Peter Schiff is crying uncle

Discussion in 'Economics' started by Daal, Sep 12, 2008.

  1. Daal


    The guy thought the market was a one way street, whats wrong with taking profits

    "The Price of Sanity in a Time of Madness

    In the last few months, many of the investment portfolios recommended by Euro Pacific Capital have experienced the most adverse conditions that I have seen in ten years. At present, the troubles are continuing. Driving the declines has been weakness in foreign currencies that are important to our investors. Some have fallen nearly 20% against the U.S. dollar, pushing down the dollar value of stocks in those markets. Simultaneously oil and gold have seen significant declines from their highs in the early part of 2008, which has punished the share prices of commodity-related stocks. The resulting paper declines in our portfolios have been painful to watch. As I'm sure many of you are aware, all of my own investments adhere strictly to our philosophy, so my concern is not academic.

    In such an environment it is natural that some of you may be questioning the basic beliefs that originally led you to Euro Pacific. If economic conditions were unfolding differently than what we had expected, then I would share your concerns. Fortunately for our investors, the scenario that I laid out earlier in the decade, which saw an ugly end to America's bubble economy, is playing out almost exactly as I had predicted.

    The problem as I see it is that the vast majority of global investors are still chasing phantoms and clinging to false hopes. I believe the markets have now diverged from reality. This is not the first time in recent history that this has happened. But in the end reality can be defied only so long, and I am absolutely confident that those who refuse to succumb to the madness will be redeemed. Fortunately for virtually all of our clients, by avoiding margin and other investment gimmicks, they are not forced to sell, and are in position to ride out the tempest.

    The latest "catalyst" noted for pushing up the dollar is the government's recent bailout of Freddie Mac and Fannie Mae. If the market were functioning rationally, the resulting transference of staggering new liabilities to the U.S. Treasury would have been immediately seen as a catastrophe for the dollar. Instead the dollar has rallied.

    I believe this counter intuitive reaction results from two forces. First, by transforming trillions of dollars of suspect mortgage backed securities into seemingly bullet-proof Treasury bonds, the move has sparked a relief rally in the dollar as foreign investors no longer have to worry about defaults or markdowns. In fact, to holders of Fannie and Freddie debt, it no longer matters what happens to the housing market. Home prices can drop another 50%, every single homeowner can default on their mortgage, and bond holders will not lose one dime. This has emboldened foreign investors, and temporarily increased demand for both dollars and Freddie and Fannie debt.

    The second force is related to leveraged players, particularly hedge funds, around the globe unwinding their trades. Those who have been short the dollar are now buying those dollars back. Those who have been long gold, oil, and other commodities, are liquidating their positions. This massive, though in my view misguided, rush to the exits is causing sharp counter-trend price movements. However once speculators have been flushed from the market, I expect the primary trends to return stronger than ever.

    Had the government done the right thing and not guaranteed Freddie and Fannie debt, I believe we would now be experiencing outright financial crisis. The dollar would be falling sharply along with real estate prices, gold would be soaring and the recession would be deepening. However, by nationalizing Freddie and Fannie, the government has merely delayed the crisis. The borrowed time will cost us dearly, as the day of reckoning will now likely involve much steeper losses for our currency.

    $5.5 trillion dollars of formerly privately held mortgage backed securities are now, in effect, Treasury bonds. In addition, over the next year or two, my guess is that several trillion dollars of existing mortgages, not currently insured by Freddie or Fannie, will be transferred to the pile. Going forward the vast majority of new mortgages made to Americans will be bought by Fannie or Freddie, and will also become the equivalent of U.S. Treasury bonds. Therefore in a few short years there will be in excess of $10 trillion of new obligations for the U.S. Treasury.

    The defenders of the bailout claim that Fannie and Freddie debt does not represent true obligations because they are collateralized by homes. But anyone with a casual interest in the current real estate market knows that homes are now only worth a fraction of outstanding mortgage debt. And that fraction gets smaller every day. My guess is that $10 trillion of Federally insured mortgages will result in $2 trillion or more of losses. That amounts to more than $25,000 per American family.

    I do not see how the government could possibly cover these losses through legitimate means (taxation or borrowing). To make good, they must rely on the printing press to create money out of thin air. As a result, even though bond holders will get their dollars back, they will lose purchasing power.

    The Freddie and Fannie takeover does nothing to address the underlying problems that forced the companies into bankruptcy. All the bad mortgage debt still exists. In fact, based on this bailout, there will be trillions more in bad mortgages insured over the next few years. The only thing that has changed is how the losses will be distributed. Instead of falling solely on bond holders, who had chosen to invest in mortgage debt, they will now be dispersed among U.S. taxpayers and all holders of U.S. dollars, who made no such choices.

    It is my guess that annual Federal budget deficit will soon approach, and then exceed, $1 trillion, and that the national debt, including actual bonds and guaranteed mortgages, will soon exceed $20 trillion. When these untenable obligations force investors to shift focus from default risk to inflation risk, a mass exodus from both Treasuries and mortgage backed securities (now Treasuries in disguise) will ensue.

    Right now every asset on the planet is being sold except the U.S. dollar. To me this rally looks like the last gasp of a dying currency. Just like a toy rocket ship, once the dollar runs out of fuel it will crash back down to earth. In the mean time, I realize that it is difficult for Euro Pacific clients to watch the dollar value of their accounts fall every day.

    If you see the world as I do, we have no choice but to grin and bear it. The alternative is to sell our foreign stocks and get back into the dollar. However, I am confident that such a course of action will lead to total disaster. I feel sure that any current paper losses in our accounts will be temporary. However, the real losses that will befall holders of U.S. dollars will be permanent.

    For those of you on my mailing list who do not have accounts with me, or who have not already moved out of the dollar through other channels, recent events are a blessing in disguise. On the eve of what I see as a pending economic collapse of historic proportions, you have an unexpected ability to protect yourself. Right now the window of opportunity is wide open, --please climb though it before it is slammed shut.

    For a similar take on the subject, watch this recent interview with by legendary investor Jim Rogers:

    Click here to watch the video.

    Also, if you have not yet done so, please watch my 2006 presentation at the Western Regional Mortgage Bankers Association. As confident as I was then in my real estate predictions, I am even more confident now in my dollar prediction. So if the current strength of the dollar and paper losses in your brokerage account have you worried, watch the presentation. I am sure it will give you the confidence you need to stay the course.

    Click here to view the presentation.

    Also, if you have not been listening to my weekly radio programs, please do so, as I am sure they will help you understand what is happening and calm any fears you may have as a result of market turbulence. Listen to the most recent shows first.

    Click here for the archives.


    Peter Schiff
    President and Chief Global Strategist
    Euro Pacific Capital"
  2. gwac


    He called this crash in his book, I read it he was right. I do not understand how he got his calls wrong!!!

  3. Note to Peter Schiff, whom I respect for his integrity anf foresight...

    if you think it's been bad thus far, and 'illogical', wait til after next Tuesdays Fed announcement, when you see your returns lopped-off another 20%, and declines approach the 40% area.

    You can be thankful you are not highly or lightly leveraged, as that will prevent a total wipeout, though, alas, all you well reasoned bais and arguments will count for nought, and in fact cause much anguish, let alone losses.

    Good luck Peter, I hope you come out alright.

    Note: Trim sail
  4. Digs


    So what are you expecting the FED to do that will be sooo big ?
  5. just goes to show most economists cant trade for shit.

    he anticipated the mess but obviously he doesnt have the skill to time his entries and exits.
  6. empee


    dont think hes an economist. Also, he's probably way up from when he started since he has been crowing the same stuff since the late 90s I believe (I recall a interview with him on youtube that was either late 90s or 2001 area).

    Dont confuse brains witha bull market, more important will be his call to get OUT of these.. and into other asset classes.
  7. Digs


    Most of his trades are $USD based, so when it changes !