Peter Schiff: Wall Street Unspun, 30th of June

In his latest Wall Street Unspun radio show (30th June), Peter Schiff begins his main monologue with an analysis of the weak US stock market, talking about how the main stock market indexes are moving down against gold:

Looking at the weak US economic confidence figures, Schiff notes that he thinks it a good thing that the lowest number of people since 1967 are thinking about buying a new car (3%). They should be saving money, he says, rather than wasting it on new cars. New house sales have also plunged, following the removal of temporary government tax credits, and this kind of evidence indicates to Mr Schiff that the phoney recovery — the green shoots recovery that never was — is coming to end, now that the first major round of stimulus has petered out.

Next up, although Schiff usually disagrees with everything the wretched New York Times columnist Paul Krugman says, he finds it refreshing that Krugman is finally on the same page as him by saying that we are now entering what the history books will call a depression. Krugman is right, says Schiff, but mercifully Mr Schiff then returns to form by laying into Krugman’s solution for this depression, which is for the US federal government to spend even more than it currently spends.

Krugman’s position is of course unfalsifiable. No matter what happens, he will be right. If we get out of depression, then it will be because of stimulus. If we fail to get out of depression, it will be because the stimulus needed to be higher.

Schiff ridicules this position. The US government is currently spending $4 trillion dollars a year, with a deficit of $1.5 trillion dollars and interest rates are being kept down at zero percent. “How much more stimulus does Paul Krugman need?”

Unfortunately, Krugman will still be listened to by Washington, says Schiff, because of his Nobel prize (created and financed by Sveriges Riksbank, the Swedish central bank); Krugman is also telling Washington exactly what it wants to hear, which is that it needs to increase spending, which is pure music to its ears. This lies at the root of Schiff’s prediction that there will be another almighty Obama stimulus package coming soon, to replace the one that just failed.

Schiff then moves on to combine this prediction with an analysis of the weak US stock market. In Pavlovian fashion, traders have moved into US Treasuries and the Dollar, because of this weakness in stocks, he says. Schiff thinks that these traders will figure it out eventually, but the weakness in stocks should be bearish for bonds, because it presages a new massive Obama stimulus and subsequent massive monetary inflation.

This will increase the deficit, therefore more US Treasuries will be sold to fund this expanding deficit; so how can many more US Treasuries coming into existence be good for their price?

One sign that the traders should be reading is that according to the old pattern of “stocks down, bonds up”, gold should be following stocks down. But it is holding up. The old financial relationships are trying to decouple, claims Schiff, and when they do successfully schism, a new leg of the monetary meltdown will ensue.

Mr Schiff then moved into his usual phone-in session.

The first caller asked about the prospects of US utilities stocks, especially if an inflationary depression takes hold. Schiff answered this by predicting that nominal price of stocks would rise, due to monetary inflation effects, but that real values would fall. He also recommended that investors in US stocks should think about what punitive taxes might be imposed under the guise of windfall profits on the few remaining successful companies in the US, to keep the government’s spending bandwagon rolling. Dollar-measured profits will rise, due to inflation, which will provide a good excuse for ‘windfall’ taxes.

However, having said that, Peter Schiff’s general advice is to avoid the danger zone of the US economy entirely, and to just keep keep out of the US stock market. If you must be in the US, or if it becomes illegal to invest abroad, stay in resources, commodities and export companies, he says. However, with Washington being so hostile to business, it would be better to be in a Chinese water utilities company than in an American water utilities company.

The second questioner asked about the consequences of a second crash, following the first one in 2008. Will there be a big dip in gold prices, as there was last time, due to the herd of panicking investors flooding into Dollar-based securities and out of everything else?

Markets tend to go against expectations, replied Schiff. With so with many waiting for gold to sell off in a crash, the short positions might get caught out if price of gold goes up rather than down as they are expecting, which means they won’t be able to cover their positions, which could cause a lot of problems.

The general assumption is that gold will go down with stocks, in a second crash, so Schiff is sticking to his contrarian prediction that the next collapse will be a flight away from the Dollar rather than a flight towards the Dollar, though he does admit he could easily be wrong about this. He thinks he knows where the endgame will be and he bases his long-term investment strategies upon this endgame. But predicting the path of the market over several years, on how and when it finally reaches this endgame, is an unknowable and impossible estimation process.

Most people investing these days, he continues, especially those investing other peoples’ money, will be wrong in their predictions, just as they were wrong in the dotcom bubble. The few people who shorted the dotcom bubble looked wrong for a long time because the dotcom prices kept going up, but they were proved right in the end.  The danger comes in figuring out how much pain and time you can suffer in backing what you think is the right contrarian position. As the old saying goes:

“Markets can remain irrational longer than you can remain solvent.”

Baron Keynes of Tilton

A third caller asked how you can short the bond market if you don’t have much money? Schiff replied that he didn’t necessarily recommend that people short the bond market, for the reasons stated earlier, although he did discuss the derivative-linked securities you can buy which go up when bonds go down (and vice versa).

The next interesting question involved questioning Schiff on his views over the argument that government monetary inflation is being more than offset by massive credit deflation. Mr Schiff replied that although it may be technically true that more Dollars are temporarily being destroyed than are being created, the demand for money is falling, which therefore makes it less valuable. In simpler terms, as production is destroyed through loans going bad, then much less is produced. If these bad loans are replaced by more printed money, then much less production is being chased by the same number of dollars as previously, hence each dollar is worth less real physical goods.

In a final test of sanity, Schiff postulated that if replacing loans-gone-bad with printed money was so pain-free and so consequence-free, then Zimbabwe would be the wealthiest nation on Earth.

He claimed that deflationary ideas do hold for gold, but they do not hold out for paper money, which can be produced in virtually unlimited quantity. (Though in Zimbabwe’s case, they actually ran out of paper when the Bavarian company, Giesecke & Devrient, refused to deliver blank banknotes to the Zimbabwean government.)

The stimulus will keep rising to fight off deflation, said Schiff, with the government mailing larger and larger amounts of Dollars to people.  However, deflation is needed to get rid of the depression, to flatten out the price structure to a base level. In times gone by, when the world was on a gold standard, price deflation was usually accompanied by a (much shorter) recession, which was a relief to those who had just been made unemployed because pricers were cheaper. The lower ‘bust’ prices then enabled the economy to quickly re-balance itself and re-adjust and shrink the high ‘boom’ prices down to a more realistic level (in gold).

Food, gasoline, and health care and other consumer prices should now be much cheaper after the meltdown in 2008, said Schiff, but they are still stable or rising, even with unemployment rising and with the economy weakening. This shows you just how much monetary inflation there has been by the government, and at some point this inflation will start to outstrip and outpower price deflation.

Further questions dealt with more on shorting bonds, the merits of buying physical as opposed to paper gold, the impossible assumptions the US government is making about growth and rolling over its debt, and the likelihood of the US government banning foreign investment to lock in its power over the American people.

One further thing that did come up during the radio programme was a reference to a televised discussion Peter Schiff had a few months ago with James K. Galbraith, the son of John Kenneth Galbraith, the infamous Keynesian and author of the influential book, The Affluent Society (this is one of Roy Hattersley’s favourite books, which probably tells you all you need to know about its quality).

I thought Cobden Centre readers, being a discerning audience, might like to watch the debate: