This Is 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 than 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.

Comments

[prudentinvestor]

I agree with all the trends you describe, but expect them to happen to a much lesser extent, at a slower pace, and without extreme catastrophic consequences. The global system has too much damping built in for a meltdown in the world's largest and most powerful country.

2009 Feb 08 09:22 AM

[Dave Wrixon]

Well I think you have just about said it.

I think, however, right as you are in rest of your argument, the stimulus is needed, not to bring about recovery, which it never could but simply to mitigate the level of disjoint from the immediacy of the pending shock. Its effect at best will be to serve like an air bag in a road accident.

2009 Feb 08 09:31 AM

[yellowhoard]

What would happen to the dollar if China, India, or Japan bought up some of the worlds larger gold and silver producers and backed their currencies with precious metal?

2009 Feb 08 09:32 AM

[investor88]

Could well be this is just the beginning as Peter Schiff has argued in this article. It means the next shoe is about to fall, timing unkown even to Peter Schiff.

Under the circumstances it is not business as usual, and cash may not be trash.

2009 Feb 08 09:39 AM

[sheople]

Dave, I might agree with you if we had money to burn, which we don't. Assuming that the dollar could recover, the taxpayer will be inundated with taxes, assuming that we are going to pay our debts. Realistically you are right only if the dollar is to fail and the monies will not have to be paid back. The stimulus to the economy is like kicking a dead person. The body will move from the kick.

On Feb 08 09:31 AM Dave Wrixon wrote:

> Well I think you have just about said it.
>
> I think, however, right as you are in rest of your argument, the
> stimulus is needed, not to bring about recovery, which it never could
> but simply to mitigate the level of disjoint from the immediacy of
> the pending shock. Its effect at best will be to serve like an air
> bag in a road accident.

2009 Feb 08 09:43 AM

[patio]

USD GBP CAD EUR AUD
1 1.46979 0.799699 1.2796 0.659347
The dollar rally has run out of steam? Really? Sure doesn't look like it. Maybe vs. the Yen, thats it.
The really big money, the ones that buy billions in Treasuries, have a lot smarter people than PS, and have analyzed the situation with I suspect far better data than PS will ever see. Perhaps he is right and they are all wrong.

2009 Feb 08 09:46 AM

[Jim Hawthorne]

An excellent analysis that will hopefully lead to a healthy debate!

We all seem to have a tendency to 'telescope' time, and I think that many of the trends described will happen later rather than sooner, but may well come to fruition with even more explosive volatility than we've seen to date.

'Investors' will have to learn to be 'traders', IMO.

2009 Feb 08 09:55 AM

[yellowhoard]

So right Jim. I used to only buy equities with a 2+ year time horizon. Now I move in and out over a period of hours, or days.

2009 Feb 08 10:18 AM

[Boubou]

Patio...it would certainly be nice if some 'big guys' out there somewhere playing a big game knew what they were doing. AND what "they " were doing were good for anyone but them.
But until "they"explain it in detail , and how it will play out in what time frame, we will have to assume from all the evidence that they don't have a clue.
Meanwhile I am giving Schiff the beefit of the doubt.
Also check leap2020.eu

2009 Feb 08 10:25 AM

[Nikola]

At first I never heard of Peter, then I was his fan for a while, and now I am losing interest.

This is pure fear mongering. I think by now everyone is aware of the clear and present danger of failed auctions, and eventual inflation and fall of the dollar.

The question now is what to do about it, how to soften it, and potentially avoid it. Peter says the stimulus plan is bad. Many other people say the same thing, but at least they have some other proposals.

If we are all doomed, and if there is no escape, then should we all just go and shoot ourselves? Is this what we need Peter Schiff for?

It's getting old Peter.

2009 Feb 08 10:30 AM

[patio]

- PS has lost his clients a lot of money; so far that is a fact
- He claims in this article the dollar rally has lost steam; that is factually wrong to date. Just look at the current exchange rates.
- He claims in this article that the Fed has thrown trillions into circulation; that is factually wrong, money velocity has not increased at all. The money is being "hoarded" by banks that received it. To define 'hoarding" , they are only making new loans to companies and individuals that actually qualify, not a bad thing at all.
- The big guys, Japan, China, Saudis et al lose their collective asses if the dollar declines precipitously, everyone loses not just the US. Doesn't mean it won't happen, but their are strong headwinds against it.


On Feb 08 10:25 AM Boubou wrote:

> Patio...it would certainly be nice if some 'big guys' out there somewhere
> playing a big game knew what they were doing. AND what "they " were
> doing were good for anyone but them.
> But until "they"explain it in detail , and how it will play out in
> what time frame, we will have to assume from all the evidence that
> they don't have a clue.
> Meanwhile I am giving Schiff the beefit of the doubt.
> Also check leap2020.eu

2009 Feb 08 10:36 AM

[Lars39]

It sounds like a suggestion to stock up on gold, food, guns, ammunition and items for survival during the coming collapse. Only a few will succeed at day trading. Hope Peter Schiff will tell us when it is safe to go outside when the storm is over.

2009 Feb 08 10:53 AM

[KJP712]

One good thing happened after watching Mr.Schiff's past videos.Took money that once went into buying stocks and transfered it to a currency account.There I traded the dollar against the Euro and the Pound which in turn was very successful.Moral of the story? Never take the whole of one's message but pieces of it to create your own profitable mosaic.

2009 Feb 08 11:06 AM

[SW Richmond]

The fact remains that the US government has committed $Trillions to the reflation effort, the budget deficit for this year is projected at over $1 Trillion absent a stimulus package, and Treasury thus far has actually come to the well and funded very little. The recent movement of the USDX and gold can be interpreted as reactions to growing awareness of the US debt situation.

Another fact is that we are in uncharted waters. No one alive today has ever seen a situation like the one we face. Jim's point above is correct IMO, we see what we think will happen and we expect it to happen quickly, but massive economies contain massive inertia made up of hundreds of millions of individual investors and billions of people.

The unpredictable nature of government response is the overarching factor in the intermediate term IMO. Having said that, there are mathematical realities related to standard of living, capital flows and currencies that I believe that will be observed on the other side of this event. In other words, long term I think I know where we're going, but intermediate term I don't know what the road that takes us there will look like, and government intervention is the reason I don't know.

Keep speaking and writing, Peter, I need your input.

2009 Feb 08 11:36 AM

[X-15]

If Shiff was the only voice out there saying what he is saying , well, ya it would seem suspect. However -Rogers, Faber agree and say pretty much the same thing with the same force, and are not shy at putting it out there.
I believe it is best to avoid US backed equities-- American politicans and Wall Street Bankers ponzi schemes,whether you believe this or NOT, have trashed the Dollars future.

The future World in investing is moving offshore.

Sad but true wanted a Woman never bargained for you......

2009 Feb 08 11:42 AM

[expatsp]

Many of Schiff's criticisms of the U.S. are correct, but the fact is, the rest of the world is often worse. Even with the stimulus, debt/gdp ratio in the U.S. will be far lower than that in Japan or pretty much any European country.

As for the emerging markets, well, I live in Brazil, and for all the complaints about corruption in the U.S., it doesn't hold a candle to what's happening here. Plus Brazil has a birthrate below the replacement level and a long-term Social Security that makes U.S. fiscal problems seem like peanuts. Russia has similar problems. China and India are dependent on exporting to the U.S.

So if you want to flee the dollar, where will you go? What will support commodity prices if all the world economies are in recession?

I don't have any answers--but I do believe that much of the negativity surrounding the U.S. is not because things are much worse there, but because they garner more attention and so are better known.

2009 Feb 08 12:37 PM

[Ian R. Campbell]

I find Schiff’s comments interesting. In the past few months as the U.S.$ has strengthened, U.S. consumers have lost further confidence and are spending less and saving more than they previously did. If Schiff is correct in his observations, it seems to me that unless U.S. job losses are quickly curtailed and the U.S. consumer gains confidence and again spends, Schiff’s scenario has the abyss in site and the locomotive moving down the track at full speed with a comatose driver at the helm.

I think all Americans should be writing to their Congressmen, Senators and other elected officials to get the selfless message through that the Administration needs to divert all possible budget and other monies in the immediate term to improving the lot of the American consumer. The American consumer must start spending again. To me the American consumer spending again is the only obvious available key to U.S. economic recovery.

2009 Feb 08 12:43 PM

[Jase]

Gold broken out? You must be kidding me. It's pierced the declining tops line, but it has yet to confirm the move. It's more likely to break $800 than it is to break $1000.

2009 Feb 08 12:43 PM

[Dave Wrixon]

No, you don't have money to burn. Every dime must count.

I am utterly against the tax cuts, because I don't believe they achieve anything useful. There is no such thing as a free lunch, and tax breaks send totally the wrong message to the people, many of whom need to get their butt into gear and get a proper job.

I am 100% behind infrastructure investment because most of it is needed anyway if you are to have a competitive economy in the longer-term.

I work on highways in the UK. The money that could be save by investing adequately in the first place is unbelievable. Can you imagine how much it costs to maintain infrastructure that is already at breaking point? Everything is done piecemeal in the middle of the night, often in freezing temperatures. Do you really think that is effective use of Government money.

Having said that if you invest when the economy is on its knees, you do tend to reduce costs. If contractors are struggling to make ends meet, it surprising how much they will sharpen their pencil.

Also you must remember that lost momentum in the economy cost the Government dearly because of increased social cost when the tax base in shrinking. For the stimulus to have an impact you need to have a Keynesian multiplier as high as possible. In other words the Government spend induces additional private sector spend that exceeds the usual wastage. Only infrastructure projects will deliver that multiplier.


On Feb 08 09:43 AM sheople wrote:

> Dave, I might agree with you if we had money to burn, which we don't.
> Assuming that the dollar could recover, the taxpayer will be inundated
> with taxes, assuming that we are going to pay our debts. Realistically
> you are right only if the dollar is to fail and the monies will not
> have to be paid back. The stimulus to the economy is like kicking
> a dead person. The body will move from the kick.
>
> On Feb 08 09:31 AM Dave Wrixon wrote:

2009 Feb 08 12:48 PM

[Steve0]

I find it interesting that pundits such as yourself are loath to spend, yes, finance dept to keep our Country from falling into the economic abyss. America has incurred a war dept of almost a Trillion dollars between the Iraq and Afghanistan war. Whoever you blame for the current crisis I feel it well time for our Government to take care of it's own during this period. Sure, we will need to get our house in order and immediately make the correct decisions to return to creditor nation. I just don't see how spending 800 billion on the war effort is acceptable. But if we spend 800 billion on America our nation will end as we know it. Hogwash.

Yes foreign financing is critical to maneuver through this economic crisis. But has not America helped the world develop through our spending? Free trade has benefited the world economy immensely. It is in their best interest to help aid the US through this time because a healthy economic engine of America makes for a healthy world economy.

2009 Feb 08 12:54 PM