Peter Schiff is a huge pessimist about the future of the U.S. economy. If you read Part 1 of this series you already know that. This post continues to take a look inside Schiff’s mind, listing some of my favourite parts and some controversial parts from The Little Book of Bull Moves in Bear Markets.
Chapter 3 – Beware of False Prophets
Interesting, after two chapters of predicting doom, Schiff steps back here and encourages readers not to just blindly accept the words of “prophets” and instead learn for themselves. Great advice I think. He spends much of the chapter deflating the arguments of others, but if you take his main idea of doubting others, then logically you should doubt him as well and do your own research. I firmly believe nobody cares more about your money that you do. Here are some quotes from this chapter:
“Economics may or may not be a dismal science, but it’s important to recognize that it is not like a natural science, like physics or mathematics, where everything is about facts and outcomes can be predicted with certainty. Economics is a social science where facts are weighted along with questions about how people will act on those facts.”
When discussing some of the usual suspects, the agendas of different professional groups and institutions, Schiff writes:
“Our own federal government, meaning the administration and bureaucracy as well as the purportedly independent Federal Reserve, pulls the wool over the public’s eye as matter of standard operating procedure.” “It has to do with the public’s right to the knowledge it needs to vote intelligently and make sound judgments at the personal level.” For example, Schiff writes that “the motive for choosing to print money is purely political.” “The other way to do it would be to raise taxes, which would cause a public uproar costing elected officials their jobs.” “Not that voters would stand for any reduction in social programs. The voters want it both ways, and the elected politicians have found a way to accomplish that.”
“Uncle Sam is using GDP growth as evidence that a weak, dangerously overextended economy is strong, healthy, and growing, and that Americans should therefore keep spending.” “When it comes to government-contrived facts, also consider the source and the motives of those compiling them. More important, do not base your investment decisions on any government numbers.” “We’re sick enough to be sweating through our pajamas, but the government thermometer reads 98.6 degrees. There’s obviously something wrong with the thermometer.”
“My problem with unemployment numbers is that they exclude the long-term unemployed-people working part-time when they prefer to work full-time; others who, because they cannot find jobs, opt for self-employment but have little in the way of real earnings; discouraged workers; and any unemployed people not actively seeking jobs. How in the world can that be explained except as a way to understate the problem? But why? What does the government have to gain by giving the public phony unemployment figures? The answer is obvious: They want you to think things are better than they really are.”
Chapter 4 – Of Babies and Bathwater
Of course, many people are holding a lot of U.S. investments, both in their retirement accounts and in their taxable investment accounts. Schiff’s advice to people holding a lot of American stocks is to move them into producers of basic materials, energy companies, agricultural companies, and oil companies, as well as into conservative foreign companies that pay a good dividend. What should you avoid? Schiff tells people to stay away from any stock that relies on the American consumer – consumable goods should be avoided like the plague. Schiff writes:
“The outlook for the American stock market has never looked grimmer, as deepening recession accompanied by higher interest rates and rising raw material costs depresses corporate earnings, and high inflation eats away at the purchasing power of people lucky enough to have jobs.”
“It stands to reason that different stocks will react in different ways to the ills about to beset us, and some will actually benefit. A look back at past hard times will show that to be true and help us to decide which stocks to hold and which to sell.”
“Stocks in certain sectors have similarly earned a reputation as recession protection. Stocks designated as defensive are those in industries that make stuff we’ve simply got to have, food and drugs, or items in the category of sin, referring to things we may not need but will kill to get – traditionally tobacco and alcohol, and perhaps other things to newer generations.”
When Schiff takes his readers through the past to apply lessons for our future, he offers the following advice:
“In 1930, every stock in the Dow Jones Industrial Average declined except three. Those that gained slightly were Leggett & Myers, General Foods, and Borden Co. – one tobacco company and two food producers.” “Of course we will see, and are already seeing, instances where prices are declining. One example I noticed recently was a health club that was lowering prices to attract membership lost because of high gas prices and general inflation. As Americans lose access to their credit cards, have no home equity to tap, and are forced to pay more for basic necessities, including higher taxes, insurance premiums, and interest rates, discretionary spending will collapse, causing those providing most discretionary services either to cut prices or to scale back on capacity to regain profitability on lower volume.”
Chapter 5 – Hot Stuff
Another piece of the investment puzzle when the stock market is in terrible shape is commodities. Schiff argues that basic commodities are a great thing to own when the economy slows because people will still need products, it’s just that complex products will be less popular than basic staples. That points one straight towards commodities – crops, livestock, raw materials, and so on. Schiff says the average investor should look at index funds of commodities as a good way to invest.
“Unlike previous bull markets, this one will be driven by a global development of epochal magnitude: the industrial revolutions taking place in China and India. With a combined population of 2.4 billion people, these nations are on the verge of joining the community of developed economic powers and they have newfound wealth that, once unleashed, will cause demand for commodities to reach stratospheric levels.” “With commodities, then, we get an investment twofer in the nick of time: a time-honoured inflation hedge and a super bull market.”
“If you are unable to identify companies engaged in basic materials production, I would recommend high-dividend-paying stocks of companies engaged in commercial real estate, utilities, or other income-producing activities in countries that are resource-rich and have developed, growing economies.”
Chapter 6 – The Ring in the Bull’s Nose
Here, Schiff addresses rare metals – gold and silver. Schiff argues that these commodities are different because there’s an inherent limited supply of them – they’re rare because there simply isn’t that much of either metal on earth. Thus, they will hold their value always to some extent and are a solid place to put your money to preserve wealth over the long, long term. I think this is largely true, but I also think gold and silver have both bubbled over the last decade and the prices may be on the high side. However, when you buy them, I guess you are getting a rare commodity. Schiff says:
“Gold’s financial role is unique. Money gravitates to gold as a safe haven, a store of value when the purchasing power of currencies is threatened by inflation or economic instability. The United States has both problems in spades. Inflation is also becoming a big problem abroad. Not surprisingly, the price of gold has more than tripled since 2000. But we ain’t seen nothing yet.” “With the dollar facing imminent collapse, and with foreign central banks printing their own currencies to buy dollars in politically motivated yet economically misguided attempts to manage its decline, people are responding by buying gold.”
“With the national debt, funded and unfunded, somewhere around $50 trillion, there’s plenty of paper money to print and enough inflation ahead to keep gold busy. Expect volatility; that comes with the territory.”
Schiff is a strong pessimist about the next decade or so for the U.S. economy. Do you share his views?
Even if you don’t agree with him, do you invest in the companies he suggests - high-dividend-paying stocks of companies engaged in commercial real estate, utilities, or other income-producing activities?
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