Peter Schiff Writes A Rebuttal to His Critics

Peter Schiff writes a rebuttal to his critics on the Market Oracle.

(emphasis mine) [my comment]

Peter Schiff Rebuttal- A Response to My Critics
Jan 29, 2009 - 04:47 PM
By: Peter_Schiff

My popularity on television and the internet has led a very small money manager to use his popular financial blog to promote his fledgling business by attacking the recent poor performance of my long-term investment strategy. The post is causing quite a stir and compels me to provide some badly needed context.

[I am just guessing here, but it is pretty clear that Peter Schiff is referring to Mike Shedlock and the piece he recently published on the Market Oracle: Peter Schiff Was Wrong on the U.S. Dollar and Foriegn Stock Markets ]

To achieve his ends, this individual has distorted much of what I have been saying and writing, and has twisted the facts to support his own preconceived conclusion. In essence, his piece is nothing more than an overt advertisement (and a highly deceptive one at that) to use my popularity to advance his career. In so doing he has given my critics, particularly some who have been embarrassed by their roles in the "Peter Schiff was Right" video, their moments of retribution. In addition, some members of the press who have never been among my greatest fans are seizing the opportunity to discredit me as well.

The crux of the blogger's arguments are that my beliefs in "decoupling, hyperinflation, and that the dollar is going to zero" have been completely discredited by the events of 2008, and that the resulting investment losses suffered by my clients last year confirms the fatal flaws in my approach.

In addition to mischaracterizing many of my beliefs, he also is confusing short-term market fluctuations with long-term economic trends.

[Agreed. Last year' s commodity bubble completely distorted inflation upwards in the first half of the year and then downward in the second half.

Side note: I predicted the commodity bubble (though I wasn' t blogging at the time so you won' t find my warnings on this blog). On August 2, I bet a bottle of Don Perignon that oil would fall under $100 within two months. I am particularly happy to have won that bet. ]


First of all, the hyper inflation issue is a straw man at best. While I often talk about the possibility of hyper inflation, I have always said that it would be a worse-case scenario that would play out over many years [I disagree. When hyperinflation in the US begins, it will happen much faster than anyone expects, including Peter Schiff apparently expects. I will write more on this in another post]. The fact that it did not appear in the first year of the economic crash (2008) does not invalidate my position. I have always maintained that this worst-case scenario will likely be avoided by what will ultimately be a dramatic shift in policy once our leaders come to their senses. However, until then the dollar will likely lose a substantial portion of its value.

Second, I never said that the dollar would go to zero [I am willing to go on the record that the dollar will lose over 95% of its value within two years], either in 2008 or any year thereafter. I have said that in the event of hyper inflation the dollar's value would approach zero. My actual forecast in my book "Crash Proof" was that the Dollar Index would fall to 40 (currently about 85), with a realistic worst case scenario, assuming very high but not hyper inflation, of 20 or lower.

Third, the blogger points out that because the decoupling theory (foreign economies improving while the U.S. falters) that I wrote about in "Crash Proof" has yet to occur, that the theory itself was ridiculous. In my book I wrote that this process would not occur overnight, that initially our creditors would come to our aid, and in so doing our problems would become manifest abroad. [This manifestation will take the form of hyperinflation in China] I wrote that it would take time for the world to realize that what had been decoupled from the economic train was not the engine but the caboose. In fact, that is precisely the way it is playing out.

Chapter Ten of "Crash Proof" is specifically focused on the need to keep funds liquid to take advantage of the buying opportunity that would initially develop once our stock market began its collapse. I specifically mentioned that when U.S. stocks began to fall, we could expect sympathetic declines overseas. While I did not know the precise timing of those events, I advised readers to prepare.

I did not expect the huge dollar rally of 2008. [I did, but again wasn' t blogging at the time. The reason I believed the dollar would rally was because I didn' t believe in a painless decoupling, as it was being presented in the media at the time (US suffers while everyone else is unharmed). I do believe in a painful decoupling in which everyone suffer, but the US suffers far more.] But to discredit my long-term view of the dollar based on an eight month move is absurd. [Agreed. Commodity bubble distorted everything] So while I believed that a weak dollar would cushion the temporary decline I expected in foreign stocks, a strong dollar ended up exacerbating it. In the meantime, I believed that the high dividends these stocks were paying would make it easier to ride out any correction. The problem was that the dollar fell so far leading up to the crisis (in 2005-2007) that by the time the crisis finally erupted the dollar was poised for a bounce.

Central to the argument that my investment thesis is wrong is the belief that the crisis is over or that the recent trends will continue until it is. But the crisis is just beginning and the movements thus far in the dollar, commodities, and foreign stocks, are mere head fakes. Once the speculators have been flushed from the markets, the underlying long-term trends I have been following should return in earnest.

To illustrate the flaws in my investment strategy the blogger has posted a client's statement that shows a loss in excess of 60%. In addition, he claims to know of other Euro Pacific clients who have experienced similar losses. The inference of course is that most, or all, of my clients must have suffered similar losses, and the existence of such losses proves that I am wrong. In fact, some have gone a step further, claiming that such losses prove that I am a fraud.

First let's deal with the one client's account. I have been following several key investment themes for the past ten years. The basis for my strategy is that recent U.S. prosperity has been false, and that the consequences of the bursting of our bubble economy would ultimately play out in a substantial decline in the value of the U.S. dollar, higher commodity prices, the re-monetization of gold, and foreign equities substantially outperforming U.S. markets [I pretty much agree with all of these. For those of you who insist on investing in US markets stick exclusively to equities of either manufacturing or commodity companies]. From an investment perspective, those themes played out extremely well in the eight years from 2000-2007. Recently we have seen a sharp, and I believe temporary, reversal of these trends. Those that came late to the party (at least based on where we are today) now have to ride out a particularly difficult correction.

For example, the account in question belongs to the son of a long-standing Euro Pacific client, who is still adding funds to his accounts. Without specially commenting on the performance of the father's account, it must have been compelling enough to finally persuade the son to come on board himself in early 2008. However, as is often the case, by the time he came on board, foreign stocks and commodities were about to sell off, and the dollar was about to begin its unexpected rally. Following such a sharp correction, the son now regrets his decision and must blame me for my part in helping him make it.

Perhaps as a stockbroker I should have persuaded the son to wait for a correction. However, while this clearly would have been the right call with the full benefit of hind-sight, it was certainly not as clear given the information I had at the time. However, I never held myself out to be a market timer. My advice was always geared to long-term investors. [I am more focused on the medium term. This is why for the half of 2008 I was concerned about deflation (oil was clearly a bubble)] Given the thousands of clients that I have, and the large number who joined near the recent dollar peak and market tops, it's no wonder that a few have contacted this blogger to complain; especially since he has actively sought them out. Of course, the fact that the overwhelming majority of my clients are not complaining, to him or anyone else for that matter, says a lot more about what is really going on.

To the extent that the long-term trends I have been following continue, I am confident that even those whose short-term timing was bad will still do well in time. This is especially true if they take advantage of this pull back by adding to their accounts, either with new funds or by re-investing their dividends. However, to examine the effectiveness of my investment strategy immediately following a major correction by looking only at those accounts who adopted the strategy at the previous peak is unfair and distortive.

Since I have been advising investors to follow these trends for ten years, I will leave it to the public to draw their own conclusions as to how long-term followers of my strategy have fared. However, for those who only recently adopted my approach in 2007 or 2008, the road has been a lot bumpier than they or I thought it would be when they climbed on board. Yet if these long-term trends re-emerge, though the journey may be different than planned, the ultimate destination will remain the same.

The blogger in question implies that all of my clients are down by levels similar to the account he cites. He has asked me to refute his allegations by providing broader performance figures for more clients. But, since Euro Pacific Capital is a brokerage firm and not a Registered Investment Advisor, I am prohibited by regulators from providing any details on the investment performance achieved by my clients. The blogger in question makes his challenge knowing full well that I am legally prevented from accepting it. He then uses my failure to refute his false claim as validating its accuracy.

In addition, to look only at the performance of foreign stocks, while ignoring other aspects of my investment strategy only tells part of the story. What about gold, foreign bonds, short positions in financials, home builders and subprime mortgages (or merely avoiding long exposure to those sectors), or other investments people have made, either at Euro Pacific or elsewhere based on my insights? What about dividends earned, or gains realized on closed positions?

Mainstream economists, journalists, and investment professionals have never liked my message and have never resisted the temptation to shoot the messenger [I know this feeling. My uncled thougth I has high on something when I told him bank stocks would crash back in October 2007. It took a steady stream of emails with articles detailing all the financial sectors problems before he accepted that I was, in fact, sane (he got out of bank stocks in 2007). My experience in consistently persistently (and correctly) predicting events that were heresy to the mainstream media (financial stocks are worthless” or “oil will crash”) is what propted me to name this site is called Market Skeptics]. When my investment strategies were performing well, I got little credit for it. Instead, all the attention was focused on the apparent failure of my dire economic predictions to materialize. Now that the economy is collapsing along the lines that I correctly forecast, criticism is being focused on the recent poor performance of my investment strategy (a fact that I have never tried to hide). Of course by the time my investment strategy is once again in step with my economic forecasts, an event that I believe will occur sooner than most people think, it will likely be too late for most people to do adopt it.

My critics have often referred to me as a stopped clock. I believe that the accusation is best leveled at the accusers. Having been wrong for so long, they are now enjoying their brief moment in the sun. They should enjoy it while it lasts. For now, they are creating fodder for some future "Peter Schiff was Right" piece where those who now criticize my investment performance will look just as foolish as those who once criticized my economic forecasts. [Agreed. Deflation is impossible in 2009]

My reaction: One of the fun (and sometimes frustrating) parts of blogging the financial crisis is watching the ongoing war of words between those who believe we will experience deflation in 2009 VS those who believe we will experience hyperinflation (I am in this group).

Mike Shedlock (deflationist) runs one the most successful financial blogs, at least for right now (if the US experiences hyperinflation, he will lose traffic and bloggers like me will gain it). Several times in the last few months, Mish (Mike Shedlock' s nickname) has written articles predicting deflation, while criticizing those who believe the dollar will collapse.

The above article represents the first time Peter Schiff has taken the bait and responded to these criticism (Mish is probably thrilled about it). I hope you had fun reading it.

Other Random Thoughts

*** Peter Schiff' s Euro Pacific Capital is based in Darien about 2.5 Miles from where I live. It would be interesting to meet him one of these days.

*** I have recently gotten personally involved in the blogosphere war of words over deflation VS hyperinflation. Specifically, Mike Shedlock and I have recently had a slight difference of opinion about the dollar' s prospects. You can read our discussion at the end of my piece,
*****Hyperinflation will begin in China and destroy the dollar***** (Scroll down to the comments).

*** After reading this article, I think I might dig up some of my old emails from last year before I started this blog. It might be fun to put a couple of them on this blog. Would any of you be interested in seeing them?

*** You can find Peter Schiff's book, “Crash Proof: How to Profit from the Coming Economic Collapse”, in the Amazon banner on the right side bar (I must admit I haven' t read it yet, as I like to work these things out for myself). If you click on the Amazon banner to the right, and do some shopping there, Amazon will commission pay a commission which will support help this site.

This entry was posted in Currency_Collapse, Market_Skepticism, News_Developments. Bookmark the permalink.

18 Responses to Peter Schiff Writes A Rebuttal to His Critics

  1. Anonymous says:

    I respect both Mish and Peter Schiff (and Market Skeptic too). However, when money is on the line....specifically as in MY money...I really respect the adviser who takes best care of it.

    Now I don't employ any of the above mentioned to manage my humble amount of funds....but if I did, it would be Mish who gets the nod. The reason being he seems the most all around savvy,responsive and in tune with the here & now (versus 6 months or something down the road).

  2. whoguess says:

    hyperinflation - when the dept becomes cheaper than earnings. Only that can help US economy, knowing that it's depts more than 100 billion dollars. Check Flow of funds accounts in US:
    http://www.federalreserve.gov/releases/z1/Current/

  3. Anonymous said...
    Now I don't employ any of the above mentioned to manage my humble amount of funds....but if I did, it would be Mish who gets the nod. The reason being he seems the most all around savvy,responsive and in tune with the here & now (versus 6 months or something down the road).

    Well, sir, we have a difference of opinion.

    I happen to believe Mish is completely out of touch with the here and now. Specifically, he is predicting months of deflation, whereas I expect the dollar to lose over half its value in the next six months. So one of us, either Mish or me, is hopelessly, totally out of touch with the "here & now". Of course, I don't think it is me.

    On that note, I hope you will agree that, if the dollar loses over half its value in the next six months, it would prove that Mish is not, in fact, "responsive and in tune with the here & now"?

  4. whoguess says:

    I also think that hyperinflation begins after the goverment of US gives to several banks sum of money more than 10 billion for any purposes as for example - problematic mortgage. Nowaday injections less than 1 billion - simle tests how economic agents act, but it's not enough for inflation.

  5. whoguess says:

    Ooops, I've made a mistake:
    hyperinflation - when the dept becomes cheaper than earnings. Only that can help US economy, knowing that it's depts more than 100 trillion dollars. Check Flow of funds accounts in US:
    http://www.federalreserve.gov/releases/z1/Current/

  6. andy says:

    I'm in the hyperinflation camp too. check this article out:

    http://www.lewrockwell.com/rozeff/rozeff264.html

    If the monetary base has more than doubled hyperinflation is likely coming down the road.

  7. Anonymous says:

    I think they could both be right personally. Mish is on the mark about deflation right now. He has even said he keeps a close eye on it because it could change. I like that he is open to the possiblility that things could change.
    I think it really comes down to how much you think the governments of the world can get the money into the hands of the people to spend.
    I lived in China for two and a half years. I have seen first hand what their system can do if the government requires it, so I agree with your take on their coming inflation.
    The problem is that I don't think our government can inflate that fast with the huge job losses and falling house prices we are seeing.
    So it seems to me that the US could continue to slip down the deflation route for quite a while, while China inflates away. Just because China exports its inflation doesn't mean we get to buy into it too! Don't get me wrong, I think the governement will do it's best to try, but it if they push it too hard it might give up the ghost and crash back down.

  8. whoguess says:

    Inflation will be hyperfast so nobody can't speculate on dollar, nor run from it in stable currencies. Euro isn't stable - once USD falls euro will rise and destroy itself because dollar will be cheaper, so euro will die due to it's deflation:). The more currency depends on USD or connected with it more chances that it will crash.
    Because of the inflation in USA most competitive currencies will be defeated!

  9. whoguess says:

    And dollar will remina if anybody doesn't spoil anything...

  10. whoguess says:

    And dollar will remain dollar if anybody doesn't spoil anything...

  11. David says:

    I'd like to see old email exchanges from before the blog was started.

    I've got a few old emails between me and Mish on hyperinflation myself. Mish basically doesn't buy the hyperinflation thesis because he doesn't think the Fed will let the printing get out of control and he thinks hyperinflation must be caused by printing. He has no response to the point that hyperinflation can be caused by a **failure of confidence** and you'll see he just never talks about that point at all.

  12. Mac says:

    I love the smell of hyperinflation in the mornin'!

    "The above article represents the first time Peter Schiff has taken the bait and responded to these criticism (Mish is probably thrilled about it)."

    I agree it is the first time Peter Schiff has seemed to 'take the bait', but Mish called him out. This has been all over the forums and certainly may effect investors thinking of working with Schiff. And to boot, Mish plugged his own company, Sitka Pacific, in the process.

    Schiff must have been really PO'd about it all. Even his brother, Andrew Schiff jumped on the bandwagon and responded.

    Mish is well followed, and while Schiff called him a "small money manager", the fact is, Mish has a serious following of thousands of readers.

    I think that Mish's attacks are the tip of the iceberg. Mish, in one of his comments in the article in which he attacked Schiff, asked Schiff investors interested in speaking with the Wall Street Journal to contact him.

    It sounds like Schiff is about to come under serious fire from not just 'small money managers' but the main stream media as well.

    It'll be fun to watch all the YouTube videos, that's for sure.

    But, only time will tell who best positioned their clients for what's ahead.

    Mac

  13. Anonymous says:

    Dow below 8000, why not? I have been reading this blog for a couple months now. I have a comment and a question: comment I dont think we can get hyperinflation unless those dollars come back to chase goods here - I dont see that happening. Question: why is it that the dow NEVER closes below 8000 now?

  14. Anonymous says:

    I think it will close below 8000 next week.

  15. Numonic says:

    "I dont think we can get hyperinflation unless those dollars come back to chase goods here - I dont see that happening."

    You still don't get it.

    Check out Eric's previous blog about rising food prices around the world.

    http://www.marketskeptics.com/2009/01/world-food-prices-are-rising-fast.html

    "Deflation fears are forcing up borrowing costs, which like commodity costs, must be passed on to consumers. While the fed might have lowered interest rates, banks aren't lending and companies face much higher financing cost. The failure to pass on higher borrowing cost will lead to more bankruptcies and less supply. Again, this reduced supply will allow surviving competitors to raise prices.

    Everyone who is expecting deflation is ignoring this reality: companies can’t sell goods below their production costs and stay in business. Since the profit margins of manufacturers at home and abroad were razor thin going into this crisis, don’t expect prices to drop. Expect companies to go bankrupt.
    "

    Less supplies with same dollars moving around, has the same effect as more dollars with same supplies.

  16. Anonymous says:

    Some great comments here, especially as we all try to figure whether inflationary times or Japanese style lost decades lie ahead (and adjust our strategies to account for it).

    There's no doubt that high unemployment has entered the equation, that translates to folks not inclined to spend (score one point for the deflationary side).

    Opposing this is helicopter ben and continuing bailouts ...i.e. money printing (score one point for the inflationists).

    Schiff, Mish and this blog (by the way....good analysis Eric deCarbonnel)offer insights to guide us. Best I can tell the future could very well offer widespread unemployment and inflation). On that thought...I'm off to the bar. Cheers! And God help us.

  17. Anonymous says:

    Perhaps interesting for some, I´m a 27 year old Swede driving cab, as off monday next week i will be the proud owner of two goldbars á 100 g.

    That is pretty much the savings I have, prices are going up here in sweden, and just wait until OPEC´s actions starts kicking in....

  18. Numonic says:

    I just explained how we will have rising unemployment with rising prices by quoting Eric. The key part is "this reduced supply will allow surviving competitors to raise prices." The reason they are not raising prices is because they are competing with others with lower prices in order to stay in business. Once enough people go out of business, the competition will be gone and they will be able to raise their prices. In fact with each company that goes out of business that leaves less competition and more room to raise prices. This is how rising unemployment will bring rising prices.

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