Four Reasons Peter Schiff Is Wrong

Doomsaying is a tricky business. In the late 1970s, when commodities were king, technical analyst Bob Prechter correctly predicted the implosion of the commodity bull market and a “’super cycle’” bull market in equities. His eerily on-target prediction made him an investing superstar. Unfortunately, he then predicted the 1990s would be a severe bear market for stocks, capped by a prediction that the Dow would fall to 800 at the start of this decade.

Right now, Peter Schiff, president of Euro Pacific Capital, is the doomsayer du jour. Schiff, as you may be aware, takes credit for predicting the market crash of last autumn in his book “Crash Proof: How to Profit From the Coming Economic Collapse.”

I don’t begrudge Schiff some credit for the prediction (though it did come 18 months early). But like Prechter, one correct prediction from a doomsayer often emboldens them to more outlandish ones. Schiff, for one, is busily telling the business press (and posting videos on YouTube) about his prescience and saying the current stimulus package and greater government regulation of Wall Street mean the worst is yet to come.

I’ll admit, there is something tempting about subscribing to bleak predictions when times are tough – after all, even the best investors lost money last year. But there are four reasons I believe Schiff is wrong.

For one, stimulus packages are a proven way of getting the economy out of recession – because Hoover didn’t do it and Reagan did are significant reasons why we hold the divergent views we do of those presidents.

The second reason is that the market has actually been pretty stable since the November lows. The technical signs are strong and showing that we’re in a base building phase that, at some point, will be the basis of a bull move.

The third reason is one of perspective: We’ve come out of severe recessions before. It’s easy to think the game has changed, but history says that’s very likely not the case, especially since people were predicting doom in each of those recessions, too.

The fourth reason is that for all his predictive abilities, Schiff still wasn’t able to make his investor clients money in 2008, admitting in a recent article they lost “badly” last year. If someone is negative and still can’t make his investors money, maybe he’s not so insightful, just lucky once in a while.

Which brings me to George Soros. It’s fascinating to me that Soros gets less attention than Schiff, even though Soros is better known, more successful and, in fact, published his own prescient book, “The New Paradigm for Financial Crisis: The Credit Crisis of 2008 and What it Means,” early last year.

Soros’ prediction was that a huge market bubble had formed thanks to loose government regulation of the financial industry and an ever widening expansion of credit to consumers and to Wall Street, which allowed the explosive growth in risky derivative products. Sounds right on the mark to me.

Not to dismiss Schiff’s career, but Soros also has the benefit of an unmatched track record that doesn’t rely on luck, most notably a correct bet against the valuation of the British pound that made him $1 billion in profits in one day in 1992. But perhaps Soros doesn’t get as much notice because unlike the doomsayers, Soros takes a more nuanced view of the position we’re in.

Essentially, his view is that this isn’t the end, this is a change. That change, as he told Bill Moyers in an interview last October, is from American consumer spending being the engine of world economic growth to alternative energy and countering global warming being the driver of future growth.

Soros Sees Green

Soros’s notion is this: For the past 25 years, American consumer spending has been the force behind global growth. A lot has changed in that time – 25 years ago, the average fixed-rate mortgage was 13.5%, and in all likelihood one couldn’t have gotten a mortgage with less than a 20% down payment. Americans also saved about 6% of their income. Lower interest rates, the expansion of mortgage products, an increase in credit cards and a shift away from saving fueled growth globally by encouraging us to spend more. Clearly, that has been played out.

A lot has also changed environmentally, laying the groundwork for Green to drive the next quarter century of economic growth. In 1983, the EPA and National Academy of Science first noted a rapid increase in carbon dioxide in the atmosphere. Since then, NASA climate data shows a sharp spike in the average global temperature, with the warmest 14 years on record occurring since 1990.

While the present economic turmoil has made other concerns more pressing, enough Americans still worry about global warming that 30% of those questioned put global warming as a top priority in a January poll by the Pew Research Center for People & the Press.

What about the price of gasoline? Thanks to the sudden drop in the price of oil, gasoline is actually cheaper now, at a national average price of $1.82, compared to an inflation-adjusted $2.39 average in 1984. That may indicate that the cost of energy is no longer a factor in going Green. That’s true only if you’re considering the short-term. But, as I noted to Cabot Green Investor subscribers in December, the outlook for energy supply is dire.

The oil importing nations fund the International Energy Agency to gauge oil production and demand. It’s the most respected analytical body out there for oil and gas issues and isn’t prone to doomsaying. In November, the IEA issued its outlook on world oil supplies. The report was overshadowed by the market crash at the time, but that doesn’t make its conclusions less valid.

Even adjusted for the presumed impact of the economic turmoil on demand, the IEA says world oil demand and supply are so out of whack that even if demand doesn’t grow from today’s levels, by 2030 the world will need to have discovered the equivalent of another four Saudi Arabias (!) to meet demand. And the odds of that happening, the IEA noted, are impossibly low.

Consider that the bulk of global oil production comes from 800 large oilfields. The vast majority of those “giants” were discovered and tapped 40 to 50 years ago and are now producing less and less every few years. Then consider that even the modest 1.6% annual growth that the IEA sees in world oil demand means that by 2030 world demand will be 45% greater than it is today.

“Current trends in energy supply and consumption,” IEA executive director Nobuo Tanaka said at the time, “are patently unsustainable–environmentally, economically and socially – they can and must be altered.”

With Turmoil Comes Opportunity

A key difference between a doomsayer and an investor is, in my opinion, that a doomsayer sees only the negative, while an investor sees opportunity in change. What about George Soros? Beyond his general belief in alternative energy, we don’t know exactly what he is buying and selling right now, but regulatory filings do lend some insight.

One of his significant holdings reported in January is 56,306 shares in a company Cabot Green Investor subscribers learned of last summer – Clean Energy Fuels (CLNE). Clean Energy Fuels distributes compressed natural gas (CNG) and liquefied natural gas (LNG) at 170 gas stations in the U.S. and Canada. Natural gas has two advantages – much of it is domestically produced and it burns much cleaner than diesel or gasoline, emitting just 30% of the carbon dioxide of gasoline.

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Right now the biggest customers are fleet operators like UPS (UPS), Waste Management (WMI) and municipalities, as well as airports and seaports that need to reduce their carbon footprint in order to expand. The Port of Los Angeles, for instance, now requires trucks and forklifts to be converted to natural gas. Clean Energy makes money by providing fueling stations at such locations, while also providing funding and expertise in securing government incentives to potential customers.

In total, all of its operations cost Clean Energy about $2.50 a gallon, so the economics don’t appear so compelling right now. But consider that national truck emissions standards will tighten in 2010, permitting just one-third of 2007’s allowable CO2 levels. That’s so strict some conventional engine makers, like Caterpillar, have announced they are exiting the business rather than try and comply. Yet natural gas engines are already inside those 2010 limits.

So even if gasoline prices stay low, there is plenty of demand for compressed and liquefied natural gas (CNG and LNG, respectively). And if gasoline prices surge, as the IEA suggests they should? Then Soros’ bet on Clean Energy Fuels will look, well, prescient.

Comments

[WayneinOregon:]

Hi Brendon,

Thanks for the insightful article. It seems to me that it's only a matter of time before we build an NG fueling infrastructure that will allow vehicles of all kinds to run on this cleaner burning fuel.

I was wondering if you would agree, and if so, when you think this development might occur. Also, do you think the marketplace would create it, or would some kind of government mandates/incentives be involved? - Thanks

Feb 23 02:25 PM

[WayneinOregon:]

P.S. I agree with your general comments about stock market predictors like Peter Schiff. In the fall of 2007, I recommended my wife move all of her IRA money out of stocks.

I was seeing we were overdue for a recession, there was growing concern about sub-prime mortgages, and there was increasing concern about a credit crunch. I didn't understand any of the details at the time, but my sense was there was a coming convergence of events that did not bode well for the economy or the market. Well, I guess I got that one right, but it certainly does not make me an accurate prognosticator of all kinds of events moving forward.

Feb 23 02:33 PM

[huangjin:]

Hoover implemented a massive stimulus program of public works, he pressured companies not to cut wages, and he created something very similar to TARP, the RFC, and the Federal Reserve slashed interest rates and inflated the money supply. Hoover initially cut taxes, and then he hiked them. Hoover was the forerunner to FDR during a time when government intervention was thought of as a good idea.

Reagan took office at the end of a decade plus of stagnation. It was so clear that government was not the solution, that the Democratic Congress already started deregulation under Carter. Reagan took office and accelerated the reduction of government's burden on the country (though the deficits pushed the cost down the road).

Our current situation resembles which presidency?

Feb 23 02:40 PM

[TC3013:]

1. Stimulus wiil not work the way it is set up. And it is just more debt. You ignore FDR great society.
2. We are making new lows, below November, anything but stable.
3. Yes we have come out of recessions before, but that assumes this is just a normal recession. It is not. It is a burst credit bubble. That is FAR WORSE, and is the main reason we keep going lower despite people like you saying don't panic. The correct thing to do WAS PANIC, last fall and take 100% of your money out of the stock market and go all cash. Remain in cash as interest rates will be double digits within 18 months.
4. Wether Schiff made money off his prediction is irrelevant to me, he is not managing my money.

It is people like you that have failed to see that we have undergone a PERMANENT STRUCTURAL CHANGE and are going by the previous recession playbook, that will lose 80% of your money, while people like me will keep mine, which may not turn out to be as much as I need do to the runaway inflation all this money printing will cause, but I will be far better off than you.

Feb 23 02:46 PM

[CJJ:]

Respectfully you have no proof of your PERMANENT STRUCTURAL CHANGE. You have no proof of your runaway inflation.

Just like the authors points. You are both guessing as to what will occur.
You're certainties are no better than his.

That being said, in the short term I tend to agree with you that cash is where to be but only because people are quite irrational and seem intent on fighting tooth and nail to do anything and everything to not spend.

In the longer term I tend to agree more with the author. Americans are not going to become poor all of a sudden and take it sitting down. Its much easier to keep poor people poor. Its much harder to expect people who were not poor to accept being poor.

It just as probable that you'll both be wrong and something totally unexpected occurs.

Feb 23 03:18 PM

[John Polomny:]

"For one, stimulus packages are a proven way of getting the economy out of recession – because Hoover didn’t do it and Reagan did are significant reasons why we hold the divergent views we do of those presidents.'

Exactly how do stimulus packages produce long term wealth. Especially this one. It has very little actual "stimulus" and a whole lot of nonsense that amounts to transfer payments to idle non producers. I guess if you ram $1 trillion into the economy you can make GDP increase for a couple of quarters but this is not real wealth creation. Go back and read Henry Hazlitt "Economics in One Lesson" he debunked this during the Great Depression.

"The second reason is that the market has actually been pretty stable since the November lows. The technical signs are strong and showing that we’re in a base building phase that, at some point, will be the basis of a bull move."

The market completed a multi decade double top recently on the S&P. Earnings estimates are dropping on the S&P and could come in at $35 or lower for 2009. Put a generous 15x P/E ratio on it and you get around 400 on the S&P if that. put a historical PE of 8 for bear market bottoms and you can do the math, its a lot lower then here.

"The third reason is one of perspective: We’ve come out of severe recessions before. It’s easy to think the game has changed, but history says that’s very likely not the case, especially since people were predicting doom in each of those recessions, too.'

Yes except this is a depression and the government is doing everything it can to iterfere with the market clearing process which will just make the situation drag out for longer period of time.

Feb 23 03:34 PM

[Bad Dog:]

I would say that WW2 was the biggest stimulus package in history, and it worked. The problem with most stimulus packages - and this really only refers to deflationary recessions - is that they aren't big enough. The lesson people consistently miss about FDR is that the New Deal was never quite enough to pull the country out of the Depression and in fact 1937, with its lower spending and higher taxes pushed the country right back into the depths, indicating clearly how weak the New Deal actually was. WW2 allowed the US government to open the floodgates. We paid millions of people to build machines with no productive purpose, machines that would be sunk in the Atlantic, shot down over Germany, or otherwise destroyed. We also took thousands of men off production lines and sent them overseas, having them die in many cases after paying a lot for their training and education. We ended the war with a national debt in excess of 120% of GDP. Not content with plunging the country into debt, we then saved western Europe by pouring in money and aid in the vast Marshall Plan, that was then followed by Ike's crazy Interstate Highway Plan. OK, so with all this "unproductive" spending and debt, the USA was ruined for the next generation, right? I mean, that's what the conservatives would have predicted, right? On that basis, I can tell you that the only problem with the stimulus plan is that it's not nearly big enough. I have history and facts on my side.

Now for an important announcement. Brendan, you need a new photo. Your head is cut off. The photo looks balanced, and that smile - dude, not so cheesy, m'kay?


On Feb 23 03:34 PM John Polomny wrote:

> "For one, stimulus packages are a proven way of getting the economy
> out of recession – because Hoover didn’t do it and Reagan did are
> significant reasons why we hold the divergent views we do of those
> presidents.'
>
> Exactly how do stimulus packages produce long term wealth. Especially
> this one. It has very little actual "stimulus" and a whole lot of
> nonsense that amounts to transfer payments to idle non producers.
> I guess if you ram $1 trillion into the economy you can make GDP
> increase for a couple of quarters but this is not real wealth creation.
> Go back and read Henry Hazlitt "Economics in One Lesson" he debunked
> this during the Great Depression.
>
> "The second reason is that the market has actually been pretty stable
> since the November lows. The technical signs are strong and showing
> that we’re in a base building phase that, at some point, will be
> the basis of a bull move."
>
> The market completed a multi decade double top recently on the S&P.
> Earnings estimates are dropping on the S&P and could come in
> at $35 or lower for 2009. Put a generous 15x P/E ratio on it and
> you get around 400 on the S&P if that. put a historical PE of
> 8 for bear market bottoms and you can do the math, its a lot lower
> then here.
>
> "The third reason is one of perspective: We’ve come out of severe
> recessions before. It’s easy to think the game has changed, but history
> says that’s very likely not the case, especially since people were
> predicting doom in each of those recessions, too.'
>
> Yes except this is a depression and the government is doing everything
> it can to iterfere with the market clearing process which will just
> make the situation drag out for longer period of time.
>
>
>
>
>
>
>

Feb 23 03:56 PM

[Mad Stan:]

So you're advocating we enter into WW3 to solve our economic crisis? What a great way to get out of a depression.. by destroying the productive capacity of every other major industrial nation. Never mind the 60 million dead at the end of the hostilities. It wasn't the weapons we made in WWII that got us out of it, it was the industrial base that started churning out goods to sell after the war was over--after the destruction of all their industrial capacity.

As for the author.. Stimulus is proven? It didn't work for Japan. Bush Stimuli 1 didn't work Bush Stimuli 2 didn't work. What makes you think Obama Stimuli 1 is going to work?

The Feds have expanded their "balance sheet" (hint hint we're printing money) and we have people asking where the proof is in future inflation.

On Feb 23 03:56 PM Bad Dog wrote:

> I would say that WW2 was the biggest stimulus package in history,
> and it worked. The problem with most stimulus packages - and this
> really only refers to deflationary recessions - is that they aren't
> big enough. The lesson people consistently miss about FDR is that
> the New Deal was never quite enough to pull the country out of the
> Depression and in fact 1937, with its lower spending and higher taxes
> pushed the country right back into the depths, indicating clearly
> how weak the New Deal actually was. WW2 allowed the US government
> to open the floodgates. We paid millions of people to build machines
> with no productive purpose, machines that would be sunk in the Atlantic,
> shot down over Germany, or otherwise destroyed. We also took thousands
> of men off production lines and sent them overseas, having them die
> in many cases after paying a lot for their training and education.
> We ended the war with a national debt in excess of 120% of GDP. Not
> content with plunging the country into debt, we then saved western
> Europe by pouring in money and aid in the vast Marshall Plan, that
> was then followed by Ike's crazy Interstate Highway Plan. OK, so
> with all this "unproductive" spending and debt, the USA was ruined
> for the next generation, right? I mean, that's what the conservatives
> would have predicted, right? On that basis, I can tell you that the
> only problem with the stimulus plan is that it's not nearly big enough.
> I have history and facts on my side.
>
> Now for an important announcement. Brendan, you need a new photo.
> Your head is cut off. The photo looks balanced, and that smile -
> dude, not so cheesy, m'kay?

Feb 23 04:29 PM

[MN Dabbler:]

Bravo, CJJ, and bravo, Mr. Coffey. While Mr. Schiff did indeed predict the latest bubble burst, it would appear, based on his various investment theses (including investing everything overseas) that his clients are likely taking a bath. I wonder if it is any consolation to those clients that Mr. Schiff called the financial bubble?

Feb 23 04:31 PM

[AuburnGuy:]

So why no mention of Prechter's book, Conquer the Crash, which laid out today's scenario pretty accurately, and before Soros'?

Feb 23 04:41 PM

[rice crispy...:]

so now we're gonna tug o war over whos wrong and who's more wrong about what's wrong. Man! it's always one distraction tangent after another. no wonder these seated people can get away with so much underhanded shiftiness. we're all too busy goin' at each other even when we get to the bottom of the problem.

Feb 23 06:38 PM

[axelrod608:]

Betcha got an "A" in Keynsian Economics 101. Your four reasons pale in comparison the the World Banks' economists study of 30 years of all financial crises which found that in every case, without exception, the length and depth of the following recession was directly proportional to the amount of money the government threw at the problem in an attempt to "fix" it. Why do you think Japan has NEVER recovered ? Simple - they threw the most money of all at their crisis. But not as much as the US is wasting.

Schiff has history on his side. You have Keynes.

Feb 24 09:37 AM

[the ilster:]

Wow you really are clueless! I suggest you get educated by Nouriel Roubini. Your assumptions are laughable. You really have no idea what is going on. let me help you. THIS IS THE PROBLEM

We have now reached the stage where the banker's charade of paper money and debt can no longer expand fast enough to even minimally service the debts it has created.

Feb 24 10:30 AM

[wanagi:]

Overall I think you are on the right track. Except for one thing. Natural gas emitting "just" 30% carbon than gasoline is not an acceptable solution. It may be for certain uses but the overall economy will need clean electric energy infrastructure buildout to not only save the planet in the long term but lift ourselves out of this predicament in the short term.

Feb 24 10:37 AM

[D. Montini:]

If you like CLNE then you must purchase stock...Do your homework first, then add Soros to the list of heavy hitter stockholders..Also, you must back it up with the purchase od Westport Innovations..WPRT..the... make the gadgets that inable the engines to run on Natural Gas.....This is a no brainer......

Feb 24 11:11 AM

[D. Montini:]

Sorry for the typos, it should read they make, and enable, and purchase of...oh well....

Feb 24 11:17 AM

[J. Grandits:]

I know he is not real mainstream but Casey Research, Doug Casey's company, has been fairly accurate in terms of timing and severity of this recession/depression. Their newsletter from Sept '07, International Speculator, called a short on MBIA and further deterioration of the housing/financial sector. Based on their advice I was able to adjust my portfolio and avoid large losses and made money with gold miners and producers. They are calling for inflation as result of these huge deficits and misdirected stimulus.

Feb 24 11:37 AM

[PainfullyAware:]

Exponential Growth Is NEVER INFINITE !!!

The problem with using reality to gage the future is that Governments Alter Reality until their effect becomes too negligible to sustain the fiction. With this wild card in the deck it is impossible to have "Accurate Timing".

We have come to the end of the charade and the reset must take place.

We are in a case similar to an airplane that has lost its engines. You can pull back on the yoke to keep your altitude but eventually you run out of velocity and the wings have no effect. The aftermath is predictable.

Humanity will pick up the pieces and we will begin again, learning little from the past but having new engines and much more altitude to exploit.

Feb 24 01:14 PM

[perceptions...:]

"Stimulus will not work the way it is set up. And it is just more debt."
"Exponential Growth Is NEVER INFINITE !!!"

Both, quite correct!

Stimuli are legitimate tools, given that an economic downturn is purely a temporary confidence issue.

However, on this occasion there basic, structural problems, which are creating the reduced confidence.

The basic sources of the current economic symptoms, are"
1) Population - Total & Aging (Baby Boomer Bust)
2) Peak Oil
3) Climate Change

We are just at the leading edge of the Baby Boomer Bust & Peak Oil.

These issues require structural/system wide change and if they continue to be ignored, the system will collapse.

The above, together with the usual Greed, are basic drivers of the global economy.

The Baby Boomer generation, since WW2, has driven the biggest economic boom in human history and it, together with Greed, has largely contributed to financial market distortions, such as sub-prime & derivatives.

However, like Oil, any economy is finite, it has limits.

We are just now entering a period, where a number of finites will reach their limitations, around a similar timeline.

The baby Boomer generation has already commenced their 20 year cycle, into retirement saving, then retirement, before finally leaving us forever.

Global Peak Oil is no longer a matter of fiction, it has clearly been fact, since around 2005, as viewed first by the explosion in its cost pb, then its reduction in cost pb, to conserve its usage.

Finally, our greatest asset, the Global Climate, which is set to cause enormous difficulties, as this century proceeds, largely due to our exploding population & humanities industrial revolution over the last 200 years.

All of this is now absolutely interlocked!

Can we change, in time to make a difference?
Yes, we can!

Will we change, enough to make a difference?
That is the $64 Trillion question?

Feb 24 08:09 PM

[Abirch300:]

Ok...just another example of how our public education system has indoctrinated people with revisionist history. Hoover was in interventionist. FDR was even worse, and Keynes was a moron who believed you can make something at of nothing (which the Fed does all the time thus causing our problems.)

think about it. If you were sitting at a bar on Friday night and told the guys your plan to get out of debt and become solvent was to borrow and spend more money, they'd laugh you right out of the joint.

Peter Schiff isn't God, but he has a lot of common sense. I recommend reading "Meltdown" by Thomas Woods. I don't think he's right about everything...the macro economy has way too many variables, but he sure makes a hell of a lot more sense than Bush and Obama with their damn stimulus (welfare expanding) programs.

Finally, regardless of economic outcomes, what makes it morally right for the government to steal from me and my grandchildren? To serve the greater good? If it did so than maybe I'd be ok with it. But most of the money gov't steals gets eaten up in beaurocracies. Private charities are much better and more efficient. And here's a novel idea...how about letting good old supply and demand determine where resources should be allocated instead of propping up failed businesses and building bridges to nowhere?

I understand that letting things take their natural course is painful...my own brother in law is out of work and my sister is pregnant with their 10th child. But short term pain is much less damaging in the long run than dragging out the inevitable.

by the way, research the depression of 1920-21. It only lasted a year or so because the government didn't get its damn hands in it so much. The great depression lasted 14-15 years (no, world war ii didn't end it contrary to the revisionist history taught in public schools.) If war ended recessions than I'd say we should be doing pretty well right now (about a cool trillion has been spent so far on Iraq last I heard) It's easy to say unemployment went down when 29 percent of the male population was in the military.

"Government is like a prostate. The bigger it gets, the less it works."

Mar 03 12:49 AM

[User 371000:]

while initially much of the LNG/CNG will be domestically derived and packaged..........russ... and the middle east still have a hold on the majority of the worlds natural gas reserves.....this is Russia's market (>30%) and not ours........NG will not be our ticket to energy independence

Mar 12 11:51 AM

[retired avi...:]

I was initially a Peter Schiff fan when I first saw the famous youtube video "Peter Schiff was Right". In fact, after that I began in earnest to study the man's views, as I feared his prediction that the worst is yet to come. I wanted to be informed and position my assets.

After doing a lot of study, though, I did a complete 180 degree turnaround from being a Schiff believer - see my website and book on debunking his arguments!

Aug 04 12:57 AM