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MIke NO LONGER posts on Seeking Alpha. Mike Stathis is the Managing Principal of Apex Venture Advisors, a business and investment intelligence firm for the private and public markets, serving the needs of venture firms, corporations and hedge funds. Mike’s work in the private markets includes... More
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AVA Investment Analytics
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America's Financial Apocalypse: How to Profit from the Next Great Depression
  • Peter Schiff: Wrog on the Economy, Wrong on Healthcare (Part 1 of 4) 3 comments
    Jul 15, 2009 8:18 PM | about stocks: GLD


    I normally don’t bother myself with reading personal views pumped out throughout the Internet. But I came across one of Peter Schiff’s pitches demonstrating just how off the mark he remains. So I felt compelled to address his misguided opinions; not only because he is wrong, but also because he has been inducted into the deceitful media club. And he has used this venue as a manner by which to sway political and economic opinion.
    Let me begin with a brief assessment of his track record on the economy. As the record shows, Peter’s understanding of the economy is so superficial that he appears to have no idea what he’s talking about. If you don’t agree, you haven’t kept up with his track record. 
    Sure, Peter, many people knew there was a real estate bubble; many people were aware the U.S. consumes too much and produces too little. But unless you’re able to get the details right, you won’t do too well when translating your economic picture into winning investment strategies (hint, hint).
    As much of the details as Peter missed or got wrong about the economy before the collapse, he continues to preach his oversimplified and extremist thesis - as any good salesman would do. No Peter, we aren’t headed for hyperinflation. You and the rest of the doom club need to stop preaching this nonsense to millions of sheep out there. 
    I previously discussed the reasons why hyperinflation isn’t going to happen; at least not in the United States. Remember, I’m the guy who predicted a depression in America’s Financial Apocalypse. Yet, I know when to come back to reality because I’m not in the business of selling gold or securities.  This unbiased perspective enables me to maintain a level head.
    Of course Mr. Schiff isn’t the only one preaching these scare tactics. Many other perpetual doomers and gold bugs are as well. But they simply have no idea what hyperinflation means, they’re just mindless, or they want to manipulate the gold and currency markets.
    When it comes to the details, Peter got so many things wrong while leaving others out, it’s too voluminous to list here. I know it, and sophisticated investors know it; perhaps some of his former clients know it. Meanwhile, the sheep still have no idea how wrong he has been. This is why they are sheep. This is why they get blown out so often in the stock market.
    Those who have bothered to research Schiff’s track record understand he has been pitching the same doom lines for well over ten years now. Anyone can be right if they predict rain in the dessert. But if you leave out or miss the details, your predictions are useless. What matters most is knowing how hard and long the storm will be, how much it will rain, how hard it will be, how much of the dessert will be covered and who will be affected. 
    The really amazing thing is that Schiff had numerous opportunities (almost daily) to change his mind or revise his “global investment strategies.” Instead, he took on the personality of a parrot, mimicking the same lines over and over as any good salesman would do. Apparently that was enough to satisfy the sheep whose brains remain glued to the financial media.
    Today, Peter has fans clubs all over the Internet, demonstrating why individuals such as Kevin Trudeau make so much money and hit the New York Times Best Seller list. The verdict is in; America has been transformed into a nation of brainless sheep. 
    So now I’d like to take the opportunity to teach Mr. Schiff and his fellow perpetual doomer colleagues (Faber, Rogers and their lackeys) a few lessons in economics, investment management, and of course healthcare. Let’s begin. 
    Lesson #1: Gold is not a hedge against inflation. 
    Having worked on Wall Street, Peter should realize this. But all you really need is some common sense. I don’t think Peter is a dumb guy. But when you’re trying to pitch a sales line in order to get more business, the results often make one seem as if they were not too bright.
    As the facts show, gold is a hedge against deflation. The misinterpretation often arises when the gold bugs fail to consider that gold provides a short-term safe haven during crises. Inflation happens to be a frequent side effect of these crises. I discussed this in a recent article.
    However, over long periods, gold has not held its value when adjusted for inflation. For instance, the big argument the gold bugs cling to centers upon gold’s previous high of around $900 made in 1980. They claim that since the inflation-adjusted price is now let’s say $2200, that’s the price gold will reach.  
    That all sounds good until you remember that gold is in no way linked to inflation since we are no longer on the gold standard. Therefore, the real value of that $800/ounce gold is only about $365.
    If gold is a good hedge against inflation, I’d like to know why it peaked in early 2008 and has not reached the highs since then, despite the fact that we experienced a very intense period of inflation. 
    What about the 1980s and beyond? Why did gold remain lower in price than in 1980 for nearly 30 years? And if gold hedges against inflation, why hasn’t it increased steadily after the bubble burst? The reason for this is because the previous gold bubble experienced a typical post-bubble correction period. I discussed these points in the following article.
    The good news for you gold bugs out there is that gold is likely to go considerably higher in the coming years. However, similar to the gold bubble in 1980, when this one bursts, you had better be in cash ahead of time because the higher it climbs the faster and harder it will fall. 
    Gold prices are driven by supply-demand dynamics, crises, and market manipulation; not inflation. Unless we get back on the gold standard, inflation cannot and will not drive gold prices (other than for short periods). Gold serves as a hedge for deflation and sometimes inflation (due to indirect causes and only for short periods).
    Anyone who buys AND holds gold will most likely be stuck with fool’s gold. While I believe there is a real possibility that gold could reach $2200, it will not be due to inflationary pressures. It will be due to a crisis. Alternatively, it could rise due do the self-fulfilling prophecy being created by the gold bugs. 
    Lesson #2: Gold Provides a Hedge Against Market Declines
    As any competent investment strategist should know, the real value of gold as an investment is as a defense tool since it provides a hedge against dramatic market declines. Still, that doesn’t matter to most investors because the best hedge against a market decline is to stay out of the market.  
    Based upon what I have seen and heard, Mr. Schiff doesn’t seem to be particularly good at forecasting market movements. As far as he’s concerned the market is going down, down, down. How many years has Mr. Schiff made these forecasts now? Fifteen?  
    Always remember this. Extremists are never right, and they are often dangerous. You have to know when to change channels, even if it’s for a brief period.
    Any reasonably experienced investor knows that the most critical skill required to handle bear markets (or any market for that matter) is the ability to forecast major market movements; up and down.
    I suppose if you lack this ability, you might want to stay invested at all times and buy some gold to mitigate potential declines in your portfolio. But let’s face it. That’s a buy-and-hold bozo approach. 
    Lesson #3: Gold Should Be Traded, Never Held Long-Term
    Furthermore, I know this isn’t going to go over well with the gold bugs that encourage investors to buy physical gold, but the fact is that gold should only be traded due to its propensity to manifest wide swings in volatility. Doing so not only lowers the cost basis, but also reduces short-term liquidity risk.  
    Disclosures: none.
    To be continued.
    Stocks: GLD
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Comments (3)
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  • Donn
    , contributor
    Comments (2) | Send Message
    Mike Stathis who?
    16 Jul 2009, 06:22 AM Reply Like
    , contributor
    Comments (477) | Send Message
    -If gold is a good hedge against inflation, I’d like to know why it peaked in early 2008 and has not reached the highs since then, despite the fact that we experienced a very intense period of inflation-the fed was in overtighten mode.Plain and simple.It wont be so easy this time.Hyperinflation is very possible.The dollar is dead.Peter never said everything he predicts will happen overnight.I hope you hear from him soon.
    16 Jul 2009, 04:04 PM Reply Like
  • Retired Aviator
    , contributor
    Comments (2856) | Send Message
    I agree with some of your points, but not all. The hyperinflation argument of Schiff and others is purely the "Quantity Theory of Money" -- a theory every bit as useless in prediction as "Efficient Markets Theory". No room for all the details here. See my website on debunking hyperinflation.
    2 Aug 2009, 02:53 PM Reply Like
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