Final Take – The Little Book of Bull Moves in Bear Markets – Weathering the economy

The Little Book of Bull Moves in Bear Markets

Peter Schiff is a huge pessimist about the future of the U.S. economy, but you already know that from reading Part 1 and Part 2 of my series about The Little Book of Bull Moves in Bear Markets.  This post wraps us some interesting and controversial parts from this book.

Chapter 7 – Weathering the Storm

Schiff argues that if hyperinflation is coming to the United States then it makes sense to own stable foreign stocks.  Schiff gets pretty overzealous in this chapter but the argument is sound if you believe hyperinflation is coming to the U.S. economy.  I actually don’t – I think deflation is more possible.  Schiff writes:

“To conclude that the American consumer is vital to the economies that produce the goods we import ignores Asian realities and confuses the engine of economic growth with its caboose.”  “It will be the American caboose, in effect, that gets decoupled from the global gravy train.  Unencumbered by all that dead weight, the real engine of economic growth will burn up the tracks.   Rather than worry about foreign economies, let’s invest in them.”

On the topic of mutual funds, Schiff has several issues with them:

• “As they compete with one another on the basis of quarterly performance, their focus is short-term, which often means lost opportunities.”
• “Their general practice is to enhance return by taking greater risk and then eliminating that risk through diversification that would otherwise be unnecessary.”
• “Management expenses applied annually cause reduction in returns that wouldn’t exist in a private buy-and-hold portfolio.”
• “Short-term focus precludes buying value stocks, meaning stocks that are out of favour and therefore undervalued.”

Chapter 8 – Favorite Nations

What nations should you invest in?  Key things to look for are economies that aren’t completely hinged to the United States (companies and nations with a huge export business to the U.S.) and also internal stability.  In this chapter Schiff lists a bunch of nations with great investing opportunities:  Australia, Norway, Switzerland and Singapore led his list.  Canada was mentioned as well.

Chapter 9 – If You Want to Roll the Dice

If you’re looking to take risks outside the U.S., Schiff looks towards emerging markets – nations that are just now undergoing an industrial revolution and are pushing their way out of the third world. Given the dynamic nature of such nations, Schiff seems to encourage investors to limit the amount they invest in emerging markets and stick to index funds that buy a wide variety of individual stocks from these emerging markets.  Schiff writes:

“The greatest returns reward the greatest risk, and the most money will be made by people who invest in emerging markets directly.”  “A better choice would be exchange-traded funds (ETFs) that represent emerging markets indexes.  The most conservative emerging markets ETFs are those that replace total market indexes, such as iShares EEM…and Vanguard VWO.”

Chapter 10 – To Infinity and Beyond

What areas within the United States might remain strong during this downturn, or might benefit because of it?  Schiff points towards several areas. He predicts a rebuilding of basic manufacturing within the United States as well as continued focus on the areas where we export things, such as entertainment. As mentioned earlier, Schiff believes in companies that produce basic commodities will also remain strong.

Schiff explains:  “Things are going to get worse – much, much worse – before they get better.  Within the next five years, Americans will face a job market they no longer recognize.  “As foreign sources of credit dry up, the government will be powerless to stop the economic collapse.  I foresee many industries severely contracting or dying altogether, taking millions of jobs with them.  “In the past 30 years or so, our government and business leaders shot the U.S. economy in the foot by encouraging a major transition from a manufacturing-based economy to a service-based one.  Today, more than two-thirds of the U.S. GDP is produced in the service sector.”

Schiff says the following sectors are on the verge of collapse:

• Real Estate – the continuing real estate collapse will mean fewer jobs for brokers, architects, bankers and home-builders.
• Finance and Banking – citizens will have less money to invest and will be more inclined to put what money they do have into savings accounts.
• Retail – this business model is built on cheap imports from other countries, notably China and when these goods become scarcer and more expensive, Americans will have less disposable income to shop with.
• Healthcare – constant medical advances, mean more treatments, people are living longer; more elderly people will need more care; except there’s only one problem with this forecast:  we can’t afford it.
• Travel and Tourism – this sector will get squeezed by falling demand, rising oil prices and a falling dollar over time.

Schiff foresees the following as “the best places to be” for the coming decades and beyond:

• Engineering – mechanical, electrical and computer science.
• Construction – roads, bridges, tunnels, public transportation, communication lines.
• Agriculture – involved in pretty much anything in this sector.
• Merchant marine / commercial fishing.
• Energy – involved in pretty much anything in this sector.
• Computers and high technology – ditto.
• Entertainment – cinematography, production management (I don’t really get this one myself).
• Automotive repair, small appliance repair – involved in “fixing things” Schiff writes.
• Tailoring and textiles – because imported clothes will be scarcer and more expensive.

Chapter 11 – A Decade of Frugality

Schiff makes a statement that I actually agree with:  frugality is the best way to prepare yourself and the best way to survive any downturn.

Schiff says to focus on spending less money on unnecessary purchases. Save and invest when you can, both in yourself (through basic skills) and your personal infrastructure (through resourcefulness) as well as in the investments described throughout the rest of this book.  Schiff says:

“The decade from 2010 to 2020 will be a period of adjustment for the U.S. economy, and even more so for U.S. citizens themselves.  Depending on whose statistics you believe, U.S. households currently owe an average of $2,000 to $9,000 or more in credit card debt.  Most carry debt indefinitely by only making minimum monthly payments.”  “As credit is drying up, U.S. residents will discover that whatever cash they can lay their hands on buys much less than it once did.”

“No longer citizens of the world’s wealthiest creditor nation, they are now citizens of this biggest debtor, though most continue to act as if the rest of the world bow to the United States’ economic might.”  “In the next few years, I believe U.S. citizens will undergo a profound identify crisis.”  When Schiff discusses the parallels between this emerging age and the 1930s, he writes “This time it will be different.  Even the most uninformed U.S. citizens will be forced to notice that other nations’ living standards are on the rise, just as ours is on the decline.”

Chapter 12 – Pack Your Bags

What if you don’t want to live through this downturn? Schiff talks about emigrating in this chapter, to nations like Russia, China, India, and Brazil (the so-called BRIC nations) where the growth of the 21st century is happening – and that the best thing you can do when you get there is to start your own business.  To paraphrase this chapter, Schiff writes if you don’t like it (the U.S.) then move.  That’s very blunt.

Chapter 13 – The Light at the End of the Tunnel

To close the book, Schiff argues that all this doom and gloom does have a silver lining. Once we (the royal “we” is the U.S. economy) get through a rough decade or so of adjustment in terms of lifestyles and economy, we’re likely to come out the other side much leaner and ready to fight for our place in the world – and that can only mean a boom time for America. The path between here and there, though, according to Schiff, is quite dark:  “To restore viability to our economy, we need to start saving again so we can become producers again.”

Although biased and downright negative, I admit this book was an interesting read.  Schiff clearly has a strong perspective – he believes a financial apocalypse is coming – and part of the purpose of this book is to educate U.S. citizens about it before it happens.  If the financial apocalypse is coming, we’ve had our warming from overly dramatic Schiff.  If not, there are still some nuggets of wisdom in this book that should provoke any U.S. or Canadian to start developing their personal finance plan and if they already have that plan in place, Schiff says to stick to it.

What do you make of these quotes from the book?  Are you pessimistic about the next decade or more for the U.S. economy like Peter Schiff?

If not, why?

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