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Peter Schiff
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I am the founder and director of three companies: Euro Pacific Capital (www.europac.net), a full service, registered broker-dealer and RIA which specializes in foreign securities; Euro Pacific Precious Metals (www.europacmetals.com), a gold & silver coin and bullion dealer; and Euro Pacific... More
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Euro Pacific Capital
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The Schiff Report
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The Little Book of Bull Moves: Updated & Expanded
  • Mish Shedlock Exposed

    In January 2009, just as the "Peter Schiff was Right" YouTube video that catalogued my previously derided predictions about a coming financial collapse was racking up views and attracting mainstream attention, a blogger and investment advisor named Mike Shedlock (aka "Mish") saw an opportunity to make an unethical grab at my current and prospective clients by breaking the nascent wave.

    Shedlock put together a misleading marketing piece entitled "Peter Schiff was Wrong" which compared my recent investment performance with that of his little known firm, Sitka Pacific Investment Advisors. The piece, that circulated widely in the press and on the Internet, focused on how the foreign stocks and currencies I favored had fallen sharply in 2008 while the Sitka Pacific strategy prevented huge losses during the crash. By ignoring long-term data in favor of highly selective short-term performance, the piece tempted people to bail on positions that were poised to make sharp upward moves and lured them into a strategy that has been a long-term disaster for investors.

    While I never publically denied large declines in 2008, I maintained that the moves did not invalidate my economic forecasts or long-term investment strategy. In fact, in my book "Crash Proof" that Shedlock referenced repeatedly in his piece (often times inaccurately or out of context), I advocated a three-legged investment stool; dividend paying foreign stock, cash and foreign bonds, and precious metals.

    Shedlock neglected to point out that the book specifically warned that foreign stocks would likely fall in sympathy with U.S. stocks once the real estate bubble burst and the financial crisis began. I had advised readers to use funds from the "cash" leg of the stool to take advantage of buying opportunities created by the declining share prices.

    As an outsider to Wall Street, the government, and academia, I represented a threat to the establishment's spin that no one could have foreseen the crisis. But the popularity of the "Peter Schiff was Right" video made it hard for the media to ignore my unorthodox views. After all I had been right when the rest of the talking heads had been clueless. Shedlock's piece undermined much of that credibility and led to a negative Wall Street Journal story that was far more widely read. Thanks to Shedlock, I was no longer the guy who called the crash, but the fraud who made "minced-meat" out of his client's accounts.

    From Shedlock's perspective his attack was wildly successful. By undercutting the credibility of one of the most visible spokesmen for Austrian economics (a school of thought to which he supposedly subscribes himself); he did manage to make some bucks for himself.

    At the end of 2008, Sitka Pacific had only 75 clients and $18 million dollars in assets under management (AUM). A typical junior stockbroker at a mid-tier brokerage firm would have a larger book. In fact, during seven of the eight years Shedlock's firm has been in business, they raised an average of less than $5 million per year. However, in 2009, the year the "Peter Schiff was Wrong" marketing campaign was launched, Sitka had a banner year adding 225 new accounts and $40 million in AUM. Today Sitka manages $75 million for 342 accounts. Still extremely small, but had 2009 been a typical year, today's AUM would likely be just $40 million.

    While the 'Peter Schiff was Wrong" campaign was a great marketing success for Shedlock, it was a disaster for any investors taken in by the rhetoric. Despite his criticism of my performance, his own performance is undeniably horrible over the long term. Just about the worst investment decision one could have made was to send money to Shedlock's firm in January 2009. Since then, global stock markets and foreign currencies have rebounded sharply and Shedlock's clients have completely missed the gains. By following Shedlock's advice to sell near the lows, investors converted temporary paper losses into permanent realized losses!

    Central to Shedlock's augment was that I was wrong to have advised investors to get out of the U.S. dollar and wrong to have advised them to buy foreign stocks. To prove his point, he reproduced a short-term chart of the Australian dollar and a spreadsheet representing an account of one of my clients whose account details he managed to obtain (we had over 15,000 accounts at the time).

    Let's start with the Australian dollar. It had just fallen from about 95 U.S. cents in July of 2008 to about 65 U.S. cents in October of that year. According to Shedlock, it was going even lower as the Fed was done with its easing cycle and the Reserve Bank of Australia had only just begun to ease. However, unknown to Shedlock at the time was that the Austrian dollar had already made its low, and by April of 2011 it hit a new record high of $1.10 cents, a 70% rise. Today the Australian dollar is worth about $1.05.

    So was Shedlock right to advise investors to sell the Australian dollar near its lows? Or was I right to have advised people to ride out the decline? In fact, I have been advocating buying the Australian dollar for over ten years, just as Shedlock had criticized me for doing. When "Crash Proof" came out the currency was worth 80 cents, and earlier in the decade you could buy it for closer to 50 cents.

    Shedlock's heavy artillery however, was the specific Euro Pacific client account he "discovered" that showed unrealized losses of 49%. (Dividends received that would have mitigated those losses, were omitted). Shedlock implied that the account he showcased was a typical representation of all my accounts, and demanded that I provide proof if that was not the case. He specifically challenged me to post a year-by-year track record of all my client accounts, similar to what his firm did.

    The problem is that Shedlock threw down a gauntlet that he knew I was legally prohibited from picking up. At that point Euro Pacific Capital was simply a brokerage firm, while Shedlock's firm was a Registered Investment Advisor (RIA). As Shedlock well knew, the rules governing the two structures are very different and so there was no realistic way that I could have accepted his challenge and remained compliant with these rules.

    The truth is that all non-discretionary brokerage accounts are unique. Back then none of our accounts were managed, and each reflected the unique objectives and decisions made by the individual account holders. Some were very aggressive, others much less so. Some favored foreign stocks, others foreign bonds. Some clients just bought physical precious metals. The account Shedlock featured was highly concentrated in resource stocks and Australian utilities, two sectors hit particularly hard by the 2008 financial crisis. I was not allowed to make any claims about the performance of a "typical" account.

    Instead of giving my strategy time to play out, Shedlock seized the opportunity to exploit the short-term declines in the Australian dollar and foreign stocks, to tout the alleged superior performance of his own firm. Since these are the very benchmarks Shedlock chose to evaluate the short-term performance of his strategies, let's see how well those strategies have held up against those very benchmarks over longer time periods.

    For the Australian dollar, we will use the returns on Australian government bonds (after all, investors in Australian dollars are going to want to earn interest), and for foreign stocks, we will use a hypothetical portfolio that replicates the precise composition of the single Euro Pacific account that Shedlock featured in the "Peter Schiff was Wrong " campaign (hence forth to be known as "the spreadsheet portfolio.")

    Sitka features four unique investment strategies: Hedged Growth, Absolute Return, Dividend Growth, and Commodity Focused. Let's compare each strategy to both benchmarks over two relevant time periods. The first begins Jan 1, 2009 (the month Shedlock launched the "Peter Schiff was Wrong" campaign) and ends Sept 30, 2012 (the most recent date for which performance numbers have been posted for Sitka Pacific). This time period would reflect the returns an investor would have achieved if he had opened accounts with Sitka Pacific after having read "Peter Schiff was Wrong." The second, and longer, time period begins with the inception dates of each Sitka investment strategy, and also ends Sept 30, 2012. And just for good measure, I threw in the returns on 10 year U.S. Treasuries and the S&P 500 as well.

    First let's look at the performance starting in Jan 1, 2009. Since we have no way of knowing which of Sitka's four strategies an investor would have selected, I simply averaged the returns of all four.

    As you can see Shedlock's strategies substantially underperformed both Australian government bonds and the spreadsheet portfolio. If after reading "Peter Schiff was Wrong," an investor put $100,000 into Sitka Pacific ($25,000 into each of Shedlock's four strategies), his total gain as of the end of Sept. 2012 would have been a mere $9,600. That's 89% less than the $95,400 that the same investor would have earned had he put the funds into Australian government bonds, and 92% less than the $116,100 he would have earned had he invested in the spreadsheet portfolio!

    Now some may think that Jan 2009 is not a fair starting point, as foreign stocks and the Australian dollar were way down at that time. While this is true, Shedlock had the opportunity to buy those lows, but chose not to, as he incorrectly anticipated further declines. Others might say that starting in Jan of 2009 is unfair as it omits 2008, Shedlock's only relatively good year.

    At first blush this might seem to be a valid point, until you compared the returns on all four managed account strategies since their inception dates to the same benchmarks. Even if you include his one good year the relative performance of his strategies is almost as bad. Take a look at the data below.

    The "Hedged Growth Strategy" has the longest track record of all Sitka's strategies. Had you invested $100,000 back in July of 2005 your account would have been worth $116,700 by the end of Sept. 2012. That represents a meager annual return of about 2%. No wonder Shedlock wants his clients to believe there is no inflation, as he cannot even outperform the CPI! Contrast that to the $242,300 his client's accounts could have been worth had they purchased Australian government bonds, or the $255,500 had they invested in the spreadsheet portfolio. Those returns annualize to about 18% and 19.5% respectively.

    Alternatively, had you invested $100,000 in Shedlock's Dividend Growth Strategy at its inception in June of 2007 (three months after my book Crash Proof came out), your account would have been reduced in value to $92,200 by the end of the third quarter of 2012. However, had you bought Australian government bonds on that date instead you would have had $215,000. Even if you put $100,000 into the spreadsheet portfolio, despite its being down nearly 50% in 2008, your account would have recovered to $140,600 by the end of Sept. 2012!

    So even from their respective inception dates, and despite the huge declines in the Australian dollar and foreign stocks in 2008, no matter which Shedlock strategy an investor chose, his account substantially underperformed both Australian government bonds and the spreadsheet portfolio!

    Shedlock has been warning about the specter of deflation for years, and his strategies are apparently designed to guard against this outcome. However, like Linus sitting in that pumpkin patch, it's been eight years, and the Great Pumpkin has yet to appear. By preparing for deflation and a strengthening U.S. dollar, Shedlock's clients missed out on the far more substantial returns they otherwise might have earned preparing for the opposite.

    More significantly, if investors really feared deflation and simply bought U.S. Treasuries instead of giving their money to Shedlock, they would also have been much better off. Apparently Shedlock has succeeded in developing an investment strategy that underperforms under both inflation and deflation! So, when it comes to the inflation/deflation debate, no matter which camp wins, Shedlock's clients still lose.

    The only reason I decided to revisit this topic is that Shedlock is at it again. As a result of his unethical "Peter Schiff was Wrong" advertising campaign, I decided long ago not to dignify him by doing any joint interviews. Not realizing this, a new member of my staff agreed to a request from RTV to host an informal inflation/deflation debate between Shedlock and me. As soon as I found out, I politely told RTV that I preferred not to appear with Shedlock. I suggested that I would be happy to debate respected "deflationist" voices such as Harry Dent or Robert Prector. In the end they decided to book me for a solo interview.

    Shedlock then circulated another blog post that was picked up by numerous web sites, in which he accused me of backing out of the debate, presumably out of fear. Even though I informed Shedlock that I never agreed to debate him, he refused to revise his post.

    In addition, Shedlock also lied about having supported my 2010 Senate run. Though he did write a self-serving endorsement of my candidacy, it was merely another advertising campaign in disguise. Despite his talk about wanting to host a fundraiser, Shedlock did not contribute one dime to my campaign himself. He simply wanted to use his endorsement to attract the attention of my clients so as to solicit their business.

    Had Shedlock really wanted to patch things up between us he would have apologized for his conduct in 2009. He would have attempted to set the record straight himself with respect to the performance of my investment strategy. Instead, he continues to market his RIA with more insults and false allegations against me. He absurdly claims to have personally taken the high road to patch things up, while accusing me of vindictively holding an irrational grudge against him.

    As is always the case with Shedlock, the truth is something that is easily cast aside when it interferes with his inflated ego or marketing agenda. Now that I have presented the truth for all to see, let's see how Shedlock likes stewing in his own brew. The only upside for Shedlock is that he doesn't have much of a reputation to lose.

    Disclosure:

    Performance of Sitka Pacific Capital Management portfolios were calculated as a time weighted return, using annual figures available on their public website, as of September 2012.

    The following assumptions were made for the spreadsheet portfolio - All positions weighted according to their original cost basis as featured in the Shedlock "Peter Schiff was Wrong" campaign, for both inception and 2009 starting dates. 2% commission charged on all buys. All dividends reinvested proportionately into each stock in the portfolio. Proceeds of companies acquired for cash reinvested proportionally into the remaining positions. Stocks not publicly traded at various Sitka Pacific strategy inception date were added to the portfolio as soon as they went public, with funds to finance the purchases raised by proportionately reducing the previously established positions.

    The performance of the stocks in the hypothetical spreadsheet portfolio and Australian government bonds in no way implies anything with respect to past performance of Euro Pacific Capital clients' portfolios, and in no way should this article be seen as being indicative of future performance for Euro Pacific clients. Past performance is no guarantee of future results and current results may be lower or higher than the data quoted. The return analysis is simply offered to demonstrate the poor performance of Shedlock's strategies relative the specific benchmarks he chose to use in Jan 2009.

    For those of you who are interested in performance figures for Euro Pacific Asset Management, which did not begin managing money until after Shedlock's piece, it can be found on our web site at http://www.europac.net/services/wealth management

    Investing in foreign stocks and bonds involves a high degree of risk, as the volatility of 2008 certainly evidences, including currency fluctuations and political risks. Past performance does not guarantee future success. Do not invest in foreign markets if you cannot afford to lose your principal. Read any prospectus carefully before you invest. Consult with a professional to determine if such investments are suitable for you.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: long-ideas
    Dec 12 4:15 PM | Link | Comment!
  • Inflation: Washington Is Blind To Main Street's Biggest Concern

    Journalists, politicians and economists all seem to agree that the biggest economic issue currently worrying voters is unemployment. It follows then that most believe that the deciding factor in the presidential race will be the ability of each candidate to convince the public that his policies will create jobs. It seems that everyone got this memo…except the voters.

    According to the results of a Fox News poll released last week (a random telephone sample of more than 1,200 registered voters) 41 % identified "inflation" as "the biggest economic problem they faced." This is nearly double the 24% that named "unemployment" as their chief concern. For further comparison, 19% identified "taxes" and 7% "the housing market" as their primary concern. A full 44% of women, who often do more of the household shopping and would therefore be more sensitive to prices changes, identified rising prices as their primary concern.

    My most recent video blog addresses this topic in detail.

    While these statistics do not surprise me, they should shock the hell out of the establishment. According to the Federal Reserve, inflation is not a concern at all. Time after time, in front of Congress and the press, Fed Chairman Ben Bernanke has said that inflation is contained and that it is below the Fed's "mandated" rate of inflation (whatever that may be). The Bureau of Labor Statistics is saying the same thing. The measures they use to monitor inflation, such as the Consumer Price Index (NYSEARCA:CPI) and the Personal Consumption Expenditure (PCE), show annual inflation well below 2%. In fact, the GDP price deflator used by the Commerce Department to calculate the second quarter's 1.3% annual growth rate assumed annual inflation was running at just 1.6%.

    In fact, Bernanke thinks inflation is so low that he is actually worried about deflation, which he believes is a more dangerous issue. As a result, he is recommending policies that look to raise the inflation rate, not just to combat the phantom menace of deflation but to boost the housing market and reduce unemployment. He mistakenly believes these problems are the ones that concern Americans the most.

    If inflation really is as subdued as the government claims, how is it that so many people are concerned? It's not as if the media or political candidates are fanning the fears of rising prices. In fact, given the media's preoccupation with the housing market, the fact that nearly seven times as many Americans worry more about rising food prices than falling home prices shows just how large the inflation problem must be. Yet most economic observers continue to swallow the government's inflation propaganda hook, line and sinker. In fact, although the Fox poll came out last week, I did not read or hear a single story on this topic, even from Fox news itself, which appears to not have noticed the significance of its own data.

    For years my critics have always attempted to discredit my inflation fears by pointing to government statistics showing low rates. However, I have long maintained that such statistics underreport inflation, and the results of this poll seem to confirm my suspicion. There are only two possible ways to explain the disconnect. Either the government is correct and consumers are worried about a non-existent problem, or the consumers' concerns are real and the government's statistics are not. From my perspective, it seems that it is far more likely that consumers are in the right. If so, we are in a lot of trouble.

    If annual inflation is actually higher than 3%, which would certainly be the case if consumers are so worried about it, then we are already in recession. Had government used a 3% inflation deflator (rather than the 1.6% that they actually used) to calculate 2nd quarter GDP, then growth would have been reported at negative .1% rather than the positive 1.3%. I believe that if the government used more accurate inflation data over the past several years, it is possible that we would have seen no statistical recovery from the recession that began in the fourth quarter of 2007. This would help explain why the "recovery" has failed to create jobs or lift personal incomes.

    The Fed's zero percent interest rate policy is predicated on the assumption that there is currently no inflation. If this is not accurate, then they are making a major policy mistake. The Fed is easing when it should be tightening. If inflation is such a major concern now, imagine how much bigger the problem will become once the Fed achieves its goal of pushing the rate higher. More importantly, how much tighter will future monetary policy have to be to put the inflation genie back in her bottle? If inflation becomes so virulent before the Fed realizes its mistake, then it may be forced to raise interest rates significantly. U.S. national debt is projected to reach $20 trillion within a few years. As a result, a 10% interest rate (which would be needed to combat 1970's style inflation) will require the U.S. government to pay about $2 trillion per year in interest on the national debt. This will absolutely upend all economic projections.

    Since 10% interest rates will likely crush the economy, not to mention the banks and the real estate market, tax revenues will plunge and non-interest government expenditures will go through the roof. Assuming we try to borrow the difference, annual budget deficits could go much, much higher from the already ridiculously high levels that they have reached during President Obama's term. Annual deficits of $2 trillion, $3 trillion, or even $4 trillion, would result in a sovereign debt crisis that would force the Federal Government to either default on its obligations or inflate them away. Given the tendency for politicians to prefer the latter, voters who think rising prices are a problem now should just wait until they see what is waiting down the road!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Oct 16 3:57 PM | Link | 1 Comment
  • Justice Roberts Is Right: The Plan Won't Work

    Now that the Supreme Court has given its narrow blessing to the Affordable Care Act, the big question is whether it will deliver the benefits that its proponents promise. Unfortunately, as it is now constructed, the plan will backfire causing fewer healthy people to buy insurance, raise premiums for those who do, destroy employment opportunities, cripple the health insurance industry, and weaken the economy.

    In order to guarantee insurance to all, regardless of age, health or pre-existing conditions, the framers of the plan concede that it is essential that the young and healthy (who are less likely to be heavy users of health care) pay into the insurance pool. The surplus generated from their premiums compensates for the money lost to those receiving more in services than they pay in premiums (e.g. older people and those with medical conditions). But the ACA has given these healthy people a "Get out of Jail Free" card that many of them are sure to play.

    Most healthy young people know that they are losing money to insurance providers, at least in the near term. That is the nature of insurance. You pay to prevent costly exposure to an unlikely event. And just as homeowners wisely pay for fire insurance even though they don't expect their homes to burn down, given the high cost of medical care it is also practical that healthy young people buy health insurance.

    But, the ACA makes it illegal for insurance providers to deny coverage to anyone for any reason. This allows healthy people to drop insurance until they actually need it without incurring any risk. It's like allowing homeowners to buy fire insurance after their houses burn down. To counteract these new free rider incentives, the law imposes "no insurance" penalties (also defined as taxes by the Supreme Court). The problem is that these "penaltaxes" (for lack of a better word) are insufficient to the task. In fact, Chief Justice John Roberts ruled the law constitutional precisely because the burdens were not high enough to compel behavior. (In other words, he thought the law was constitutional because it will be ineffective.) The numbers support his arguments.

    On average, in 2010, a typical healthy young person paid at least $2,500 per year for insurance (for a plan that would still involve significant out of pocket expenses). In some areas of the country, premiums were more than twice as high. When the program takes effect in 2014 the penaltaxes will be the greater of $95 or 1% of household income. A single person earning $40,000 per year who chooses to go uninsured would then be subject to a $400 penaltax. The decision would be an easy one: drop the insurance, incur the penaltax and pay for any routine medical services out of pocket. In the unlikely event that he gets cancer or is hit by a bus, he can always buy insurance in the ambulance on the way to the hospital. Even in 2016, as the penaltax increases to the greater of $695 or 2.5% of household income, it will still not make sense for many people to buy insurance. The penaltaxes are capped at levels that equal the full cost of an average health plan. So even high income individuals are no worse off financially for not buying insurance. In addition, the IRS' ability to actually collect these penaltaxes is limited to garnishing income tax refund checks. If an individual is not getting a refund, the IRS is impotent.

    The law places no requirements for businesses with fewer than 50 employees to offer insurance. So when younger workers realize the benefits of dropping insurance, they will naturally gravitate to savvy businesses that offer higher pay instead of insurance. This will drain more premiums from the insurance pools.

    In contrast, the burdens placed on employers with more than 50 workers are complex, onerous and unpredictable. Those that don't offer insurance would be subject to substantial (and open ended) penalties if at least one employee receives an insurance tax credit or a government subsidy to an insurance exchange. If they do offer insurance, they will also be subject to substantial (and open ended) penalties if the plan fails to cover 60% of employee health expenses, or if premiums for any employee are more than 9.5% of family income. It has been left wholly unexplained how employers are supposed to accurately determine these triggers which involve knowledge of family income, not just employee income.

    Smaller employers will look to avoid these headaches by staying below the 50-employee threshold. Though it should be obvious, there is plenty of evidence to support this tendency. French law involves significant regulatory requirements for businesses that have more than 50 employees. As a result, there are currently 2.4 times more French companies that have 49 employees than there are with 50. Incentives for businesses to stay small will hurt the economy and will further shrink the numbers of people paying into the health insurance pools.

    Employers will also be incentivized to avoid hiring lower paid workers who would be more likely to trigger the penalties tied to household income. As a result, many small companies will likely look to replace lower rung employees with temps, automation or outsourcing, further raising the barrier to workforce entry for lower skilled workers. The unemployable workers will then qualify for free health insurance, further draining the system.

    Unless the penaltaxes are raised significantly, far too many needed premium payers will drop out. As they do, insurance companies will try to recoup the lost revenue by raising premiums for the customers who remain. As the gap between the relatively low penaltaxes and the high cost of health insurance premiums increases, so too will the incentive to drop coverage. This self-reinforcing dynamic will render the entire plan non-viable.

    It is a foregone conclusion that the Obama Administration and its congressional allies are already planning to raise the penaltaxes. Although such increases would render the plan unconstitutional if they compel behavior, according to Roberts' analysis, I do not expect the Supreme Court to ever rule on this case again. The Court has a history of opening small cracks in the Constitutional barn door for the bureaucratic horses to stampede.

    Unless we can summon the political will to repeal the poorly conceived law, we should all brace for higher health care costs, many more layers of impenetrable federal bureaucracy, a significantly weaker economy, diminished employment opportunities, and lower living standards.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    Aug 01 10:09 AM | Link | 2 Comments
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