this present moment - our desires, our agendas, our beliefs, etc., than it ever will say about the future.

Jan 28 02:37 AM

[VVV:]

Peter Schiff - down 70% 2008

George Soros - up 10% 2008

Nassim Taleb - up 55-110% 2008

Feb 11 09:35 PM

[User 364722:]

Why not keep looting the foreign countries of their money until they absolutely refuse ? Then why not use our powerful military to garner "concessions" from our creditors if the doom he predicts ever comes ? I don't see Americans meekly accepting a drastically lower standard of living.

Feb 26 09:08 AM

[Plan B Econ...:]

The US market has been trash since 2000, if you adjust for the US dollar. So Peter was right then too.


On Jan 26 07:27 AM Peter Schiff wrote:

> Why do you guys keep picking 2002 as the first year I became bearish
> on U.S. stocks? I was also bearish in 1999, so why not pick that
> date? It is unfair to say I first got bearish in 2002 simply because
> that year marked a significant market bottom. However, it is important
> that the markets that I was bullish on in 2002, foreign stocks, commodities,
> oil, gold, foreign currencies, etc all outperformed the U.S. market
> until 2008.
>
> Also you mentioned the Lahde fund without mentioning that I gave
> Andy the seed capital to start his fund when no one else would.
> The original investors in that fund were all Euro Pacific clients.
>

Sep 24 05:55 PM