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Mike Shedlock (Mish) Vs Peter Schiff: Analysts Clash

InvestorEducation / Learning to Invest Feb 02, 2009 - 10:54 AM GMT

By: Nadeem_Walayat

InvestorEducation Best Financial Markets Analysis ArticleMike Shedlock last week fired a broadside attack onto Peter Schiff (Dr Doom's) record of financial forecasts for 2008, which culminated with a statement that illustrated and implied that many of Peter Schiff's clients may have actually lost between 30% to 60% of the value of their portfolios during the volatile trading and investment environment of 2008.


Key points that Mike Shedlock made were - Peter Schiff Was Wrong - 26th Jan 09

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.

To make matters worse for Peter Schiff the Wall Street Journal also ran a piece on Peter Schiff's trading record for 2008 with the key points made - Right Forecast by Schiff, Wrong Plan? - 30th Jan 2009

Investors open accounts at Euro Pacific to take advantage of Mr. Schiff's investment advice, which generally involves shunning investments in dollars. Individual returns can vary. Some investors may like gold-mining stocks, while others prefer energy-focused stocks.

Most had one thing in common last year: heavy losses. A number of investors said their Euro Pacific portfolios lost 50% or more in 2008, worse than the 38% drop in the Standard & Poor's 500-stock index last year. People familiar with the firm say that hardly any securities recommended by Euro Pacific brokers gained ground in 2008.

Investment adviser and author Peter Schiff, still riding high on his prescient call on the collapse of the U.S. housing market, is the subject of more than 3,000 YouTube videos, including one called "Peter Schiff Was Right."

Such losses came as something of a surprise. Mr. Schiff's prescient call for the collapse of the U.S. housing market and the weakening of the financial system helped him gain fame as an economic guru and savvy investor who promised shelter from the financial storm.

In his 2007 book, "Crash Proof: How to Profit from the Coming Economic Collapse," he recommends that investors pile into gold, commodities and overseas stocks that spit out steady dividends.

Many other analysts responded to the exchange both for and against Peter Schiff's record and the events of 2008.

Peter Schiff's Response to the criticism - Peter Schiff Rebuttal- A Response to My Critics - 29th Jan 09

First of all, the hyper inflation issue is a straw man at best. While I often talk about the possibility of hyper inflation, I have always said that it would be a worse-case scenario that would play out over many years. The fact that it did not appear in the first year of the economic crash (2008) does not invalidate my position. I have always maintained that this worst-case scenario will likely be avoided by what will ultimately be a dramatic shift in policy once our leaders come to their senses. However, until then the dollar will likely lose a substantial portion of its value.

Second, I never said that the dollar would go to zero, either in 2008 or any year thereafter. I have said that in the event of hyper inflation the dollar's value would approach zero. My actual forecast in my book "Crash Proof" was that the Dollar Index would fall to 40 (currently about 85), with a realistic worst case scenario, assuming very high but not hyper inflation, of 20 or lower.

Third, the blogger points out that because the decoupling theory (foreign economies improving while the U.S. falters) that I wrote about in "Crash Proof" has yet to occur, that the theory itself was ridiculous. In my book I wrote that this process would not occur overnight, that initially our creditors would come to our aid, and in so doing our problems would become manifest abroad. I wrote that it would take time for the world to realize that what had been decoupled from the economic train was not the engine but the caboose. In fact, that is precisely the way it is playing out.

To illustrate the flaws in my investment strategy the blogger has posted a client's statement that shows a loss in excess of 60%. In addition, he claims to know of other Euro Pacific clients who have experienced similar losses. The inference of course is that most, or all, of my clients must have suffered similar losses, and the existence of such losses proves that I am wrong. In fact, some have gone a step further, claiming that such losses prove that I am a fraud.

For the whole rebuttal click here

2008 The Year the Financial Markets Panicked

The behaviour of the markets during 2008 was unprecedented, it was not just that the markets crashed it was that the markets repeatedly panicked. Therefore no matter how much work one has put into their models and scenarios of what could transpire during 2008, there is no way one could have gotten all of the trends right, the only way to cope with the panics during 2008 was to continuously reappraise ones analysis and outlook, for instance that means going from a Gold bull to a Gold bear back to a Gold bull again a Gold bear and eventually settling to be Gold positive by year end. Now that was not Peter Schiff's outlook for gold but my own, as I tried to extrapolate the trend in terms of position trading rather than investing and there is the jist of the argument in that 2008 was not an investors year but a traders year, therefore those that stayed invested throughout 2008 would have seen their portfolios lose value.

Peter Schiff

I first became aware of Peter Schiff's commentary during mid 2007 via submissions to the Market Oracle which have remained consistently bearish in terms of the outlook for stocks, economies, housing, bonds and the US Dollar, and bullish in favour of foreign markets and commodities. However the problem I see here is that Peter failed to respond to the volatile trading environment by recognising that deleveraging would lead to a commodities bear market and a dollar bull market, and this is not something that happened over night i.e. out of the blue for the commodities markets peaked over the summer months, in fact Gold acted as a leading indicator by peaking during March 2008 at $1030 which prompted my analysis - DELEVERAGING- Gold and Commodities Teetering on the Brink of a Bear Market? . The U.S. Dollar took plenty of time to create the base off of its March 2008 low with the breakout from the base targeting first USD 80 and then USD 90.

Failure to take account of this unfolding change in trend represented a failure of ongoing analysis where reliance is wholly placed on conclusions drawn as long ago as 2 years earlier, rather than paying attention to the actual unfolding market trends. I can only conclude that the reason for this is that Peter had invested much time in publicising his book and the trends contained thereof, which means that he took his eyes off of what was actually happening in the markets i.e. unbiased analysis gave way to marketing, therefore given the degree of investment in marketing in the existing scenario it thus became increasingly difficult to respond to or recognise the changing realities on the ground and hence the experience of large scale losses in portfolios.

The Importance of Reacting to Changing Events and Black Swans

During early 2008 I too was bullish on foreign markets, well let me rephrase that for I was bearish on China since the October 2007 peak, and remained bearish during the whole of 2008 up until the SSEC hit 2000. However I recognised the relative strength of Russia which was priced much more competitively than either India or China, and therefore outperformed whilst other markets plunged. However the strong Russia scenario and trends were blown right out of the water by the Black Swan event of Russia's invasion of Georgia, and the soon to follow oil price crash that I had correctly called right at $147, which led to a bloodbath in the Russian stock market that crashed far beyond that of western markets.

Now, If I too had published a book during April 2008, then that would have been extremely bullish in relative terms for the Russian market, as you had oil price nudging above $110, with the stock market cheap on a comparative basis, it seemed at the time to me that Russia was where China had been 10 years earlier. Even a fall in crude oil price from summers peak to towards the target of $80 would still leave plenty of revenues for the Russian state to continue expanding its economy, and given the petrodollars the Rubble should also remain relatively strong and hence additional profit on the exchange rate basis. Having spent much time and effort in writing and publishing a book, I too could have been increasingly caught up in the media and spend less time on ongoing analysis.

The consequences of which could have been missing the significance of Putin's decision to invade and kill a few thousands Georgians and annex South Ossettia which frightened foreign capital out of Russia whilst at the same time the crude oil price had begun its crash of 2008 that saw it slice through the the $80 target and waved good bye to the $60 overshoot spike target, and has continued to march all the way to as low as $30 !

So the reality of the events during the second half of 2008 paints a completely different picture for that of the Russian markets than that of April 2008. Therefore the question is could I have abandoned the book that I had published in April 2008, that I would have invested so much time and effort into in response to changing facts on the ground ? Or would the book and the media act as a noose around my Neck taking my forecasts and my portfolio down with it... Well since I did not write a book, I had nothing invested but a few articles the implications of which evaporated in the face of the changing facts on the ground. The same goes for my gold outlook during 2008, for I was neither a perma bull or a perma bear but recognised the necessity of being prepared to abandon preceding analysis in lieu of the changing market trends. The same goes for the U.S. Dollar since I turned bullish in March 2008, which does not mean I have become a perma bull for as my latest analysis forecast that the U.S. Dollar appears to have hit a brick wall in the region of 90-92 which now implies a trading range fro the next 5 months or so rather than a sustainable trend higher.

The point is this, investors and traders cannot afford to invest so much in an scenario that they disregard what the market is actually doing and saying in terms of trend and price patterns.

Peter Schiff - The Bottom Line a Loss is a Loss

Whilst Peter Schiff has been put on the defensive in terms of forecast trends against outcomes, however the real importance and the bottom line is the performance of managed client accounts, which given the response illustrate losses in the region of 30% to 60%. Peter needs to forget about responding to internet postings criticising his forecasts and and go back to see why so much money was lost on the portfolios, as clearly the results indicate a significant failure in hedging market exposure against trends that were not part of the scenario.

Lessons for Investors

The key lesson for investors to learn from here is that investors broke one of the cardinal rules of investing which is that YOU and NOT Peter Schiff are responsible for your money, therefore the flaw is with investors in offloading the responsibility for managing their own portfolios onto others. It is an imperative for investors to educate themselves in the management of their own portfolios, for no one is going to care about what happens to your money than you yourself. A professional money manager such as Peter Schiff in times of profit will sing his own praises, however in times of losses make excuses. IT IS HUMAN NATURE TO DO SO.

ALL Forecasts are Best Guesses

The more forward in time one forecasts the greater the probability is of being proved wrong.

So why forecast ?

Forecasts are made on the basis of models, scenarios and insight, however there is no crystal ball, so in this respect I am far more easy going on Peter Schiff being wrong on his outlook on the Dollar and foreign markets, as the future is unwritten, the key here is in being able to or should I say being practiced in recognising when your scenario is wrong and taking appropriate action, to do so one cannot afford to invest themselves personally in such a scenario to such a degree that they ignore the changing market trends.

The Secret to Trading Profitably is Reacting to Price Movements in Real time

In my opinion the only way to trade consistently profitably is by reacting to price movements in real time. Yes forecasts and forward looking analysis is useful in formulating both investment scenarios and trade scenarios i.e. for the placement of entry triggers targets and stops, but after a position is on, then the forecast is no longer relevant for afterwards its the subsequent price movements in real time that determine whether you hold, exit or accumulate more. In this respect Peter Schiff does appear to have failed, which implies lack of real time trading experience, in knowing when to cut your losses or reverse direction.

This is why all positions, and I mean ALL should carry a stop loss, for long term investments my stops are at 20%, which basically means if half my positions rise by 20% and half fall by 20%, then I break-even. Though it appears the strategy adopted by many investors is to not have a stop and hence stock prices collapse into oblivion of 95% of the original stakes, which is the reason why portfolios are experiencing losses of 40% to 60% when they should not, even if the analysis turned out to be wrong with losers far out weighing winners, the net loss of such a stop loss portfolio would be more in the region of 14% not 40%.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 22 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Attention Editors and Publishers! - You have permission to republish THIS article. Republished articles must include attribution to the author and links back to the http://www.marketoracle.co.uk . Please send an email to republish@marketoracle.co.uk, to include a link to the published article.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Tracy
02 Feb 09, 22:45
Peter Schiff for Senator!!!

Peter is the man!


Paul
03 Feb 09, 01:00
Schiff Clients - Your losses

Please reveal your losses .


Wall
03 Feb 09, 16:03
Thanks Peter!

So 7 years of 20% gains following Peter's advice, and 1 bad quarter for those who jumped on late. Basically they're like the fools who bought oil at the high. BTW my gold is up... thanks Peter!


Rhys
04 Feb 09, 23:10
This is ridiculous

How can you say schiff is wrong when you look at two or three accounts, with only one third of the accounts holdings are down... the part examined. gold and cash, which he's heavy in, is up. also, he doesn't trade on the margins. as someone who wiped himself out at an earlier age, by trading on the margins, i can say this is why so many people are wiped out.

look at the people attacking him, they've wiped out or are wiping out.

schiff's strategy is down this year over last, not overall, because he seeks high yielding dividends. also, since he doesn't trade on the margins, this year when the payday of his plan unfolds, we'll all be broke and he'll be filthy rich. so will all his clients.

most of what he said the crash is, is still getting warmed up. credit cards, auto loans, retail, service, government.... all default or bankrupt within the 1-3 year picture. his only timetable i've ever heard has been, "by the end of the next's president's first term" which means obama cause he said it before november.

So you're looking at his stock market statements, which is some third or so percent of his holdings, and are down, and say he's losing money... he's not. he's making money because he already bought them, now he gets dividends at the same returns, new bids at higher returns... and then the dollar crash that comes from the fed's trillions and obama's trillions and bush's trillions... a trillion here, a trillion there and pretty soon you're talking real inflation. i don't see how he's missed.

i see how the whole economy is tanking and europac is ready. everyone knows these are the times that separate the traders from the investors.


Paul
09 Feb 09, 12:46
Hyperinflation Coming

Hyperinflation will be seen in prices at the end of this year. Though, it is already obvious in the money supply.

Mish is just wrong, who always insists on deflation until it is too late for sheople to save themselve, are trusting Mish. He cites Nadler. The sheople who trust Mish will be punished.


Nullsh*t walks...
11 Feb 09, 18:45
Money Talks..

Schiff was down 70% in 2008.

Soros was up 10% in 2008.

Both were bears.

One of them is a

P.S. I vote for the Bezerkley grad...


YOU LOST MONEY
11 Feb 09, 18:48
Talk to me Petey

SOROS AND TALEB WERE UP 10%-110%...

Please explain, oh Europac flamers...


EK
17 Feb 09, 21:24
Peter Schiff

Last year I outperformed 99% of mutual funds and managers. I follow trends and always have stop losses. I don't believe other's theories, or even my own theories. I believe what really happens in the market.

After 26 years of doing this, i've noticed it's not always true "no one cares more about your money than yourself." Many people don't want to devote 6 hours a day every day to the screen, as I do, nor do they have the knowledge of when to enter or exit, nor the gumption to pull the trigger. Some don't open their statements for months on end.

So i provide a valuable service.


Rod Aries
07 Mar 09, 09:43
Peter Schiff

Ok, does that mean this figure of 70% loss in 2008 is wrong?

Ironic that the author has 22 years in derivatives. Isn't that the next thing that is going to go "Pop"?

A loss is a loss when you close your position.

What does "a number of clients....", does this represent the majority? It would be interesting to know....

Peter, care to comment?


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