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.

Comments

[somecatchyp...:]

I've noticed the same thing. Those who predict delflation are invariably trying to make short term predictions with a time horizon of less than two years. In the longer term, Schiff is almost certainly right on. Short term predictions suit the needs of the financial media, not investors. For the media, it's all about attracting eyeballs and generating ad revenue in the short term. Schiff represents his clients. The media represent their advertisers and shareholders. There's little doubt that short term prognostications help generate "churn" for the financial industry. Schiff freely admits that he doesn't know what will happen in the short term.

Jan 27 07:30 AM

[Gone Broke:]

I followed Schiff's strategy and ate it big time. I sure hope he's right about being early rather than wrong.

What bother's me most is Schiff's inability to admit he made a mistake. Makes me want to run as far away from this guy as possible. Anyone can make a mistake, but not everyone sticks to it like super glue.

The math is simple. If the currency of a country is down 35% and the stocks of that country are down 35%, you are down 70%. You don't have to be a financial genius to know that hurts.

Jan 27 08:51 AM

[mavericks:]

Defending Peter Schiff? This is a guy who has done nothing but add to the crisis of confidence by exacerbating the current economic despair. He may have called the crisis here in the US, but going around calling for the second coming of the depression puts him in the same catagory as chicken little, IMHO. He is no friend of the US.

"With Barack Obama now waiting in the wings to conjure a newer New Deal, far larger than even FDR could have imagined, and at a time when we cannot even afford the old one, this will not be your grandfather's Depression. It may be much worse." - Peter Schiff, Oct. 2008

Jan 27 09:28 AM

[Smarty_Pants:]

Mish does however make two points that are important regarding Euro Capital:

Wrong in risk management
Wrong in buy and hold thesis

Even if you are right on the economic big picture, if you can't use it to make money, or at least avoid losing money then you aren't serving your clients very well.

I happen to agree with many of Peter Schiff's arguments and I find Mish writes a lot of good stuff too. Where they don't agree, I have something to conisder myself with two opinions I regard highly to work from.

I personally wouldn't be satisfied by giving my money to someone to 'manage' for me. I don't have enough of the stuff and I worked too hard getting what I've got. If I'm going to lose it in the markets, then it's going to be making trades that I think are suitable at times I feel are appropriate.

As a result, I have many years of my own bloody nose investing experience to mix with opinions like those Schiff and Mish provide. Past lessons have taught me a thing or two about what NOT to do in the market. Lesson #1 being don't lose money if you can help it.

I was prepared for 2008 as a trader. It was my best year ever, but it was MY implementation that worked, based on information supplied from various sources, including Peter Schiff.

Arguing about which advisor was "right" is mostly a waste of time. YOU must take responsibility for your own money and it's placement. If you follow a specific advisor and the trades aren't working, YOU have to decide to stop the losses before they become catastrophic.

This is really the most telling point Mish makes. While Peter Schiff may turn out to be right about may issues, his lack of risk control for his funds would seem to be a serious negative. That doesn't mean his analysis isn't good, only that his implementation needs improvement.

You can know everything there is to know about boxing, but until you get your butt in the ring and take a couple smacks to the head, you won't likely get very close to being champion. It's your job to see that the number of smacks you take is minimized on the way to the title.

Jan 27 10:51 AM

[Alphameister:]

The arrogance of a stopped clock that gets it right twice every 24 hours!

Jan 27 11:03 AM

[rm:]

[You can know everything there is to know about boxing, but until you get your butt in the ring and take a couple smacks to the head, you won't likely get very close to being champion.]

I love the Mike Tyson quote: "Everyone's got a plan until they get hit."

Jan 27 11:26 AM

[CitizenPete:]

"With Barack Obama now waiting in the wings to conjure a newer New Deal, far larger than even FDR could have imagined, and at a time when we cannot even afford the old one, this will not be your grandfather's Depression. It may be much worse." - Peter Schiff, Oct. 2008

Good quote, thanks Mavericks!

Does his quote have any truth and relevance? Note that Schiff subscribes to the Austrian School of Economics (as apposed to Keynesian pump and dump economics) and he understands how tightly economics and civil liberties are intertwined. Obamanomics is steering to less private ownership, more government control and regulations, more government bailouts, massive fiat printing, and citizens literally shoveling our way out of a depression -- all for the glory of the Fatherla--er.. country. FDR's new deal programs, where of course declared unconstitutional by the Supreme Court, as I expect many of this administrations programs might be later down the road. (Assuming we still have a Constitution at that time).

The biggest factor and "unknown(s)" that Schiff and other Austrian School minded analysts get buggered by consistently is not necessarily a misunderstanding of the fundamentals, but more so a misunderstanding of the incredible level of corruption and fraud. They don't like to admit the lawlessness of our government (that even Congress admits to), corrupt markets (CTFC, COMEX, $EC, SEE-IA?), M.I.C., corporations (esp. banks) are driven to keep the world fiat ponzi scheme going. If the US can regain control over the opium crop revenues in Afghanistan and keep the gas lines open to India then that would have a major impact on market in the US. The money from drug money laundering into the stock market alone would do much to keep the Dow up and the dollar hanging on a bit longer.

How can analysts account for selective outed fraud and the bankers spreading the "wealth" (sarcasm) across the globe, in their forecasts?:

(1) Do you really think the Made-off scandal is a one off isolated issue? How many government sponsored money laundering schemes are protected by the SEC, CTFC, "auditors" and analysts? Does Occom's Razor tells us that the global politics of the Made-off situation didn't go Bernie's way and he got caught the path of the axe as it was swung in all earnest in support of another agenda? Why didn't Bank of America's recent federal court securities fraud conviction, get the same news - oh I forgot, because they were rewarded with more bailouts and the American public is covering that bill. How about the offshore accounts of Citi -- is that ok to overlook if we just break them up now? What Fraud is too big to bail to let fail?

(2) In 2008 the privately owned FEDERAL RE$ERVE doles out over $8 TRILLION (8000 Billion) monopoly dollars and refuses (even after Bloomberg files suit in a federal court) to disclose who the money went to (or how it was utilized)? How many more corporations will line up at the free-fiat pig trough to become bank holding companies under the grip of the privately owned Federal Reserve (e.g. GMAC Financing, Discover Card)? Now the Obamanation plan is to borrow more fiat from the private FEDs printing press? In addition to Congressional appropriations, how much more? ( HOW MUCH MORE REALLY AND TO WHOM?)

(3) Unknown to most Americans (and quietly ignored by Congress) Paulson (illegally?) changed the tax laws and gave the banks a $140 Billion dollar tax windfall without involving congress?

(RE: See ANP video called "Paulson's 140 Billion Surprize" here:
newsproject.org/videos...).

... and who is the NEW Treas. Sec?: Tim Geithner, former CFR economist, former head of the private NY FED, former IMF er...taxpayer - (the same folks who are currently running the the ship into the reef.) Talk about the fox guarding the hen house!

(4) According to the GAO, the US government consistently "looses" (can not account for) vast sums (as in trillions) of money each year (We are not talking chump change here.) - Much of the money is laundered through HUD, Department Of Agriculture, and of course the DOD. In 2001 DOD reported is lost 2.5 TRILLION (2500 Billion) monopoly dollars.

(See: Corbett Report's "$700 Billion is nothing" : www.youtube.com/watch?... )

(5) Unfunded loans for debt, plus liabilities of the US Government total close to $60 Trillion (60,000 Billion) and they borrow the equivalent of 6 million every minute (from Japan, China, OIl Countries, Brazil, Russia, etcetera) just to keep in operation, yet continue to spend like drunken sailors with platinum credit cards on shore leave. Then they produce economic numbers that get cooked up more and more every year. (See John Williams Shadow Stats: www.shadowstats.com/al... )

Fraud, Fraud, Fraud... and more Fraud

Schiff is wrong?
So how could Schiff or any other Austrian School minded analyst get the timing right as the rats climb and piss all over each other to get to the highest point of the mast on the sinking ship? Would another (false flag?) 9/11 type event throw off the economic forecasts a bit?
The only thing that would surprise me at this point is that a slow burn of the economy into ash continues without any "shocking or dramatic" events or even further destruction of American civil liberties.

IMO, Schiff has got it right. His timing and safe haven recommendation is off because nobody can forecast the increasing government, geo-political, economic, and corporate fraud and lawlessness prolonging (or perpetuating?) the slow burn of the US economy into ash.

I agree with maveriks comment: If you believe America is a Republic of the people that should be ruled by law, Schiff is a patriot and one of the economic heroes of our time. However, If you believe America is ruled by socialist Oligarchy and should be directed by elite special agendas ignoring laws then Schiff is certainly no friend of that U.S. Sig Heil maverick.

Jan 27 12:32 PM

[Tony Daltorio:]

You are absolutely correct - all the deflationists are "traders" whose time frame never extends beyond a few months. Not exactly "deep" thinkers, but your typical "I want it now" Americans.


On Jan 27 07:30 AM somecatch wrote:

> I've noticed the same thing. Those who predict delflation are invariably
> trying to make short term predictions with a time horizon of less
> than two years. In the longer term, Schiff is almost certainly right
> on. Short term predictions suit the needs of the financial media,
> not investors. For the media, it's all about attracting eyeballs
> and generating ad revenue in the short term. Schiff represents his
> clients. The media represent their advertisers and shareholders.
> There's little doubt that short term prognostications help generate
> "churn" for the financial industry. Schiff freely admits that he
> doesn't know what will happen in the short term.

Jan 27 01:28 PM

[Conan the B...:]

CitizenPete: You have provided many links so I have to assume that that the information they contain reflects the views therein.

Your quote: "IMO, Schiff has got it right."

He may be correct in his own Mind, but It all boils down to 'How Much Money have I Lost' following his lead. IMHO

Your Synopsis ends without a conclusion, it only asks a question. Your "Sig Heil maverick" is totally uncalled for since mavericks gave an opinion on the antics of a "so called Professional Analyst" Who Did Not have an exit strategy for his clients.

Blindly following orders, I just did what I was ordered to do. Just follow the lemmings, they know where to go.

Jan 27 01:36 PM

[Moon Kil Woong:]

People get famous and on TV ue to their arrogance and big mouth and nothing else. In the world of investment your track record is what counts. If his track record failed then he should not be famous, but hey, most of the guys on CNBC are spouting a load without numbers to back themselves up.

TV would be much better if they had to show credentials before they got to speak to you. And I'm not talking position or degree. I'm talking about their recorded investment history. In most cases it's just terrible except the period of time they mention and the 1 fund out of 10 they outperformed on. Like I mentioned before, the reason so many funds look good is because for every 1 fund they tout they shut down about 20. Standard deviation does the rest in terms of making the remaining 1 look swell until regression makes it worth their time to close it and do the exercise all over again.

Fund management is filled with charlatins.

I also must agree with Smarty Pants that buy and hold strategies fail miserably in economic downturns. It is an investor's own fault if they are burned embracing this concept at this time. Brokers preach this to newbs simply to get them off their back during a downturn. Otherwise they'd be swamped with sell calls.

(FYI: as mentioned previously I do buy and hold some stock including catapillar. Also as mentioned, I also hedge myself often by buying puts in the market to what I do keep long term. Sure it's onerous but it keeps you from losing money. This is what hedge funds are suppose to do that often don't.)

Jan 27 02:51 PM

[bbowen7:]

Schiff is apparently a good long-term economist/philosopher, and a deficient investment manager if he doesn't manage risk. With that, he was right on housing, the problem of American debt, and the future implications of our huge deficits. If nothing else, he should help people think about long term bonds.

Jan 27 03:39 PM

[CJJ:]

Wait a second. So for corporate CEOs it is NOT okay to make bad moves in the short term but an INVESTMENT ADVISOR like Schiff whose job it is to invest people's money gets a free pass from some of you people saying his visions are LONG TERM.

Where's Henry Blodget doing a stupid little video saying Schiff should be fired for his performance last year?

Do I think this guy has made some good calls and obviously saw a lot of this when other people just thought house prices would rise indefinitely. Yes. But if you are on here commenting that X,Y,Z CEO should be fired, then you should also saying Schiff should shut down his business because he FAILED.

If you are realistic that downturns are tough to play then you should realize that your calls to give Schiff time should be the same to CEOs and the Government.

What isn't right is to pick and choose who you whine about and who you let off with a free pass.

Jan 27 06:22 PM

[The Pragmat...:]

When you lose 30%+ the timing doesn't matter. You are wrong. Many of his international investment ideas lost far more than that. "Eventually" is not a risk management tool or an investment plan. You lose that much and you're nothing more than just plain wrong.

Everyone is right "eventually". But as the old saying goes, the market can stay irrational longer than you can stay solvent.

Schiff has been 100% dead wrong. There's really not a whole lot more to it.

Jan 27 10:25 PM

[meta9999:]

Well, no... he's obviously not 100% wrong, because he correctly warned of the entire banking implosion, and steered many people out of the financial sector, which is, by the way, down 70%!!! I've long followed Peter Schiff, and have gone through virtually EVERY video appearance on his website, from YEARS ago. His consistently MOST prevalent themes were 1) Get out of US stocks and 2) Buy Gold. Buying foreign equities was third. OK, so he screwed up there. But if you listened to him and understood the message, you could have avoided MOST of the carnage. Most people are PO'd because they didn't like his abrasive confrontations with the media, but he was MOSTLY correct. Before anyone makes critical comments about Mr. Schiff, i suggest they do their homework. Go to EuroPacific Capital website and LISTEN to the recorded videos, before you flap your mouth and show your ignorance.

On Jan 27 10:25 PM The Pragmatic Capitalist wrote:

> When you lose 30%+ the timing doesn't matter. You are wrong. Many
> of his international investment ideas lost far more than that. "Eventually"
> is not a risk management tool or an investment plan. You lose that
> much and you're nothing more than just plain wrong.
>
> Everyone is right "eventually". But as the old saying goes, the
> market can stay irrational longer than you can stay solvent. <br/>
>
> Schiff has been 100% dead wrong. There's really not a whole lot
> more to it.

Jan 28 01:09 AM

[GoldenSafe:]

The crash Peter Schiff warned about in his book is a US dollar crash, not a US stock market crash...though he has mentioned to stay out of most US dollar denominated assets. Therefore, following the investment advice of his book is not immune to short term declines of his clients' stock portfolios. However, if the crash he is referring to (the dollar crash) eventually happens, his clients will be protected. The jury is still out on this one, but I for one see the dollar losing massive amounts of value in the coming 4 years.

Schiff only made a few predictions that would specifically happen in 2008. Let's take a glance, shall we? :)
1) Gold will hit $1,000...it hit $1030 in March of '08.
2) Oil will hit $150 per barrel...it hit $147 in July.
3) The Dow will be worth 10 ounces of gold by December...it was almost exactly worth 10 oz of gold by the end of the year.

Keep in mind, people, that the economic crash is not nearly over and the dust has not cleared. If you want to evaluate Schiff's predictions, evaluate specific things that he claims will actually happen in a given year.

Jan 28 03:00 PM

[Ed Walters:]

I'm pretty familiar with Peter Schiff from CNBC and You Tube. And I've read the Mish blog. But, who is "Mish" to criticize anyone about portfolio performance?

Does Mish manage a portfolio? Does "he" have a track record? Or, is he just a "blogger" on the sidelines, who seems to be skating on legal thin ice, since he's also a registered investment advisor, and is hanging his hat on an affiliated brokers (Sitka) performance?

And the performance he's hanging his hat on is rather pedestrian. Sitka underperformed just holding gold bullion over the last 5 years = Yawn.

Biggest bear market in history with housing, banks, and the broad market
down 40-80% and they're bragging about 12% returns?

I've "sharted" and made 13%?

Maybe Peter Schiff can be added to the list of investment legends like Warren Buffett who had bad years. Why didn't Mish attack Warren Bufett, or Eddie Lampert?

The bigger story here imho, is if Mish doesn't even have a portfolio, or a return to post. If it turns out that he's just an arm-chair blogger, he's the biggest joke
in the history of the financial blogosphere.

Sour Grapes x 10.

Ed

Jan 28 07:12 PM

[occdude:]

I read Schiff and Mish avidely and I am both saddened and elated that the Austrian economic tent is big enough to accomodate both almost diametrically opposite views.

Deflationists have the upper hand as of late and will continue to thump the "inflationistas' as long as there is a credit bubble that needs deflating. Ironically Schiff reallly thought that the domestic market was going down, was he wrong? Is he a deflationist?? He also recommended holdings in PM, commodities and foreign currencies if all those asset classes were averaged in would Mr Schiffs portfolio show a better return than foreign equity holdings alone? Meanwhile his equities are still paying their dividends for the most part in countries with low credit exposure and or high manufacturing or commodity exposure.

Long term I think there will be a currency crisis, once we get away with the first couple of trillion in printed money without everyone raising their eyebrows we'll continue to try and print our problems away until finally our lenders will have had enough and will take away the punch bowl.

At that point you'll see the Schiff scenario come roaring back, but this is going to take a while. The world economic system is realigning did you think this would happen overnight? The dollar will not go gently into the night, its gonna need a good push and maybe even a drop kick.

I think buy and hold is good for the passive investor who has a long term perspective and you could do alot worse than follow Mr Schiffs advice if you're not interested in running your own portfolio.

One thing both Mish and Schiff DONT disagree with is the fact that PURCHASING POWER of the average American is going to go down hard,

Jan 29 01:05 AM

[Conan the B...:]

occdude: If I had the amount of money you must have, I would go along with your statement. Most people do not.

Losing $30 out of a $100 is not acceptable.

Fully agree that the purchasing "of the average American is going to go down hard".

Will the average American notice anything if everything purchased is domestically made using raw materials domestically mined with the New Isolationism?

Jan 30 10:28 AM

[Rhys:]

If you're worried about Peter Schiff's strategies because of 2008, you must have broken his first rule... don't leverage your assets.

Feb 02 03:09 AM