An Interview with Peter Schiff from Barron's

Peter Schiff is an interesting character, with an interesting perspective which he is quite articulate in expressing despite significant bias on numerous financial interviews. We disagree with him on a number of points, in particular with the 'cure' to our economic ills. We enjoy reading various perspectives as long as they are based on facts and stated intelligently. Peter Schiff does this quite well and we hope you enjoy this interview with Barron's.


Gloom and Doom? Nah; Just for the U.S.
By Lawrence C. Strauss
Barron's

The U.S. wouldn't be afloat without help.

Peter D. Schiff is an extreme bear when it comes to investing in the U.S., and he's made a name for himself selling his point of view with considerable zeal, often on television but also in print. Schiff, 43, has contributed articles to Newsweek International and other publications, and he is the author of the recently published Crash Proof: How to Profit from the Coming Economic Collapse. Our own Alan Abelson cited his musings in a recent column.

However, comparing Schiff's performance with a benchmark is impossible because he does not run a fund; instead, he recommends stocks for clients' brokerage accounts. Schiff, who holds a degree in finance and accounting from the University of California at Berkeley, is president and chief global strategist of Euro Pacific Capital, a brokerage he founded in the mid-1990s that emphasizes international stocks, preferably with dividends.

Not everybody is a fan. Schiff has been criticized for aggressively courting publicity to tout his doomsday message relating to U.S. equities and the domestic economy. But he has been right on several key calls, notably the weakening greenback and his emphasis on international stocks, and he has helped his clients make money. Barron's caught up with him recently.

Barron's: When did you turn bearish on the U.S.?

Schiff: A long time ago I worked as a retail broker at Shearson Lehman Brothers and I was selling tech stocks, and I was generally bullish. I had difficulties with some of the problems in our economy, but I was recommending U.S. stocks. I left Lehman in 1991. In the mid-1990s, when I was working for a small broker-dealer in California and then for my own firm, I started getting concerned about the dollar. So I began getting some clients invested in some foreign stocks -- just to get out of the dollar a bit. The dollar had a big drop, and then it started to rally in the late-1990s, in conjunction with the tech bubble. It was all part of foreigners' efforts to try to participate in the Nasdaq's bubble.

What kinds of stocks did you like in those days?

Traditional value stocks with dividend yields. I also liked commodities, so I was buying international oil stocks back when oil was under $20 a barrel. The stocks I recommended weren't doing very well in '98 or '99, especially after the Asian crisis, but they started doing better around 2000. I turned really, really bearish on the U.S. when I saw what the Federal Reserve was doing to prevent a recession in the early part of this decade, notably pumping a lot of liquidity into the system.

You continue to be very bearish on the U.S. But haven't there been other times when there was lots of negative sentiment toward the U.S., only to see another era of prosperity emerge? Such as the late 1980s, when there was concern that Japan would take over the U.S. economy. Look at how that turned out.

Yes, but we haven't been through anything like what we are going through now. The United States has really been living in a fool's paradise, or a phony economy, probably for more than 20 years. But our economy has been growing and getting bigger and bigger. We have been able to convince the world to lend us money and to provide us with goods that we don't produce and that we can't afford to pay for with exports. And it has gotten to the point now where the problem is so big, especially since the real-estate bubble. We've now borrowed so much money from abroad. Our trade deficits are now very big, and our industrial base and our infrastructure have been allowed to decay for so long, that we are now at a point that we can only survive as an economy thanks to the charity of the rest of the world. They have provided us with all the goods that we can no longer produce because we lack the industrial capacity. And they have to lend us the money because we don't have any savings anymore.

What's your take on oil prices?

As oil prices are going up in the U.S., they are not rising nearly as fast in other countries because their currencies are strengthening. Ultimately, when currencies like the renminbi that are pegged to the dollar are allowed to float, I see the Chinese currency rising five-fold against the dollar. That would make oil a lot cheaper in China relative to what it would cost in the U.S.

Speaking of China, how do you see things developing there and its impact on the U.S. economy?

The whole science of economics, as I see it, is how do you satisfy unlimited demand with limited resources? China has more than one billion people. It is not as if Americans are unique in wanting things. It's not as if the Chinese don't want dishwashers. The reason they don't have those possessions is because they don't have the purchasing power. But they do have that power; it's just that their government is taking it away from them and giving it to us. But it is Americans who can't afford these goods, because we can't produce them. So if the renminbi is allowed to rise, then Chinese factory workers will be able to afford the products they are producing instead of shipping them over here. That's going to be a major, major boon for their economy.

So it sounds as if the U.S. will be relegated to second- or third-tier status.

The U.S. is in trouble. We are a post-industrial society, which is the same as a pre-industrial society; our manufacturing base has disintegrated. It's not nonexistent; we still make some things and we are still competitive in some areas. But on the whole, as a nation we are not competitive. We are mainly a nation of a service sector and consumers, and that's going to have to change. Nor do we have the savings that we need to fund the transition.

What could go wrong with your scenario?

Somehow, the U.S. could buy itself some additional time. We could convince the world -- Europe and Asia -- that they need us, and that while propping up the U.S. economy is going to hurt them with more inflation, letting the U.S. collapse is going to be even worse. Of course, none of that is true. The truth, in my view, is that the cost of propping us up far exceeds the cost of letting the U.S. economy collapse. But I think we are already in a pretty severe recession.

But isn't there an argument that once we clean up this housing mess -- along with the credit bubble, whenever that occurs -- the U.S. will be a lot closer to a bottom, where the outlook begins to improve?

I don't think that's true. The resolution to the housing problem is going to mean housing prices are going to be a lot lower than they are now, and most Americans are not going to have any home equity. It's going to mean that trillions of dollars will have been lost by the lenders. When the home equity is gone, Americans are broke, as they don't have any savings. All they had was their home equity. They were counting on their home equity, without which they will be unable to pay off their credit cards.

But don't U.S. companies that do business abroad benefit from all of the trends you have outlined?

Yes, they are going to benefit to the extent that they can generate higher sales abroad. But ultimately the shareholders are not necessarily benefiting just because a multinational company earns more dollars. If the dollars have less purchasing power, they are not necessarily better off. The way I see it, we are just putting our goods on sale to sell more of those goods. But if you want to look at U.S. corporate earnings in terms of euros, barrels of oil or gold bullion, these companies are not necessarily seeing a real increase in earnings.

Plenty of investors and financial advisers have decreased their allocations to U.S. stocks in recent years. Why not do that instead of completely writing off the world's largest economy?

Individuals can make their own decisions. I don't see a way for the U.S. economy to avoid a major retrenchment. There's no way that U.S. assets are not going to be marked down relative to foreign assets. Therefore, I would rather invest in the rest of the world. There are plenty of people who for the whole decade of the 1990s were investing everywhere but Japan, which is the second biggest economy in the world. Why were they excluding Japan? It was obvious that it was in decline. I'm saying the same thing about the United States. I don't care if it is the biggest economy in the world; it is in decline. There are going to be a lot of losses in the United States, so why don't I avoid it? Worst-case scenario: I miss out on the U.S. market. But what are the odds that it is going to outperform all the other major markets that I am investing in? And I can't see how the dollar is going to be moving up over time.

Why keep your business open here? Why not set up shop in Asia?

Right now my business is helping Americans to preserve their wealth from a collapse of the U.S. dollar. If I were to go to a different country, obviously I would have to come up with a different business. I don't think people in China need to protect their wealth; they are going to do great. My business works better here. I could try to run the business from overseas, say the Cayman Islands or Australia, but I have friends and family here. I'm optimistic.

I've supported political candidates in the U.S., including Ron Paul, who ran for the Republican presidential nomination this year. I'm not writing America off. But I'm trying to educate people so that they understand that when this economy does collapse, it is not because of capitalism but that it's because of too much government.

What kinds of stocks do you look for?

The dividend is the most overlooked and important component of equity investing. Capital appreciation is great, but that's the icing; the cake is the dividend yield. I look for good dividend yields, but I want to get them in currencies that are gaining in value so that my clients can maintain their purchasing power here. These companies are playing into the growing purchasing power of the rest of the world -- not the shrinking purchasing power of the United States. The rest of the world has been selling us goods and hoarding our Treasuries and mortgage-backed securities. They are not going to be doing that anymore. They are going to spend their earnings on themselves.

How about a few stocks that you like?

One of the mining stocks that I have been buying, although it has pulled back a lot, is Oxiana [ticker: OXR.Australia]. Oxiana and Ziniflex, another Australian mining company, just merged. Another holding is an infrastructure play called Road King Infrastructure [1098.Hong Kong], which is listed in Hong Kong. It's also pulled back quite a bit. I also like Singapore Petroleum [SPC.Singapore]. Those are three names I've have been buying recently. One is a play on the growing infrastructure in China, while the other two are ways to invest in resources. A lot of people look at me and say, "Peter you are gloom and doom." I'm not gloom and doom.

Well, you are pretty gloomy on investing in the U.S.

I'm very negative on the U.S. economy. But I'm very optimistic on a lot of other economies. A lot of people tell me, 'Peter, this doesn't make any sense. How can you be so dire and gloomy on the U.S. and yet so positive on the rest of the world?' That shows you I'm not just gloom and doom. I recognize that contrary to popular opinion, the U.S. economy has been a drag on the global economy, and that when the rest of the world stops subsidizing us, growth abroad will actually improve as a result.

Surely you see some light at the end of the tunnel for the U.S.?

It is a long tunnel and the light is far away. But, yes, in the end I'm still optimistic that we can one day dig ourselves out of this hole. Look at the Germans and Japanese. They lost World War II, but here they are. We didn't lose a war, but in many respects we did in that our factories have been destroyed even though they weren't bombed.

What's a reasonable plan for the U.S. to right the economic ship?

We are going to have to replenish our savings. We are going to have to rebuild our industry. We are going to have to repair our infrastructure. All of that is possible, though it's not easy. It's going to be very difficult given the current level of government we have, along with the types of taxation and regulations we have. To really rebuild the economy, we are going to need cooperation from government and the government is going to have to get out of the way and make itself a much smaller burden on society, which means major reductions in government spending, taxes and regulations.

Thanks, Peter.

The US Bear Market as Seen from the Shoulders of Giants

US stocks are in a bear market which started from the last highs in October 2007.

The 'correction' became a bear market when the declines originally surpassed twenty percent in March. It does not matter that a few of the broader markets did not confirm. Once two of the major markets crossed that was it.

Since then we have had a corrective bounce which retraced approximately half the decline, and then turned sharply lower once again. Notice how all the index moves are starting to become more 'synchronized' although the broader markets are still lagging.

It would be classic bear market action to see this leg decline down to the thirty percent level, with perhaps a little bounce back up.

The US is also in an economic recession, despite the games being played by the Bureau of Labor Statistics with the GDP and inflation numbers. All the classic signs and co-indicators are there. Slapping paint on a falling building does not make it stronger or keep it from collapse.

The financial sector is in disarray. The investment banks have turned into predators in the speculative markets, and are engaging in little productive activity or efficient capital allocation. What we are seeing is the final transfers of wealth from the many to the few as the Republicans exit the Beltway.

We are also seeing a 'changing of the guard' from the leadership of the Cold War generation to Aquarian Agers and Generation X. A shift in attitude will be noticeable especially as the last of the Depression - World War generation fade away. They bore heavy burdens, they accomplished many great things, and had many flaws as a result of their harsh environment, but they also are of the past, and their time is done, and new challenges lay ahead. The US presidential election could not be more representative of this change.

It will not be easy, as for example the change of this type that occurred with the demise of the Victorian era and ushering in of the twentieth century.

As such this is more than a bear market, but one of those generational cyclic changes that are quite painful and sometimes violent, but which often lead to a more sustainable equilibrium.

Certainly there will be new schools of economic thought to supplant those which have gone before, but all of which are echos of the past.

Who was it that said we look and move forward 'standing on the shoulders of giants?' Isaac Newton in the 17th century comes to mind, but before that Bernarnd of Chartres in the 12th century, and before that the Greeks in the myth of the blind giant Orion carrying Cedalion. So it is that we have a debt of gratitude and preservation to the past, but a obligation of achievement and advancement to the future.

More Warnings from Europe: Fortis Bank Forecasts a US Financial Market Meltdown

We won't disagree with the forecast, although timing may be another matter, and we do have our 'talking their book' filters in place.

As background, Fortis has been making some moves to raise 8 billion euros in capital, and the stock was sold sharply in a share offering last week, out of fears of shareholders dilution and further troubles at the bank.

Interestingly enough, Fortis is part of the tripartite acquisition of ABN Amro, along with Banco Santander and the Royal Bank of Scotland, the largest bank takeover in history. The US retail operations were separately taken by Citigroup. ABN Amro was one of the largest banks in Europe and had operations in about 63 countries around the world.

RBS issued a similar dire prediction of the US financial crisis around 17 June. We just thought it was striking that both banks issued such forecasts about this time. Barclays issued a similar forecast last week. Something ugly in those balance sheets?

Warnings from Europe ahead of a US crash which is ignored by the American media and dismissed by the financerati have an historic resonance, as in the case of the stock market crash of 1929.

We think there is a strong probability of a dead cat bounce that may turn into a multi-day short squeeze relief rally within the next two weeks, barring fresh disclosures and confessions from the corporate crowd.

There are a number of pros expecting the same thing, as they did on Friday past. So you can see we are cautious, and back into our short term 'advantageous' trading posture. The narrower index charts show the breakdowns are in progress, and we may be over the edge, but the broader market indices are inconclusive. This may actually be quite bearish since the bulk of the market shows little fear yet and the VIX is at moderate levels for this bear market leg.

Oil is an interesting market. Is it a bubble driving by 'speculation' or a flight to safety haven for those disaffected by the US dollar, and without further desire for the euro? Is oil a sustainable world 'currency?' Perhaps its industrial demand is a two-edged sword in this discussion.

One thing we like about gold and silver is that they keep only one set of books, and nothing is off balance sheet, although the same might not be said of the Central banks that often muddy their markets.

Fortis Story roughly translated into English

American 'Meltdown' Reason for Capital Raising - Fortis
28th of June, 9:10
De Financiële Telegraaf

Fortis Bank predicts US Financial market meltdown within weeks...

BRUSSELS/AMSTERDAM - Fortis expects a complete collapse of the US financial markets within a few weeks. That explains, according to Fortis, the series of actions by the bank of last Thursday to raise €8 billion. "We have been saved just in time. The situation in the US is much worse than we had thought", says Fortis chairman Maurice Lippens. Fortis expects bankruptcies amongst 6000 American banks which have a small coverage currently. But also with Citigroup, General Motors, a complete meltdown in the US is beginning."

Amerikaanse ’meltdown’ reden geldinjectie Fortis - De Financiele Telegraaf


Fortis expects no more capital raising
Sat Jun 28, 2008 9:59am BST

BRUSSELS, June 28 (Reuters) - Measures taken by Fortis to shore up its finances should be sufficient, the Dutch-Belgian bank's supervisory board chairman told Belgian financial daily L'Echo on Saturday.

Chairman Maurice Lippens, asked if there was a chance that further capital-raising measures will be announced, replied: "Normally, it's sufficient. Of course, if this is a return to 1929, then we are in a different ball game."

Fortis raised 1.5 billion euros ($2.36 billion) from a heavily discounted share issue this week, part of a package of measures to shore up its finances by more than 8 billion euros.

Lippens said Fortis has been the victim of speculators and wondered how much money certain -- unnamed -- hedge funds made.

"Besides, Thursday's step was completely successful," Lippens said.

He also backed Fortis Chief Executive Jean-Paul Votron.

"You don't kill the captain in a storm," Lippens said.

The drop in Fortis' share price -- down more than 40 percent so far this year -- has not made the company a takeover target as other banks also have their problems, he added...

Barclays Warns of an Oncoming Financial Storm

It was the Royal Bank of Scotland that issued a similar warning on 17 June RBS Warns Its Customers of a Financial Storm.

Barclays warns of a financial storm as Federal Reserve's credibility crumbles
12:01am BST 28/06/2008
UK Telegraph

US central bank accused of unleashing an inflation shock that will rock financial markets, reports Ambrose Evans-Pritchard

Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".

"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth." (Hmmm. Let's see, what is renowned through the ages as a safe store of wealth in troubled times especially of inflation? Celery futures? Google? - Jesse)

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. (The bond vigilantes are all retired to keeping bees in Sussex. These must be imports. - Jesse)

"This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.

Strategists at Barclays accuse Ben Bernanke of a policy blunder

The grim verdict on Ben Bernanke's Fed was underscored by the markets yesterday as the dollar fell against the euro following the bank's dovish policy statement on Wednesday.

Traders said the Fed seemed to be rowing back from rate rises. The effect was to propel oil to $138 a barrel, confirming its role as a sort of "anti-dollar" and as a market reproach to Washington's easy-money policies.

The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year.

Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said. (If China were wise they might move to place their currency in a foundation of gold and silver to anchor it in this storm. - Jesse)

"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box." (Where did we hear a specific and strong stagflation forecast for this time period? Oh yes, in our predecessor blog last year. - Jesse)

Barclays Capital recommends outright "short" positions on Asian bonds, warning that yields could jump 200 to 300 basis points. The currencies of trade-deficit states like India should be sold. The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders.

David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said.

The bank said the full damage from the global banking crisis would take another year to unfold.

Rob McAdie, Barclays' credit strategist, said: "The core issues have not been addressed. We're still in a very large deleveraging cycle and we're seeing losses continue to mount. We think smaller banks will struggle to raise capital. We're very bearish - in the long-term - on high-yield debt. The default rate will reach 8pc to 9pc next year."

He said investors had taken their eye off the slow-motion disaster engulfing the US bond insurers or "monolines". Together these firms guarantee $170bn of structured credit and $1,000bn of US municipal bonds.

The two leaders - MBIA and Ambac - have already been downgraded as the rating agencies belatedly turn stringent. The risk is further downgrades could set off a fresh wave of bank troubles. "The creditworthiness of many US financial institutions will decline in coming months," he said.

The bank warned that engineering and auto firms we're likely to face a crunch as steel and oil costs surge. "Their business models will have to be substantially altered if they are going to survive," said Mr McAdie.

A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt. (Interesting that the French are preoccupied with deflation. - Jesse)

Bernard Connolly, global startegist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".

He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.