Peter Schiff is a huge pessimist about the future of the U.S. economy. For that reason, he was arguably one of the best people to author The Little Book of Bull Moves in Bear Markets. This book is one of many in a series of “Little Books” whereby each book focuses on specific area of investing using layman’s terms to make the book easy to read and understand. In each case, the author outlines a strategy and the book revolves around that strategy. For example, the book focusing on index funds for investing is written by John Bogle, the founder of Vanguard.
As I referenced in my opening line, Peter Schiff is widely known as a person who is quite pessimistic about the future, so much so, his skepticism of the future have earned him the title of Dr. Doom. Consider Peter Schiff, the Darth Vader of economists; always seeing the dark side of market forces. Given Schiff’s credentials and views of the future, I thought his book would be an interesting read – and it was. This post will take a look inside Schiff’s mind, listing some of my favourite parts of this book as dark as his opinions might be.
I hope you enjoy these posts; there are at least two more planned and I look forward to your comments about Schiff’s gloomy forecast for the U.S. economy.
Chapter 1 – Let’s Do the Time Warp Again
Schiff opens the book by making his case that we’re currently in a very desperate economic situation. Most of this is pretty basic stuff to people who have followed the news recently, but Schiff is pretty negative arguing that the United States is actively destroying its own wealth by spending so much of its money on imported goods. It’s an interesting chapter to read if you haven’t heard Schiff’s arguments in the past – he makes a very strong case for a strong financial downturn over the next several years. When discussing the coming economic collapse in the United States, Schiff writes:
“A service-based economy had largely supplanted one based on manufacturing that was now at a competitive disadvantage to producers in Asia and elsewhere who were less burdened by regulation, high taxes, and mandated worker benefits. America had become a nation of consumers, and producers were disappearing.”
“To say the United States government was operating on borrowed money and dangerously dependent on foreign suppliers and lenders was to make an understatement of the new millennium.”
“In any event, I don’t think it’s brain surgery to predict that a playboy who is without a job and living the high life on credit card debt is going to run into trouble. Why, then, is it not just as obvious that a nation that, on a chronic basis, consumes more than it produces; imports the difference; running up huge external liabilities in the process; borrows rather than saves; and spends the borrowed money on nonproductive consumer goods and services; is going to hit the same wall as the playboy?”
“There is, of course, one huge difference: A nation can create money and the individual cannot. But the more money it prints, the less purchasing power the money will have.” “The end result for the offending nation will be the destruction of its economy by massive inflation.”
If real estate was the first of many financial meltdowns in the United States, “consumer credit is another meltdown waiting to happen.” “Delinquencies are on the rise in auto loans…student loans, where the tarnishing of traditionally good repayment records is a clear sign of too much borrowing; and credit card debt, which is approaching $1 trillion.”
Chapter 2 – Saving Your Assets
After reading Chapter 1, there is an obvious question to us: How can we protect ourselves against such an economic mess? Schiff starts with the answers here, and his first tactic maybe a bit controversial: avoid cash and bonds. Schiff tends to believe that hyperinflation is about to happen and makes a lengthy economic case for it, arguing bonds and cash (referring to U.S. dollars) are poor places to keep your money. Instead, his advice is this: if hyperinflation is coming (or has arrived), keep at least some of your money in a money market account made up of non-dollar currencies. Here are some quotes from this chapter:
“As inflation gets worse, financial assets denominated in the failing currency and the income they throw off become progressively less valuable. Ironically, in times this dire, cash and bonds, which are the time-honoured safe havens during stock-market crashes, become the worst assets to hold when the dollar is crashing. Cash and cash equivalents simply become increasingly depreciated in value.”
“What people have to understand about inflation is that it causes, and is not caused by, rising prices.”
“Inflation is used for political reasons to stimulate the economy and counteract down-cycles that are perfectly normal and corrective of excesses but are unpopular with voters.”
“Government debt and other obligations such as social security become more manageable when payable with cheaper dollars.”
“Inflation helps finance entitlement programs that would otherwise cause tax hikes.”
When writing about popular U.S. government scapegoats, Schiff writes:
“Another popular scapegoat, one that also allows the government to claim that inflation is beyond its control, is strong economic growth abroad, especially in emerging markets such as China and India. However, that dog won’t hunt either, as it ignores the tremendous increase in output that is the true source of that growth. True economic growth causes prices to fall. It’s the growth in money supply that causes them to rise.”
There’s much more to follow in future blogsposts but what do you think about Schiff’s book so far?
Is Schiff Dr. Doom or is he a realist? What do you agree or disagree with Schiff about?