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Peter Schiff Was Wrong

Stock-Markets / Financial Crash Jan 26, 2009 - 07:33 AM GMT

By: Mike_Shedlock

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleThere are numerous YouTube videos, articles, and references to Peter Schiff being "right" rapidly circulating the globe. While Schiff was indeed correct about the US imploding, most of the praise heaped on Schiff is simply unwarranted, and I can prove it.

First, let's start with a look at the claim being made. Peter Schiff concludes many of his articles, books, etc. with the following statement.

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly .

Highlight in red is mine.

I would like to see some proof of that statement. Specifically I would like to see the average returns posted by EuroPacific clients for 2008.

I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff's investment thesis was flat out wrong.

I have an actual portfolio statement from one of Schiff's clients at the end to discuss, for now let's discuss the main points of Schiff's thesis.

Schiff's Overall Thesis

  • US Equity Markets Will Crash.
  • US Dollar Will Go To Zero (Hyperinflation).
  • Decoupling (The rest of the world would be immune to a US slowdown.
  • Buy foreign equities and commodities and hold them with no exit strategy.

Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.

Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.

What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.

In other words, Schiff failed where it matters most: Peter Schiff did not protect his client's assets. Let's take a look how, and more importantly why, starting with charts of various foreign indices.

$SSEC Shanghai Stock Exchange Weekly

$NIKK Tokyo Nikkei Weekly Chart

$TSX - Canada TSX Weekly Chart

$AORD Australia ASX Weekly Chart

$SPX S&P 500 Weekly

2008 Equities Bloodbath

2008 was a global equities bloodbath. Clearly there was no decoupling. The Shanghai index (China), Nikkei (Japan), TSX (Canada), AORD (Australia), and virtually every world equity index collapsed along with the S&P 500, the DOW, and Nasdaq in the US.

Many, if indeed not most, foreign equity markets did worse than the US indices. The Shanghai index fell from 6124 to 1665, a whopping 72.8% decline top to bottom.

Let's investigate why this happened, starting with the decoupling thesis itself.

Global Decoupling Thesis

Please consider this excerpt from the Little Book of Bull Moves in Bear Markets, page 41:

" I'm rather fond of the word decoupling, in fact, because it fits two of my favorite analogies. The first is that America is no longer the engine of economic growth but the caboose. [The second] When China divorces us, the Chinese will keep 100% of their property and their factories, use their products themselves, and enjoy a dramatically improved lifestyle. "

I mentioned decoupling many times previously but declared it officially dead on January 22, 2008 in Global Decoupling Myth Shattered In Equity Selloff . There are some interesting charts on currencies in that post as well.

Here is a snip from Tail Wags Dog Theory Blows Up written November 1, 2008.

Tail Wags Dog Theory Blows Up

At every peak there are always ridiculous predictions. In the dotcom bust, it was all about the "gorilla game", the "new economy" and "click counts". When the Shanghai Stock Index rose from 998 to 6124 in about two years, we heard the same sort of thing about growth in China. Instead of click counts, the theory in vogue was called decoupling. China was supposed to be the 800 lb gorilla with insatiable demand for commodities and perpetual growth for the next decade.

That decoupling theory was based on the belief that the US no longer mattered, that China demand was self-sustaining, that China could grow forever with no problems, etc. Such beliefs eventually became a religion.

The tail does not wag the dog no matter how many people think otherwise.

Let's explore decoupling by looking at manufacturing, employment, and capital flows.

Global Manufacturing Contracts

Please consider US Manufacturing Orders at 60 Year Low, China Contracts 5th Straight Month .

  • China's manufacturing contracted for a fifth month.
  • European Manufacturing Contracts At Fastest Pace On Record.
  • Russian Manufacturing PMI Shrank the Most on Record.
  • U.S. Manufacturing Shrinks as Orders Hit 60-Year Low.

That's not decoupling, that's a worldwide recession.

Millions of Chinese Struggle to Find Jobs

In the wake of a global slowdown, Chinese export shrink, civil unrest is a worry, and unemployment is rising as noted in Xinhua says there will be more unemployment and social revolts in 2009 .

State council adviser Chen Quansheng, warns that unemployment is much more serious than portrayed by the official statistics. According to Chen, so far at least 670,000 small industries have been closed, leaving 6.7 million people unemployed, but this number refers only to registered workers. But there are millions of people working in the underground economy, coming from the countryside, who are being fired and are forced to return to their villages without any unemployment benefits.

The academy of social sciences is also warning about the worrisome number of firings. In 2009, the government will have to create work for at least 33 million people, including migrants, young people seeking their first jobs, and new graduates.

The odds of China finding work for 33 million workers without printing vast amounts of money are slim.

Hot Money Outflows Exacerbate Chinese Problems

Inquiring minds are reading Monetary conditions might exacerbate the Chinese adjustment by Prof. Michael Pettis.

Synopsis: Chinese monetary policy has locked the country into a dangerously pro-cyclical trap. Hot money flowed into China and pushed the economy into overheating. Those inflows have reversed sharply, perhaps by as much as $100bn last quarter, equivalent to around 8% of Q4 GDP. These outflows are causing a credit contraction and an even sharper economic slowdown at exactly the worst possible moment.

One Tail Cannot Wag Six Dogs

Those hot money inflows were all part of the global credit boom that is now unwinding. Much of China's boom centered on exports. Now that the US consumer has thrown in the towel, a key question arises:

Can China expand enough to make up for the contraction in US and European demand given that the two economies are more than six times the size of China?

The answer to that last question is an emphatic no. One tail cannot wag six dogs.

Here is another way to look at it. The US is the world's largest economy. Housing had already weakened but commercial real estate had not. US retail stores and malls were being built at an unsustainable blowoff pace and those stores were crammed with goods coming from China and Japan.

The decoupling theory was that loss of the US consumer would not matter to the commodity producers like Canada and Australia or the manufacturers like China and Japan. How could any economist have thought that? Many did. Schiff was one of them.

Peter Schiff on 2009-2010 USA Hyperinflation

Here is a partial transcript of a Schiff Audio On US Hyperinflation

The whole idea is to get out of the US Dollar. It is on the verge of collapse. The people who don't get out of the US dollar are going to be completely broke and that is obvious. Look at what Ben Bernanke did. Interest rates are zero. Money is free.

Bernanke is going to run up printing presses as fast as he can. This is pure inflation Latin American style. This is hyperinflation; this is Zimbabwe; this is the identical monetary policy of the Weimar Republic.

I am just as convinced that people who have their money in US dollars are going to be just as broke as people who have their money with Madoff.

I do not know how much time you have. With the dollar dropping 5% a week at this point, could it snap back? But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? and another 10%? At some point a year from now the dollar could be dropping 5% a day.

The inflation rate in Zimbabwe is over 100 million percent a year.

Hyperinflation or Hyperventilation?

Schiff asks " But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? .... "

That was quite some rant, enough to scare many who listened. Schiff is indeed very charismatic.

He never bothers to ask, "What if it doesn't?" The answer was not so pretty for his clients. The simple fact of the matter is Schiff was wrong where it mattered.

Schiff has been ranting about hyperinflation for years. The dollar is substantially higher now than it was at the start of 2005. His explanation for the recent rally is there is no "real demand" for dollars, it's just deleveraging.

I agree that deleveraging is indeed happening.

But why is deleveraging happening? The answer is everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out. Those trades are now being forcibly unwound. The bulk of the carnage is likely over but the losses have been immense.

Unlike Schiff, I called for this US dollar rally.

On November 9th, I went neutral on the dollar as the US dollar index came close to hitting my target.

In 2001-2002 the US$ index peaked at 121. Since then there was a massive flight out of US dollars into anything else. That flight continued into 2008 even though the fundamentals were changing.

The fundamentals of China and the commodity producers were simply not very good once the US consumer threw in the towel.

Schiff simply did not see this coming.

US the Next Zimbabwe?

Schiff continually compares the US to Zimbabwe. Such comparisons are silly. Please consider Zimbabwe to launch 100 trillion dollar note .

Zimbabwe's central bank will issue a 100 trillion Zimbabwe dollar banknote, worth about $33 (22 pounds) on the black market, to try to ease desperate cash shortages, state-run media said Friday.

Prices are doubling every day and food and fuel are in short supply. A cholera epidemic has killed more than 2,000 people and a deadlock between President Robert Mugabe and the opposition over power sharing has dampened hopes of ending the crisis.

Hyperinflation has forced the central bank to keep issuing new banknotes which quickly become almost worthless. There is an official exchange rate, but most Zimbabweans resort to the informal market for currency transactions.

Does that sound like anything that is happening or is going to happen in the US? I think not.

However, let's assume for a moment that hyperinflation is going to happen. Where then could one get the most bangs for their buck to take advantage? The answer to that question is in real estate, where one can buy on 5% down. Nowhere else can one easily get such leverage.

Note that there has never been hyperinflation in history where real property declined in value. Therefore, if Schiff really believes in hyperinflation, he ought to be suggesting that his clients buy houses.

However, Schiff thinks housing prices will continue to crash. So do I. And if they do, you can kiss hyperinflation theories goodbye.

EuroPacific Thoughts on the Financial Crisis

I do not expect every advisor at every company to think alike, but I did find these Thoughts on the Financial Crisis by Andre Sharon, Consulting Research Analyst for Euro Pacific Capital rather interesting.

What Now?
Only three possible outcomes:

1. We inflate to the level of the debt, i.e. we "fulfill" debt obligations, but in mini-dollars
2. We take the hit, cleanse the system of excesses and move on. Result: deflation, bankruptcies, high unemployment, etc...
3. We disinflate veeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeery slowly, like Japan. Won't happen: the American psyche won't take 16-odd years of no growth. Different cultural mindset: you can't prick a balloon slowly here.

My guess: combination of 1 and 2. I would hope for a bias towards 2. Terrible for many, but healthier for the system long-term. Schumpeter's concept of creative destruction trumps Keynes, in my book. That's life, and progress, with all its faults and flaws.

My pick is a combination of 2 and 3 (2 is not by choice but rather by force) for reasons explained in Brink of Debt Disaster .

But what I find interesting is that a Europacific advisor believes that Keyensian economics can be trumped (I do as well, Japan proved it), but also that Andre Sharon at least in part is calling for " Result: deflation, bankruptcies, high unemployment, etc... "

I would advise Schiff to toss his hyperinflation theories out the window and listen more to his research analyst. However, Schiff cannot and will not change because he has two books calling for hyperinflation .

On the other hand, I can change. I called for deflation and it is here right now. I do not have to wait for it. The only debate is how long it lasts.

At the appropriate time, I expect to transition my stance towards a stagnant slow growth period in which there will be inflation but not by a lot. In such a scenario, the US would hop in and out of recessions for up to a decade, much like Japan.

Time will tell whose model is correct. I reserve the right to change my model. It's too late for Schiff to change his. The damage has already been done.

Closer Look At Currency Fundamentals

The US economy is clearly in shambles. However, when the US dollar index crashed to 70 the dollar was priced as if the US alone was in trouble. That was hardly the case. Europe, China, Australia, Canada, the UK, are in shambles as well.

On August 8 2008, Trichet Put the Spotlight on the Euro, Dollar by saying economic growth in Europe would be "particularly weak". That was a clear signal all was not well in the Eurozone. Most, including Schiff ignored the signal.

Although the US had a massive housing bubble, so did Spain, Ireland, and other parts of Europe. Also note that European banks invested in US mortgage debt.

Finally, European banks invested heavily in Latin America and the Baltic states. The US did not make those mistakes.

The credit crunch now threatens the sacrosanct

On January 19 2008, New Europe reported The credit crunch now threatens the sacrosanct .

Last October, the ECB signed a currency swap agreement with the Swiss National Bank. The obvious purpose was to support the solvency of the Swiss Franc. The reason why the franc needed support was that the country's banks had undertaken huge obligations in foreign currencies, which exceed the Swiss national income, probably by many times. Who knows how many? Last week this agreement was renewed and extended in volume.

The case is similar with Iceland. That tiny country was one of the richest and most reliable in the world, a kind of small Switzerland. But Iceland's banks were found at the beginning of credit crisis to have huge obligations in foreign currency. When the banks started to go insolvent the government of Iceland stepped in and nationalised them.

In the case of Switzerland - along with the ECB - came the American central bank, the Fed, to support the solvency of the franc with foreign swap agreements. Who on earth wants the Swiss banks to fail? In short, nothing has been settled in the credit crunch crisis and the entire world continues to support those who created the problems in the first place.

Think the Swiss Franc is a safe haven? I don't.

So what about the Euro? Here are a few headlines to ponder.

Germany Faces Worst Post-War Economic Decline


Germany is facing its biggest economic downturn since the Second World War with Chancellor Angela Merkel's government saying Wednesday it expects Europe's largest economy to contract by 2.25 per cent this year.Germany's Economics Minister Michael Glos and Finance Minister Peer Steinbrueck released the latest data on Wednesday, revising their prior 2009 forecast down sharply from last October's prediction of 0.2 percent growth.Since then, German exports have declined precipitously and are expected to be down 8.9 percent for the year.

Berlin Sees No Limits to Economic Intervention


As part of her efforts to combat the economic crisis, German Chancellor Angela Merkel is increasing the state's influence in the market, buying holdings in banks and bailing out individual industries and companies.Is Germany turning into a planned economy? Only a few weeks ago, Chancellor Angela Merkel spoke out against "arbitrary, unfocussed economic stimulus programs" and large-scale government intervention in the real economy.

Trichet Vision Unravels as Italy, Spain Debt Shunned

On January 16, 2009 Bloomberg reported Trichet Vision Unravels as Italy, Spain Debt Shunned

European Central Bank President Jean-Claude Trichet's vision of economies converging behind the shield of a shared currency may be unraveling.

The gap between the interest rates Spain, Italy, Greece and Portugal must pay investors to borrow for 10 years and the rate charged to Germany has ballooned to the widest since before they joined the euro. The difference may grow further as Europe's worst recession since World War II hurts budgets and credit ratings across the region.

Diverging bond yields hurt Trichet's argument that the ECB's inflation-fighting mandate ushered in an era of stability for nations that once suffered rampant price growth.

They also make it tougher for the ECB, which cut its key rate to a record yesterday, to set one benchmark for all 16 euro nations. That may delay recovery as governments try to fund stimulus plans.

Monetary union has left half of Europe trapped in depression

Ambrose Evans-Pritchard at The Telegraph is writing Monetary union has left half of Europe trapped in depression .

Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.

Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.

A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling before the pain begins, which bodes ill.

Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped.

In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday.

Latvia's property group Balsts says Riga flat prices have fallen 56pc since mid-2007. The economy contracted 18pc annualised over the last six months. Leaked documents reveal – despite a blizzard of lies by EU and Latvian officials – that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. This was blocked by Brussels – purportedly because mortgage debt in euros and Swiss francs precluded that option.

Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year's end.

Private economists fear 25pc before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible.

Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist.

On page 157 of Little Book of Bull Moves in Bear Markets, Peter Schiff writes " The Euro could possibly replace the United States dollar as the world's reserve currency . "

I suggest a breakup of the Eurozone has a greater chance than that. While I agree that US dollar hegemony will end eventually, ideas that the Euro will replace the US dollar as the world's reserve currency are farfetched.

Looking far ahead, there may not be any one reserve currency per se. Ideally we will return to a gold standard but at the moment that does not seem particularly likely either.

So what about Australia? Can it decouple?

Australia is one of Peter Schiff's favorite countries for investing. Please consider Aussies hit by 50yr record wealth decline .

CommSec equities economist Savanth Sebastian says that is the worst fall in records dating back to 1960.

"It's no doubt that it will have a big impact on consumer spending going forward adding further downward pressure after we saw those job losses in terms of full-time employment," he said.

"So it suggests that for the Reserve Bank and for the government further stimulus will need to be on the agenda."

That additional "stimulus" is the same thing Schiff rails about in the US every time he speaks. The whole world is stimulating now.

Australia Won't Hesitate To Stimulate

Australia Treasurer Wayne Swan says Australia's government won't hesitate to stimulate the economy further should the need arise amid the global recession.

“We will not hesitate to take whatever further action is necessary to support growth and jobs,” Swan, 54, said in speech notes received via e-mail. “Major financial institutions, some of which have withstood world wars and the Great Depression, have either collapsed or been bailed out.”

Australian Dollar Monthly Chart

The Australian dollar is one of Schiff's favorites. " While other countries are creating inflation, Australia's central bank is raising interest rates to keep inflation in check. " page 161

Australia May Cut Interest Rate Below 2%

Former Reserve Bank Governor Fraser suggests Australia May Cut Interest Rate Below 2% .

Fraser, Reserve Bank of Australia chief during the nation's last recession in 1991, said policy makers may reduce the overnight cash rate target to less than 2 percent from 4.25 percent now. The bank's board gathers for the first time this year on Feb. 3.

“This recession will be deeper and longer than the last recession in 1991,” Fraser said in a phone interview today from his home near Canberra. “The Reserve Bank could go below 2 percent; they will go as low as they need to and a further stimulus from the government will be required.”

Australia started reducing rates at the fastest rate ever in 2008, culminating with a surprise cut of 100 basis points in December. More rate cuts are coming.

One of the biggest drivers for currencies is relative differentials in interest rates, as well as expectations of future increases in interest rates differentials. The Fed is not cutting any more so future rates cuts in Australia may increase the unwinding of various carry trades (borrowing in dollars or Yen, and investing in Australian dollars or Euros).

Peter Schiff did not see or simply ignored the ramifications of the unwinding of various carry trades. All gains in the Australian dollar have been wiped out since 2003.

US$ Trading Range Theory

China, the UK, the Eurozone, Canada, Australia, and Japan are all slashing interest rates. And every country above is printing like mad. Finally, European banks are in dire straits because of bad loans to the Baltic states and Latin America on top of bad investments in US mortgage backed securities.

Schiff simply ignores those problems, or worse yet is not even aware of them.

Given the severe stress everywhere, and given the race to zero interest rates by all, the odds favor a wide trading range rather than a collapse of the dollar. Hyperinflation is simply not in the cards, at least for the US. Ironically, China or Russia is at far greater risk.

What About Commodities?

The following is from a chapter in his book called "Hot Stuff" on page 105.

Schiff writes: " What I want you to take away from this chapter is the knowledge that there is extraordinary excitement in commodities, which are in the early stages of a historic secular bull market. " ...

$CRB Commodities Monthly Index

"There is extraordinary excitement in commodities ."

Indeed there was . However, the time to invest in anything is not when there is extraordinary excitement but rather when there is no excitement at all.

When there is no excitement, the likelihood of investing safely for a long period increases. The above chart shows what happens when you invest for the long haul during periods of high excitement.

The Little Book of Bull Moves in Bear Markets nailed the exact cyclical peak in the commodities boom. Ironically, the subtitle to his book is " How to Keep Your Portfolio Up When the Market Is Down ".

Peter Schiff was wrong about deflation.

There is no debate (at least there should not be a debate) that the US is in deflation. The conditions in the US are exactly what one would expect to see in deflation. The score is a perfect 15 out of 15. Please see Humpty Dumpty On Inflation for details.

I believe I know Schiff's rebuttal. He will talk about soaring money supply. Yes, money supply is indeed soaring, but destruction of bank balance sheets is happening faster. He will counter that it is money that matters, not credit.

History proves otherwise, but I willing to debate on the basis of money supply alone.

Base Money Percentage Change From A Year Ago

Using monetary expansion alone, one would conclude there was massive inflation during the great depression, starting in 1931!

Any definition that suggests that there was inflation in 1931 is silly. Some might counter, as one person recently did "It's not silly. When gold was confiscated by FDR and then revalued 70% higher in dollar terms, was this not inflation?"

My reply is "During the Great Depression, the purchasing power of the dollar went up vs. everything but gold. If the purchasing power of gold vs. the dollar is the sole judge of the inflation-deflation debate, then deflation ruled from 1980 to 2000, a ridiculous proposition."

It is important to pick definitions of inflation carefully. A definition based on money supply and credit successfully predicted interest rate trends, stock prices, the price of gold, housing, and numerous other things.

A definition of inflation based on the CPI failed miserably in predicting interest rates.

A definition based solely on an increase in money supply failed miserably in predicting interest rates, the recent strengthening of the US dollar, gold's decline from 850 to to 250 between 1980 and 2000, and numerous other things.

Soaring money supply simply is not proof "Big Inflation Is Coming" just as it was not proof that "Big Inflation" was coming in 1931. There cannot possibly be any other logical conclusion when confronted with the data.

Is Peter Schiff Early?

Some will claim that Schiff is simply "early". However, from the perspective of the Little Book of Bull Moves In Bear Markets, Schiff was 5 years too late.

To be fair, he was talking about commodities and foreign equities long before that, but as is often the case, such books come out at a time of "Peak Excitement". Schiff's book was the ultimate contrarian indicator.

Let's Return to Schiff's Investment Thesis.

Schiff's Investment Thesis

  • US Dollar Will Go To Zero (Hyperinflation).
  • Decoupling (The rest of the world would be immune to a US slowdown.
  • Buy foreign equities and commodities and hold them with no exit strategy.
12 Ways Schiff Was Wrong in 2008
  • Wrong about hyperinflation
  • Wrong about the dollar
  • Wrong about commodities except for gold
  • Wrong about foreign currencies except for the Yen
  • Wrong about foreign equities
  • Wrong in timing
  • Wrong in risk management
  • Wrong in buy and hold thesis
  • Wrong on decoupling
  • Wrong on China
  • Wrong on US treasuries
  • Wrong on interest rates, both foreign and domestic

That's a lot of things to be wrong about, especially given all the "Peter Schiff Was Right" videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.

Peter Schiff concludes many of his articles, books, etc. with the claim he saw this coming and " positioned his clients accordingly ".

Fortune Magazine bought into it the hype

Peter Schiff: Oh, he saw it coming

'Dr. Doom' became a star by predicting last year's market meltdown. And now his 2009 forecast is even scarier.

Schiff did not invest for doom; he invested for a bull market that did not exist. He was wrong where it mattered most, protecting client assets. For this amazing feat, people think of him as a star.

An Actual Schiff Portfolio

The above statement is from a person who claims to have additional portfolios invested with Schiff over the past 2 years. In total (not just this portfolio), my contact says he invested $70,000 and is now down to $27,000. That is a loss of 61%.

I have talked with another person who claims to be down 72%, and many others who claim 40% or more.

Schiff's entire invest thesis seems to boil down to "Buy and hold foreign stocks, foreign currencies, and commodities, come hell or high water, and hold on to them." Hell has arrived for those following Peter Schiff's philosophy.

Perhaps I have stumbled on the worst of Schiff's portfolios. There is one way to find out.

I challenge Schiff to post the average returns for his clients on a year-by-year basis, just as Sitka Pacific does. That is the only way to see just how right (or wrong) his investment thesis is.

Sitka Pacific vs. Europacific Philosophies

Rather than take a rigid position as to what the market "should do", Sitka Pacific Capital Management tries to position itself for what the market is doing. At times we may like a particular stock group, commodity, or currency, and at other times not.

We do not think this is a good time for buy and hold strategies for either foreign or domestic stocks or currencies. Moreover, we certainly do not think it was prudent to put 100% on foreign stocks and currencies, with virtually no exit strategy if wrong.

We do feel a long-term position in gold on a percentage of assets is a reasonable proposition.

Schiff's slogan is " Because There's A Bull Market Somewhere. TM " but for a year he failed to find one with the exception of physical gold. Ironically, one of his most hated asset classes (US treasuries), had one of their best years in history.

Sitka Pacific Strategies

The two key strategies at Sitka Pacific are called Hedged Growth (a long-short, primarily domestic strategy), and Absolute Return (a global strategy that can invest in domestic stocks, foreign stocks, gold, and currencies, hedged at times with inverse index ETFs).

Absolute Return may at times bear some resemble to Schiff's strategy but we are not dogmatic about it. If we do not like market action in stocks and commodities, we are on the sidelines and heavy in cash or treasuries.

Absolute Return had a 34% position in long dated treasury ETFs in 2008, now well less than half that after cashing out.

Chart of Hedged Growth Since Inception

Note the .17 correlation to the S&P 500 in Hedged Growth.

Correlations run from -1 (perfect inverse, think inverse ETF) to +1 (think buying every stock in the S&P). Zero is no correlation. A correlation of .17 is very low. What it means is the strategy is not dependent on market direction. Many hedge funds make that claim, but the average hedge fund got lost well over 20% in 2008.

Hedged Growth achieves its performance by picking a basket of stocks long and a basket of stocks short. Market direction, inflation-deflation debates, interest rates, etc., simply are not a concern for this strategy. The idea is to pick a winning basket of good stocks vs. poor stocks on a relative basis.

The most we ever put on a short position is 1.7%, and we only take a position in liquid issues. We never add to short positions. This is for risk management purposes.

Absolute Return Since Inception

The chart shows a monthly correlation to the S&P at .36. That is a low number, which is a good thing.

The chart also shows we had a significant drawdown between June and October. That drawdown was based primarily on an expectation that gold and gold miners would diverge from the market on a seasonal trend. That seasonal pattern did not happen. We are not going to get everything correct, but no one else will either. We made much of that drawdown back in late November and December while hedged growth was flat.

One additional thing I would like point out is that none of our strategies was net short in 2008 . Our most cautious stance is market neutral. Thus, we were neutral to long the whole year, and our two key strategies finished solidly in the green even though the S&P finished down 38.5%.

90+% of Sitka Pacific accounts are either Hedged Growth or Absolute Return.

To lay everything out in the open, we also offer Commodities Focus (a portfolio of commodity related stocks and ETFs). Commodities Focus does not hedge and will tend to track a blend of energy stocks and mining stocks. It was down 34.5% on the year. Only 2% of our clients are in this strategy, approximately ½% by total asset value.

Commodities Focus is best suited for those who want anti-dollar plays for a hedge or for those with a very long time horizon as opposed to boomers headed into retirement with their nest egg.

We also offer Dividend Growth for IRA clients who cannot short. Dividend Growth is similar to Hedged Growth, except it may or may not hedge. When it does hedge, it uses inverse ETFs as opposed to shorts. Dividend Growth was down 4.6% for the year, a good achievement compared to the S&P 500 which was down 38.5%.

Gains Needed To Get Even

10% - 11%
50% - 100%
70% - 233%

If you are down 10% you need to gain 11% to get back to where you were, at 50% down you need a 100% gain to get back to even, and at 70% down you need a 233% gain to get even. This is why risk management and capital preservation is paramount.

Boomers significantly down hoping to get back to even may find it will take a decade or more. Those close to, or already in retirement, simply do not have a decade to make up for losses. That is the problem with buy and hold strategies.

Buy and hold was wrong nearly everywhere, but especially for those in or approaching retirement.

Client Letters

We post our client letters online, on a 2 month delayed basis. The letters come out sooner if you subscribe. Subscription is free. Interested parties may Register For Sitka Pacific Monthly Newsletters . Subscribe at the bottom of the linked-to page.

In the wake of various scandals, a certain question invariably comes up.

How Sitka Pacific differs from Madoff, hedge funds, and mutual funds.

  • We are not a hedge fund.
  • We offer managed accounts.
  • The accounts are in investors names.
  • Statements are from a brokerage house not us.
  • We cannot manipulate earnings because we do not produce the statements.
  • We have no access to investor funds.
  • If someone sends us a check made out to us, we send it back. As a strict rule, we never handle client money.
  • We have no exit penalties and no exit restrictions.
  • Someone can close their account for any reason at any time and can even do it without telling us. If you do not like how we are trading your account, you can close it.
  • We do not use leverage.
  • We often have high cash positions.
  • Clients can see every trade we make. This is unlike hedge funds where you typically cannot see anything, or mutual funds where all you see is a snapshot at the end of the month.
  • We have trading rights to accounts; all other aspects of the account belong to the client.
  • Your account is not commingled with any other account.

We are the very opposite of hedge funds or mutual funds.

High Risk, High Reward Strategies

Placing everything one has on anti-dollar bets is a type of high risk, high reward strategy. There is little room for error, especially if there are no risk management controls, which Schiff does not seem to have. " The whole idea is to get out of the US Dollar. It is on the verge of collapse. The people who don't get out of the US dollar are going to be completely broke and that is obvious. ...people who have their money in US dollars are going to be just as broke as people who have their money with Madoff. "

Such arguments can easily be construed as "fear tactics". Listen to the previously mentioned Schiff Audio On US Hyperinflation and make your own determination. While it is certainly prudent to have some diversification, it is not prudent, in my opinion, to bet the farm on a complete hyperinflationary collapse of the US dollar that did not occur and in my estimation won't, at least for a long time.

Undiversified, unhedged portfolios may succeed spectacularly. They also risk catastrophic loss. Many who rolled the dice on Schiff's philosophy came up snake eyes: a catastrophic loss that depending on the exact portfolio, may take a decade or longer to recover.

Where To In 2009?

The question as to where the market is headed comes up all the time. The truth is, no one really knows. However, we see no real value here. Fundamentally stocks are not cheap. Earnings are sinking, unemployment is rising, and this was the biggest debt bubble in history. Logic dictates the biggest bubble should be followed by the biggest crash.

To pick a range for a bottom something like 450-600 on the S&P 500 would seem about right. If so, that is quite a drop from here, and one would certainly want to be hedged if that happens.

However, if the market starts to behave like there is some value now, we will change our tune.

We strongly doubt the dollar will crash, but we will take notice if it breaks out of its trading range. We do like gold here but that can change. Commodities may have bottomed. We doubt stocks have. Foreign stocks may outperform but remember they were clobbered more in 2008.

We are not permabears or permabulls, nor do we daytrade. We review and reposition our strategies monthly, but if something noticeable happens mid-month, we try to react to it.

Unlike Schiff, we attempt to position our clients for what the market is actually doing, not what we think it ought to be doing. The distinction is paramount, especially when such thinking just might be wrong.

By Mike "Mish" Shedlock

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

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27 Jan 09, 13:51
Peter Schiff - Rebuttal

Here is a complete Rebuttal to the Michael Shedlock Blog:;msg1732#new

OK, lets begin by looking at the originator of this information; Michael Shedlock.


Being that Michael Shedlock runs Sitka Pacific Capital Management, an investment firm which is in direct competition with Peter Schiff's Euro Pacific Capital, the Blog he wrote and the article based on it are hardly without conflict of interest. Shedlock is playing a dirty game by manipulating information and skewing facts in order to place obstacles in the way of the "Schiff Economic Outlook". Why? Because Shedlock's company deals heavily in the U.S. Dollar, and specifically, Treasury Bonds. Schiff's economic predictions are diametrically opposed to the Shedlock Investment Strategy. Therefore, the more prominent Peter Schiff becomes, the less clientele Michael Shedlock will get. Its quite simple, but lets move forward...........


Shedlock makes many baseless or just plain false assumptions in his analysis. He continually acts as if the current collapse has somehow "played out". That there is nothing more to see. His claim that "Peter Schiff was wrong" is presumptuous, because the collapse is far from over. How can Michael Shedlock or anyone else for that matter state with such unmitigated confidence that Schiff was "wrong" when the Economic Collapse has only just begun? This first idiotic assumption leads Shedlock to make several errors:


The first is his denial of a possible "decoupling" of the U.S. and China. Shedlock's reason for this presumption is that China is so closely tied to the U.S. economy, that they cannot 'survive' without us. He states in his blog:

"Please consider US Manufacturing Orders at 60 Year Low, China Contracts 5th Straight Month.

* China’s manufacturing contracted for a fifth month.

* European Manufacturing Contracts At Fastest Pace On Record.

* Russian Manufacturing PMI Shrank the Most on Record.

* U.S. Manufacturing Shrinks as Orders Hit 60-Year Low.

That's not decoupling, that's a worldwide recession."

Shedlock has it all backwards. The World Economy is falling in a unified fashion EXACTLY BECAUSE OF COUPLING. Globalism has tied the finances of all countries together, with the U.S. Dollar at the center of it. As the U.S. economy weakens, it drags everyone else down with it. This is what Peter Schiff has been warning of, and it is the reason why China WILL decouple with the U.S. within the next 2 years. China has already announced a program in which they will slowly be breaking away from the U.S. Dollar, and begin trading internationally using the Yuan, their own currency:

Central bank governor Zhou Xiaochuan was quoted by the South China Morning Post as saying: "The US dollar is unlikely to be stable next year and later.

"And the likelihood of the United States issuing more money in the near future adds to the depreciation risk in US-dollar-denominated assets and trade settlements."

The bottom line is, America is one of the most indebted nations in the world. China by itself holds over $1 Trillion in U.S. debt, along with a currency reserve of almost $2 Trillion. As the Dollar goes into hyperinflation, China will be forced to sell off its Dollar reserves and demand a repayment of debts by the U.S. Treasury. The U.S. Treasury, already far in the red, will be unable to pay off such debts. Decoupling is unavoidable. The damage to China would be an acceptable sacrifice compared to the prospect of staying tied to the U.S. as it sinks into the ocean. You can see a more in-depth analysis of this situation here:;msg1727#new

Of course, Shedlock doesn't mention any of this in his Blog, because he is trying to promote the idea that China is in more trouble than we are. This is utterly false. What this collapse comes down to is DEBT. Who has it, and who owns it. China is not in debt. The U.S. is far into debt. The Yuan will become a much more viable currency, while the Dollar will disintigrate. Economically speaking, China is in a position to survive the coming collapse, which is more than I can say for the U.S.


Shedlock has this to say about Peter Schiff's position on Hyperinflation:

"Schiff asks "But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? ...."

That was quite some rant, enough to scare many who listened. Schiff is indeed very charismatic.

He never bothers to ask, "What if it doesn't?" The answer was not so pretty for his clients. The simple fact of the matter is Schiff was wrong where it mattered.

Schiff has been ranting about hyperinflation for years. The dollar is substantially higher now than it was at the start of 2005. His explanation for the recent rally is there is no "real demand" for dollars, it's just deleveraging.

I agree that deleveraging is indeed happening.

But why is deleveraging happening? The answer is everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out. Those trades are now being forcibly unwound. The bulk of the carnage is likely over but the losses have been immense."

Shedlock is completely off the mark. "The dollar is substantially higher than it was at the start of 2005"? Against what? This is a complete falsehood.

The US dollar has now lost more than a third of its value (-35%) against a basket of major currencies since Feb 2002.

Shedlock may be referencing the Dollar's recent rise against the Euro, but this short term increase is nothing compared to what the dollar has lost over the past several years. He refuses to look at the long term trend, instead focusing only on the short term favorable positions that happen to pop up. So, what if the DOW is up 200 points tomorrow? In Shedlock's fantasy world, does that mean the nearly 40% loss in market value the DOW has incurred over the past year 'doesn't count'? This is slapdash economics at its finest.

Next, he again makes the claim that Schiff was wrong about Hyperinflation, even though the Economic Collapse has barely begun. His entire premise anchors on the idea that things will stay exactly the same as they are now. This is complete ignorance.

He goes on to pronounce that deleveraging of the dollar has occurred because "everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out" are now jumping ship on their "bad bets". He presents no basis for this theory. He also does not consider that this is a short term situation caused by the chaos of credit markets, especially in Europe. Again, Shedlock must assume that the current circumstances will stay exactly the same in order for his theories to work.

According to recent reports from Bloomberg, the Federal Reserve has pumped over $8.5 Trillion in bailouts into the economy. This money is printed from thin air. It nearly doubles the size of the National Dept, and it doesn't even account for the "Financial Blackholes" known as Fannie Mae and Freddie Mac, which continue to leech taxpayer money as Mortgages continue to default at an alarming rate. In fact, U.S. Mortgage foreclosures increased by 81% in 2008:

And now that the Federal Reserve has dropped interest rates to effectively zero, money creation will increase exponentially with every passing quarter.

How can Hyperinflation NOT OCCUR!?

The absurdity continues:

"Schiff continually compares the US to Zimbabwe. Such comparisons are silly. Please consider Zimbabwe to launch 100 trillion dollar note. Does that sound like anything that is happening or is going to happen in the US? I think not.

However, let's assume for a moment that hyperinflation is going to happen. Where then could one get the most bangs for their buck to take advantage? The answer to that question is in real estate, where one can buy on 5% down. Nowhere else can one easily get such leverage.

Note that there has never been hyperinflation in history where real property declined in value. Therefore, if Schiff really believes in hyperinflation, he ought to be suggesting that his clients buy houses.

However, Schiff thinks housing prices will continue to crash. So do I. And if they do, you can kiss hyperinflation theories goodbye.

This is a laughable premise by Shedlock. First off, Hyperinflation is unstoppable in an economy that continually prints money out of thin air to cover its debt. This is so simple a child could understand it, but apparently not Shedlock. He then tries to bring in Property Investment, as if it has any bearing on the mechanics of Inflation whatsoever. In a Hyperinflationary crisis, who has the money or opportunity to invest in property? Only the super rich, which I suppose, is the point. Next, he claims that if housing prices continue to decline, then there can be no Hyperinflation? Shedlock fails to realize that hyperinflation of the Dollar has nothing to do with the housing market. He makes the dubious connection based on God knows what. Also, property is not necessarily the best investment in a Crisis Climate. Gold, however, is, because you can take it with you wherever you go. Shedlock is like a naive child facing a reality he has no experience or comprehension of. As a result, his solutions will always fall short of practicality.

Shedlock then boasts that his clients have made substantial gains because his company invests in Treasuries while Schiff's clients have lost money. Of course, short term gains are not evidence of long term prosperity. Treasuries will decrease in value as our currency inflates and other countries such as China are forced to pull out of the Dollar. It is inevitable. Two years from now I would love to compare the portfolios of Shedlock's clients verses Schiff's to see who came out on top. My bet is that Shedlock's company won't even exist in two years.


A common misconception by Main Stream Economists is that deflation in markets is proof against inflation of currency. Shedlock makes this same mistake. The problem here is a lack of foresight. Shedlock's own company guideline states that they do not commit to a "rigid position as to what the market "should do", Sitka Pacific Capital Management tries to position itself for what the market is doing." Meaning, Shedlock is not interested in the future, only the present. While a noble attempt to sound rational, this is not a wise foundation for an investor. Investment is about looking ahead. Often much further than just the next quarter. Shedlock is completely incapable of this, and he will lead his clients to ruin.

Inflation takes time. While certain markets, such as oil, deflate due to lack of demand, others remain in stasis. Go into any grocery store and see if prices have moved substantially downwards. You will find that prices have actually gone up in many cases, even though energy prices are down. Shedlock claims that Deflation is "not debatable". As a consumer, I beg to differ. Wherever he seems to be finding deflation, it is having very little effect on actual retail prices, and in markets that DO have noticeable deflation, like oil, Shedlock will soon find that this is only temporary. Why? Because inflation has not kicked in yet! It takes a little less than a year for newly printed currency to circulate fully through the economic machine. Shedlock jumps the gun over an over again. Deflation in markets does not mean that Inflation of the Dollar is not occurring.

As a finale, Shedlock claims that he has "heard" from two clients of Peter Schiff's investment company, Euro Pacific Capital. According to these two anonymous sources, Schiff has lost them a great deal of money. He then produces an alleged portfolio of one of these clients. I find this story hard to swallow. One, because I fail to see any reason why these two "clients" would be afraid to come out in the open and go on the record. What, are they afraid Peter will have them killed? It really makes very little sense.

Two, anyone who invests with Schiff should know that it will be for the long term. Investments in commodities and Foreign Currencies come to fruition AFTER inflation has kicked in, not before. Why would anyone invest with Schiff, then pull their money out just as the collapse was BEGINNING? Short term losses do not necessarily translate to a lack of long term gains. This is basic investment strategy, and Shedlock completely ignores it.

So lets be painfully clear, we are only at the onset of what will be the worst Financial Meltdown in history. Denying it will not make it go away, and will not protect your savings. Shedlock represents the many shortsighted and impotent investment strategists in this country. His views are completely illogical when applied to the greater picture, but as long as he only accepts facts that support his position and ignores all those that contradict it, he will fool himself and others into believing they stand on solid ground. Only after the collapse has moved into its middle phase (which should occur in the next 6 months) will he realize his folly. Certainly, some of Schiff's clients may lose money, but will they lose everything like those who invest with Shedlock? Or those who have no plan at all? I suspect they will be in a much better position than the rest of us.

01 Feb 09, 16:44
SHIFF is right

You used several pages to proove your point. At least Pete can take comfort that it took that much to somehow proove he was wrong for the short term. Now let me ask you. Where would you rather be now that the dust has settled and the Powers that be are ready to unleash a Global Weimer of fiat cash onto your lap? That's what I thought and I only used a mere paragraph to proove you wrong. GO PETE SHIFF!!!!

Joe Regil
02 Feb 09, 01:59
Peter Schiff bashing

Peter Schiff bashing I see. You guys can play dirty and skew Peter's statements all you want but we all know who is playing dirty and who is not. This is an unfortunate attempt to win clients. Greed meets blogging. Pathetic.

02 Feb 09, 22:26
Peter Schiff Was Wrong

Yes, we can’t judge Peter Schiff by simply say he was wrong since he managed assets of his clients be declined by 60%. This is unfair! Because if there is a race going on, at least we do need give team player’s certain time, time will be decide who is winner who is loser by the end. So last year the economy getting sharp crashed and melt down was start seriously by second half year of 2008, therefore we can’s say Peter Schiff is wrong, because this just started in this financial battle, (like football game, if the game just start or played in the middle, we say team A is going lose will be unfair, we should finish this first half and second half time, then to get the final results ), so by this point, Peter Schiff’s fund might can lower or higher Vs Standard & Poor's 500-stock index last year or this year; but by the end, let’s make time for next year of June, 2010, then we might can see more clear what’s happening okay?

Who cares
28 Mar 09, 10:12
No one really knows

I have lost faith in all experts and all prognosticators. There is no doubt that more than two investors have lost heavily with Schiff in the near term. His supporters, and the whole Schiff thing is very Jim Jones like, repeat over and over that time and events will justify their hero. At this point there are a number of factors in play and I can see various scenarios playing themselves out. In lieu of some new industry or technology I see a deep trough lasting at least several years. Inflation is already heating up, but I think the long term will be closer to a classic deflationary crash. The Chinese won't be able to save themselves by decoupling. Gold and silver won't save you. Unless you are wealthy and I mean really wealthy you are vulnerable. We're all in for a bumpy ride, and I for one am sick and tired of egostical gurus.

Terance Lever
24 May 09, 16:45

Considering the price rise in gold and silver would it be wise to invest my 90-year old father's modest savings in such EuroCapital investments?

I care
12 Jan 10, 01:35
Peter Schiff

well,Well look at Gold Now, look at the Markets, Dollar is Falling and Hyperinflation is about to hit, Good Job Peter Schiff, Peter Has it right. How can we deny what is in front of us???

12 Jan 10, 19:26
Your just as bad as Schiff

this is ajoke. you have set out trying to harm his name its easy for us all to see that. second your wrong about a lot of points inc dollar. i cant be botherd going in to because your not worth more of my time.

use your time to try and achive somthing your self , not trying to put down people who have been right when you have been wrong.

Andrew Osborne
18 Jan 10, 10:55
Shedlocks Shed load

Shedlocks wrong - there you go...

15 Jun 10, 19:02
Dead Wrong

Shedlock reminds me of those Reporters on CNN who were DEAD WRONG about everything while laughing at Schiff and saying that his view was "Nonsense".

Guess who got the last laugh last time? I bet we see a repeat.

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