Over the past 12 to 18 months we have seen the mass destruction of a lot of institutional and individual wealth. Many - even most - of our cherished theories of free-market capitalism have been questioned or have been revealed as basically wrong.
Many on the right are saying that much of what has gone wrong over these 18 months is the responsibility of the former Chairman of the Federal Reserve, Alan Greenspan. In some ways, I can understand this view; however, many of these individuals are the same individuals who only four to five years ago were saying how great a Federal Reserve Chairman Greenspan was!
I was listening to a financial podcast by Andrew Horowitz -
The Disciplined Investor. It’s highly informative and interesting and I would recommend the podcast to anybody who is interested in how the stock market really works and in ways of protecting their money. In a recent week’s episode, Horowitz interviewed Peter Schiff, President of
Euro Pacific Capital. Peter is a well-known and very popular TV financial commentator. His nickname is Dr. Doom. Peter was one of the few so-called financial experts who predicted the housing bust and its consequences to the American economy.
You can see a famous, or should I say notorious, speech Peter Schiff did in front of the Western Regional Mortgage Bankers Association Meeting in November 2006 on
YouTube. In this speech, he predicts -- in front of a hostile audience -- the coming collapse of the U.S. housing market.
Spreading (Saying 'bye' to) My Investment
I have always admired Peter, mostly connected to this speech. It takes real intellectual guts to publicly swim against prevailing popular views.
I personally decided to invest a little bit of my own money with Peter’s company, which over this past year he and his colleagues have managed to completely destroy! He has managed to reduce my principle amount invested with him by half in one year!
Luckily, I decided to place only a small amount of my savings with Peter Schiff. I would strongly advise any of you not to put all your eggs in one basket. Just look at the poor people who invested all their money with
Bernard Madoff!
No, one of the basic rules of investing is, spread your money around.
I still agree with a lot of what Peter Schiff has to say; however, he is bit like a broken record, repeatedly playing the same song. Also, he doesn’t seem to believe he and his team should protect their clients’ money using options strategies, diversification and other professional tools. I have recently felt like sending Peter a copy of Andrew Horowitz’s book,
The Disciplined Investor Essential Strategies for Success.
Peter Schiff’s Gloomy Forecasts
One of Peter’s main intellectual blind spots is that he believes that the world can be defined clearly in economical separate parts. And that the Far East will do a lot better than the U.S. in this downturn.
This is clearly not correct; it is becoming clear that in the coming year the Far East might be more damaged by the global downturn then America itself. However, when the global economy does recover in the coming years, the returns that foreign shares provide will be much higher compared to U.S. domestic shares.
This is mostly because of the basic fact that even now with a 50% decline in most of the leading U.S. share prices, the shares are still too expensive, with historic high
P/E factors
Peter is very gloomy about the prospects of the U.S. economy. He is deeply worried that inflation in the high double digits will become a reality in the U.S. economy. I agree with this to some level because with the amount of money that has been pumped into the U.S. financial system, inflation will normally, in the end, become a major problem for the U.S. economy.
Peter also predicts that the U.S. dollar in the medium- to long-term will once again find itself under intense pressure and lose a lot of value against leading world currencies.
I basically agree with his outlook. However, I do feel that Peter has over-estimated the degree of inflation pressure that the U.S. economy will face. This is mainly down to the fact that there will be high levels of over-production in the global economy even after recession, and this should keep wage levels down in the U.S. This, to some level, will keep inflation down to a lower level then Peter forecasts.
My Three Disagreements with Peter Schiff
There are three main areas where I fundamentally disagree with Peter’s outlook.
- His attitude that the world economy can be split into separate geographic areas. I personally feel that this to some level correct in upturn periods but is fundamentally wrong in periods of deep global recession.
- Peter underestimates the real strengths of the U.S economy. These strengths are mostly connected to America still being one of the most open societies in the world. This allows quality individuals from the rest of the world to move and work in the U.S., start new businesses and develop new technologies that really benefit the U.S. economy. However, under President Bush’s presidency it has become much harder for clever people to move and work in the U.S. I hope this will change under the presidency of Barack Obama and return to the historic norm of America attracting some of the best minds of the world. China does not have this advantage. Yes, it has an enormous population, but it can’t compete against the global population in intellectual terms because it is not an open society!
- Peter states that free enterprise is not the real problem but the real fault was the economic policies of Alan Greenspan. In some ways I am in agreement with this view. However, this view does have some major problems. First, I personally don’t feel that free enterprise really exists. It’s a bit like trying to ask 100 people what they feel the word globalization really means. You get 100 different answers. He really feels that the system can self-regulate. This is obviously incorrect – as evidenced by this year’s experiences!
-- Jonathan
