Bull Moves in Bear Markets Print
Tuesday, 4th November 2008 (by J.D.)This article is about Books, Economics, Investing, News
In high school, I once dated a girl whose father believed the world was doomed to nuclear destruction.
While his family lived in a trailer house (as did mine), this man spent a lot of time and money building a bomb shelter in the back yard. He stocked up on food supplies. He warned anyone who would listen about the coming armageddon. He cited many reasons — Biblical, historical, political — that a fiery death was imminent. He was very convincing.
As it turns out, the world was not laid to waste by nuclear war. Perhaps it will be some day, but for now, his bomb shelter is simply a testament to fear.
Financial armageddon
Peter Schiff reminds me of my girlfriend’s father. Schiff is the president and “chief global strategist” for Euro Pacific Capital. He’s also a financial commentator, and was an economic adviser for Ron Paul’s presidential campaign. He scares me. His warnings of impending financial armageddon sound so plausible that I almost want to build a bomb shelter for my money — almost.
Schiff believes that the United States is on the verge of economic collapse. He’s been predicting this for years, and now that we’re experiencing severe economic turmoil, he’s warning that things will get even worse. He believes that the next decade is going to be a time of extreme economic hardship for most Americans. The scary thing is he could be right.
In his new book, The Little Book of Bull Moves in Bear Markets, Schiff explains the reasons for his dire predictions, and suggests ways for readers to protect their financial well-being. He offers a blueprint for an economic bomb shelter.
Weapons of mass inflation
In the first quarter of his book, Schiff describes the events that led to this economic crisis. He catalogs current and future problems:
- The U.S. Dollar is in the midst of a prolonged collapse against other world currencies.
- Government debt is out of control. Instead of solving the problem sensibly (by raising taxes and/or reducing spending), the government just prints more money, which leads to inflation, and which may lead to hyperinflation.
- The government is severely underreporting inflation, which Schiff says is running at 8-10% annually.
- The low interest rates promoted by the Federal Reserve have fueled needless consumption and the overuse of credit.
- The stock market is overvalued. Schiff believes the value of the Dow Jones Industrial Average should be closer to the price of one ounce of gold.
- Like the housing market before it, consumer debt is another meltdown waiting to happen.
Schiff believes the debt-ridden consumer economy of the United State is unsustainable, and is deflating like a big balloon. He repeatedly makes this analogy: The U.S. isn’t the steam engine pulling the world economy — it’s the caboose, and it’s about to be let go by the rest of the train. He writes:
The situation we are facing is of a magnitude comparable to the Great Depression of the 1930s and the next worst bear market, the stagflation period of the 1970s. There are parallels in both cases, but also ways in which the current crisis differs significantly…
The investment experience of the 1980s and 1990s, which is the only experience many readers have and which they remember as a time of prosperity and optimism, was poor preparation for what’s ahead.
Most of Bull Moves in Bear Markets is devoted to Schiff’s advice for preparing for his predicted economic armageddon. He doesn’t subscribe to traditional financial philosophy. He believes that it’s time to abandon long-held investment beliefs: “Do not follow the typical Wall Street buy-and-hold mantra and the advice to simply ride out the economic storm.”
Instead, he suggests a number of other options:
- Save, but not in U.S. dollars, and not in government bonds. Put your money in foreign currencies.
- Invest, but not in the U.S. stock market. Put your money in foreign stocks.
- Purchase gold and other precious metals.
- Buy commodities. Move your money to other countries. (And, if you can, move your self to another country.)
Though most of Bull Moves in Bear Markets covers investment strategies, Schiff devotes space to other real-world methods the average person can use to cope with the economic crisis.
Economic bomb shelters
“There’s a decade of frugality ahead of us,” Schiff writes, sounding remarkably like the average personal-finance blogger. “We need to return to a mind-set of saving up to buy the things we want, rather than charging them now and figuring out how to pay for them later.” Schiff offers several suggestions for embracing the mindset of thrift:
- Learn to save. Establish an automatic deduction plan to set aside a set amount on a weekly or monthly basis. (See David Bach’s The Automatic Millionaire for more on this subject.) Instead of spending a raise, set aside most (or all) of your salary increase in savings. Of course, Schiff urges readers to transfer savings away from the U.S. dollar.
- Keep savings in mind when shopping for larger items. As smart as it is to pinch pennies, it’s even smarter to save your dollars. When you buy a car or a computer (or a house), take the time to make a smart purchase.
- Get rid of debt. Variable-rate debt may be especially problematic if interest rates do rise. Make eliminating debt a priority.
- Stockpile goods. In the face of inflation, buying in bulk can be a great move. “If a box of corn flakes costs $3 today and $4 a year from now, then buying those corn flakes a year early provides a 33.3 percent return on investment,” Schiff says. (But how do you know which products are going to increase in price? Besides, the corn flakes will be stale after a year, and you won’t want to eat them, so that’s actually a loss of $3!)
- Get good at fixing things. As products become more expensive, it will make more sense to repair them instead of replace them. Schiff argues — and I agree, economic collapse or not — that learning the “lost domestic arts of our grandparents’ generation” will help insulate you from financial turmoil.
Schiff also believes that the workplace is about to change dramatically. “The employment landscape a few years from now will bear no resemblance to what most Americans have grown accustomed to,” he writes. Bad times are ahead for those in the service economy, and for those in real estate and the financial sector.
In their place, manufacturing and production will rise again. They’ll have to, Schiff says, because we won’t be able to afford to buy from other countries: “The United States will have no choice but to rebuild its manufacturing base, shore up its crumbling infrastructure, and support those few industries where it remains a world leader.”
Not all of these changes would be bad. In fact, it’s becoming increasingly clear that the existing U.S. economic system is built like a house of cards. The country needs to undergo some sort of financial upheaval, a sort of seismic settling, in order for the economy to be rebuilt, strengthened for the long term. But I’m not convinced that means we’re headed for financial armageddon.
Prophets and losses
Schiff wrote this book during the first half of 2008. It includes data up until late June or early July. Already it’s a little outdated. In some cases, he’s been proven right. (As the credit knot unwinds itself, it’s having far-reaching effects.) But in others, he’s been proven wrong. The commodities market is down even more than the market as a whole. (Commodities are down 40% in the past three months, stocks only 26%.) The dollar has strengthened. Gold is declining. Oil prices aren’t shooting toward $200 a barrel — they’re falling toward $50.
In some ways, this book demonstrates the problem with proclaiming yourself a prophet, in believing your own hype.
While there’s much truth to Schiff’s analyses and warnings, it’s dangerous to put too much stock in the predictions of any one person.
I’m willing to listen to Peter Schiff, but I’m not ready to follow his advice blindly. I’m not going to dump my stocks to buy gold (in fact, I just made a large stock purchase at the end of September), but I’m open to owning mutual funds of foreign stocks in the future. After all, that’s additional diversification, and that’s a Good Thing. For now, though, I’m keeping my money in the stock market, keeping it in index funds.
You may disagree with me. You may think Schiff is onto something. If so, then by all means pick up The Little Book of Bull Moves in Bear Markets. (And while you’re at it, check out his earlier book, Crash Proof: How to Profit from the Coming Economic Collapse.) He may be right, but I certainly hope not.
I choose to believe that the market is more complex than any one man, and that time-tested strategies will continue to work. When I read Peter Schiff’s predictions and they scare me, I remember my girlfriend’s father and the nuclear holocaust that never came.
Fallout photo by Beige Alert. Blindfold photo by Lee Carson.

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November 4th, 2008 at 4:24 am
I agree with you. I try not to listen to the sky is falling predictions, and besides, what will worrying about it get me besides a few years of lost sleep. Mr Chiot’s and I have been focusing on learning the skills to live more cheaply and being able to provide more for ourselves even before everyone was crying recession. We grow some of our own food, preserve it, fix things and try not to buy stuff we don’t need. These skills have given us the opportunity to pay things off and save up a great emergency fund. We’ve been wishing all this had come crashing down 3 years from now when we’ll have the mortgage paid off and we could live on a pittance for a while if needed.
November 4th, 2008 at 4:50 am
“The U.S. Dollar is in the midst of a prolonged collapse against other world currencies.”
*laughs*
Well, that’s the first one wrong. I won’t bother reading further, thank you.
They always say; ask two Economists and you get three opinions.
November 4th, 2008 at 5:00 am
No one can control or predict the future, which I think we all comprehend, yet it’s in our nature to seek order and understanding out of uncertainty.
What we can control is our investment behavior which is what will ultimately have the biggest impact on our investment experience.
Regardless of what the market does and whether or not you have the “best” investment available, none of it will do you any good if you don’t have the emotional discipline to hold on during all market cycles — both bull and bear.
Thanks for the post, although I find Schiff to be an alarmist who’s only good for some sound bites in today’s volatile market.
November 4th, 2008 at 5:27 am
I don’t agree with his points & argument that the US economy is doomed. He’s advocating almost alienating the US entirely. Move your currency, move your spending & investing to foreign countries, and even suggests moving yourself to another country.
Yes all of the above is going to really help out the US economy and improve my personal situation for the next 10-15 years. Let’s start funneling our earnings & savings & investments abroad instead of here in the US. /*sarcasm*/
People should stop jumping to conclusions and getting excited about nothing. Be financially responsible for your own situation as JD preaches, and you’ll be fine.
November 4th, 2008 at 5:40 am
So many things to say about this posting!
1. The sky is never falling. But there are always bull and bear markets going on simultaneously. In the 90’s the US was in the midst of one of the greatest bull markets of all time. BUT Japan, the worlds 2nd largest economy (at the time) was in a protracted BEAR market.
2. It is always more risky to prepare for the disaster that doesn’t come. Like the stale corn flakes in your basement, money has a time value (that’s why they pay interest on CD’s instead of charging you for keeping your money safe). Some of the advice was good. Learning how to fix things and gaining freedom from repair bills, that is a no lose proposition, but not if you need to buy expensive tools! Figure out the things most likely to need frequent attention, that can be done with cheap easy to use tools, and absolutely master them. Otherwise you will have a collection of dusty expensive tools and higher repair bills from the items you have broken.
3. Buy and Hold is never the best investment advice. In fact, Buy and Hold is the best investment advice for enriching money managers and investment bankers! Why?? Because they get paid by how much they have under management, even brokerage houses prosper when you buy stocks and let them hold them. Like a bank, they use your assets for their own purposes! How is this for proof, Warren Buffet the premier investor of our lifetime, is not a buy and hold investor! He bought nothing for a decade because the price was wrong. Investment is like any other purchase, you don’t want to blindly buy, buy,buy. Just like it’s cheaper to visit London in the winter (but the sites are all the same!), you want to buy stocks when no one else wants them. This is way to complicated for a post, but many knowledgeable people have written about this, if you are going to invest (which you should), you absolutely need to learn.
4. Are we heading to an economic Armageddon?? Probably not, it is hard to imagine world government leaders following a path that could lead to chaos, revolution and more. Remember that the Communist Manifesto came out of a period with revolution in the air, somehow the world didn’t go up in smoke.
November 4th, 2008 at 6:07 am
Thank you for sharing this editorial.
The bottom line is, we all have our opinions about what may or may not happen, but in the end, no one can really predict the future.
Like yourself, I can agree with Peter’s description of the problem, but I’m not sure if I agree with the solution. Fear is not an investment strategy.
As a counter-example, some of the biggest plays Warren Buffet has made in his career was based off of buys made when others were running in fear. Amex during the Salad oil scandal was one of those examples.
November 4th, 2008 at 6:18 am
The US definitely needs to rebuild its manufacturing base and accompanying infrastructure. A service based, consumer economy is no type of economy at all as we now see. The day manufacturers began using cheap foreign labor spelled the beginning of the end. Good will come out of this. It’s just going to take a long time to get out of this mess. As for the US government and its policies, this is what you get when the “leaders” bought their educations and didn’t get to hold the positions they hold based on personal merit. Whose stupid idea was it to keep printing money? I learned what a dumb idea that was when I was 8 years old. My own finances right now, however, are a bloody mess and are basically a microcosm of the US economy at large. I know where I went wrong and I know what I need to do to fix it. Can the US government say the same?
November 4th, 2008 at 6:23 am
If you are complaining or “forecasting” that the dollar will decline, commodities will decline (or increase), or that oil will decline (or increase) in price for the past 10 or so years you are bound to be lucky eventually and then wrong 90% of the time.
Yes the sky is falling and things will be bad, because in a billion years the sun will burn out.
So is Peter Schiff correct in his predictions because he semi-predicted an “upcoming” recession in the future?
If you followed his advice and put your money in overseas such as an Iceland bank, you won’t get much these days. The US wasn’t the only country full of loan and credit card fueled idiots.
Hate to “shoot the messenger” but I believe Peter Schiff still lives in Rome aka USA.
The US was predicted to collapse at least 2 million times since it has been created and 1 million of those predictions were during the 1970s.
GRS is a great website btw..
November 4th, 2008 at 6:26 am
I actually started reading your blog because I had read something by Peter Schiff that scared me to no end. I appreciate your take on his perspective and the situation as a whole, and though sometimes it takes some convincing, I truly believe that fear is never a solution.
November 4th, 2008 at 6:31 am
Inflation is awesome for those in debt. If you keep your job and even if pay raises lag inflation (as they often do) you come out way ahead.
And if you don’t have a job it is not like you can pay it anyways. The only real hedge against inflation is debt.
-ThatGuy
November 4th, 2008 at 6:45 am
I come from a family from doom and gloomers. My dad has been telling us for years to sell our house and live in an apartment to ‘protect’ our equity. (Drives me nuts to talk with him about anything financial or political.)
However I do agree with Schiff that some of the fundamentals that have driven the US Economy need to change (and have needed to change for a while). One of the things I’ve heard a lot is that the economy will pick up at the end of 2009. Every time someone says that, my first thought is that they *have* to say it. If all economists were spouting words like Schiff’s we’d be in a panic. But that doesn’t mean that they are right either. It took us ten, fifteen, twenty years to create this mess (particularly the consumer debt), why should we expect to fix it in only one?
November 4th, 2008 at 6:52 am
Glad someone else gets a bit freaked about the doomsday predictions. I, too, have to remind myself to put it all into perspective.
November 4th, 2008 at 6:56 am
My own cast of mind tends to the bleak. So, over the years I’ve learned you have to keep a grip on this kind of thinking: it’s very easy to panic when you think you’re riding a skateboard to Hell.
IMHO investing in foreign currencies is pretty risky. Making a series of radical changes in your financial strategy, all of which take you in one direction, surpasses risky.
There’s no question that we’re headed toward some hard times resulting from two decades of misguided economic policy and rigidly ideological leadership. But (with any luck at all) the pendulum is swinging, and in a few years things will settle out. Live within your means and don’t make any sudden moves. This is not the time to take a flying leap off the skateboard.
November 4th, 2008 at 6:57 am
Couple of points:
1. The economy and job market may well be very different in 10 years. Look around you… how much of that stuff you have do you really need? The point is that productivity allows fewer and fewer to produce more and more, leading to very large labor surpluses. This has happened with agriculture, manufacturing, and will probably happen with IT. So, what happens if consumers cut back by 10%? 15%? 25%? 50%?
2. Historically, people create money from gold for a host of reasons, all of which are described in detail at any of a zillion goldbug web sites. The best way I know of to describe gold’s appeal is hold a 2,3 $50 Eagles in your hand as the average rent or mortgage payment. There is something visceral about that feeling. All this being said, gold is a poor investment, but it is excellent *insurance.* Holding, say, 10% of your net worth in gold and silver coin is more than adequate insurance against hyperinflation. If hyperinflation is something that worries you, the reader, bullion coin in small sizes (1/10 to 1 oz) will put your mind at ease.
Personally, I believe we could “get out of this mess” within a couple of years, but it would take a total reframe of public discourse, and culture would have to change. Don’t know how it would have to change, just know the track we’re on right now is heading straight off the cliff!
November 4th, 2008 at 6:57 am
Thanks for the great article.
One of the problems with forecast’s like Schiff’s is if enough people read it, believe it and follow through the prophecy becomes self-fulfilling.
Is the American economy in trouble, yes, but it’ll work itself out. It may be painful, but given time things will stabilize. The manufacturing sector will need to make some fairly hefty adjustments, but then so will the financial sector. Or at least I hope they do. After all if you don’t learn from your mistakes…
November 4th, 2008 at 7:02 am
I live in a foreign country. Maybe he could tell us which foreign country we are supposed to put our money into. Our dollar has strengthened in value in the last few months. I was shocked. I thought it would go through the floor.
But one person pointed out that the reason the EU actually lost against the dollar is that when there are problems in the EU and if “push comes to shove”, each country will flee to its own currency and abandon the Euro.
At least with the dollar, there is one country behind it and one government responsible. Everyone in the world knows “who’s responsible”. The U.S. is responsible for its own problems. Can you say the same for the EU?
November 4th, 2008 at 7:25 am
He is closer to the truth than any other commentator mentioned in GRS. And J.D., who thinks past performance is not a predictor of future performance, should not say a disaster won’t happen because it hasn’t happened yet.
November 4th, 2008 at 7:43 am
Will Peter Schiff apologize to everyone if he is wrong?
Not likely. Instead he will just make a ton of money scaring the crap out of people about the impending doom that never comes.
November 4th, 2008 at 7:47 am
Note: I’m not saying that Schiff is or will be wrong. I hope and suspect this will be the case, but I do think he makes a convincing argument. Mostly.
But I’m wary. There have always been doomsayers in times of crisis. There always will be. And they’re always partly right.
The key is to educate yourself about both those you agree with and those you don’t, and then to make the best decision you can based on that information.
November 4th, 2008 at 7:58 am
Everybody knows that the absolute safest place you can put your money right now is foreign real estate. They aren’t making new land after all. I just got a great inside tip to invest in plots of land on Mars. If foreign real estate is safe, what could be more foreign and thus safer than Mars? I purchased a ranch in the area where NASA parked the rover. I plan to send them an invoice for rent.
I will let you all come visit me in my mansion when I am rich.
November 4th, 2008 at 8:33 am
I think there is value in some of the things he said, and you should always remain cautious, but doom and gloom is just one opinion. There are others who see opportunity in the current crisis and say it hasn’t been this good for investors in years. You should read both sides and decide for yourself which to follow. Some of his advice, like reducing debt, repairing rather than replacing, are good ideas in any economy.
November 4th, 2008 at 9:21 am
It’s times like these that I’m so thankful I know that God is in control. It would be easy to be awash in anxiety about the future, but I know God is bigger than stock markets and exchange rates.
November 4th, 2008 at 9:26 am
I’m afraid Peter Schiff is right and we are headed for a big crash. It’s easy to talk yourself out of it, as Wall Street continues to promote that the rally is just around the next corner. But, the facts are staggering. Just yesterday, manufacturing output was a 26 year low, auto sales are at a 25 year low, housing continues to decline and jobs are dropping by the thousands per day.
Perhaps the biggest problem is that the dooms day crowd has been talking about the big crash for so long that we have become numb to what they are saying. I think we should be very concern about this economic crisis. It took 25 years (not months) to recover from the last Depression.
November 4th, 2008 at 10:00 am
I think we are facing a prolonged period of hardship that my thirties something generation has never experienced. I do not think it is financial Armageddon. It would be unwise to exchange your money to foreign currencies now. The dollar is strengthening, which means foreign investors are buying dollars. If you wanted to buy foreign currency, last year was the time to do so.
We will have a very rough time while we rebuild our economy. The best thing to come of it, I hope, is putting the nail in the coffin to this ridiculous notion we could have a sustainable economy based on finance and services. We need to start building things again, and start building industries for sustainability instead of short term gains via bubbles.
November 4th, 2008 at 10:16 am
I just finished reading my review copy of this book, as well, and I have a lot of thoughts which I’ll blog this week.
To the naysayers: I’m pretty sure that the only major thing Schiff got wrong in this book is that he didn’t realize how overleveraged every OTHER country was in real estate — and how they all subscribed to our belief that lowering interest rates to reflate the bubble would fix their problems.
In other words, he didn’t get America’s predictions wrong — he underestimated the tendency of the rest of the world to follow our lead! That’s why the dollar isn’t as bad as he predicted it would be right now — because everyone ELSE is having problems too, not because he’s wrong about the problems we’re having.
For those of you asking “Which countries?” he does recommend some in the book, including Canada, Australia, and New Zealand if you speak English.
I have a lot more clarity on investing after reading his book — helped somewhat by my own research, as well — which I’ll be talking about on my blog. I’ll also explain there why I don’t like index funds.
-Erica
November 4th, 2008 at 10:40 am
It’s nice to see a blog about more in-depth economic issues than personal finance for a change.
I’ve been following Peter Schiff for about a year now, he has a radio show that you can listen to from Euro Pacific’s website (his company) every Wednesday @ 8pm Eastern.
Peter Schiff is very negative and doomsday about the economy - that’s for sure. I wish he would offer up more realistic solutions, rather than telling us how messed up everything is, I think that is obvious to most everyone. Right now, the U.S. dollar has been doing well against other currencies, contrary to what he has said in the past, but I think that may very well change if countries (especially OPEC, research the petrodollar) start to reject the dollar as a reserve currency. Peter Schiff’s predictions are based on basic economic theories and common-sense, but who knows what the government is going to do to change these variables. Right now we’re seeing deflation with the credit crunch, but it looks like in the long run it will be inflation.
I think the good old advice of diversification holds true, and it might be a good idea to look into precious metals while the dollar is strong right now, but that may not hold true as the Fed continues to print up inflation to fund the government’s buyout of banks, auto companies, War on Terror, etc.
November 4th, 2008 at 10:50 am
In response to comment 5, I don’t understand the mentality that something is only better to buy if it is cheap. If you buy a cheap tool then sooner or later you’ll break it while fixing something, or it will break whatever you’re trying to fix. It does not necessarily follow that if you buy an expensive tool it will sit around gathering any more dust than a cheap tool would. Actually it’s better to look for quality when buying something, rather than focus exclusively on price. Look at what you’re getting at least as much as what you’re spending. Being cheap isn’t very helpful.
As to the general subject of this post, I’m getting to the point where I don’t ever want to mess with the stock market. Buying and holding is great if you’re twenty and if the market doesn’t crash right before you retire. It’s not much consolation if you still have those hundreds of shares but they’re worth next to nothing.
This is why I like Your Money Or Your Life as a financial advice book. What do I need to have when I retire? A consistent source of income that I didn’t have to work for. This is what people are aiming for when they contribute to retirement accounts, after all. But if you’re investing in something whose price is always changing while you’re holding on to it, that’s a potential problem. Ask anyone in the current market who was just about to retire. They can’t now.
I know that fixed-income securities are not exactly a hedge against inflation, but think about what inflation *is*. It’s an increase in the Consumer Price Index. What’s in the Consumer Price Index? Consumer products. Do we buy every single kind of consumer product every single year? No, we don’t. Does the price of every single consumer product increase year after year? No, it doesn’t.
If you’ve bought a house and paid it off, your housing is not affected by inflation. If you have a car and it’s still in good shape, you having a car is not affected by inflation. For those things you have to buy periodically, if you can buy them used, their prices are not affected by inflation, as the CPI only covers new products.
That leaves a LOT of wiggle room to deal with items that ARE affected more by inflation, such as food. So using inflation as a bugaboo to scare people into investing in Wall Street is a wee bit shortsighted.
I would say, make the foundation of your retirement investing something that would give you a safe, reliable, fixed income if you had to retire today. Look at the worst-case scenario, the minimum you could live on, and aim for a goal of earning that in fixed-income interest every month. After you have that taken care of, if you want to risk other money in the stock market, knock yourself out. Best-case scenario, you retire at the top of the market, can cash in your fund and be comfortable for the rest of your life above and beyond meeting your needs.
People need to quit pretending the stock market is the be-all, end-all. We wouldn’t have to panic every time it hit a downturn, otherwise.
Federal treasury debt instruments allow you to invest in $100 increments now. Nothing short of the entire country collapsing is going to make them go away, and GWB just got done racking up a lot of national debt. Might as well take advantage of it.
November 4th, 2008 at 11:13 am
If you actually believe that inflation is 10% per year, then paying off your debt isn’t a very sensible thing to prioritize, especially if your interest rates are less than 10%. You actually *make* money by *not* paying off your debt if the rate is lower than inflation.
If inflation is 10%, and you can get a loan for 6%, you get a super-easy 4% return by taking out that loan.
Say you get a 5 year loan at 6% interest for $5000. Say inflation is 10%. Say we’re beginning in 2008. Your $5000 loan has a monthly payment of $96.66, but the value of that $96 drops by 10% per year (or about 0.8% per month), because of inflation.
The value of your first month’s payment, in 2008 dollars, is $96.66, but the next month it’s only $95.86, and by the beginning of the second year, it’s only $87.50. Your last payment, at the 60th month, is only worth $59.24 in the 2008 dollars you started paying in.
The total value of your payments at the end of the loan is only $4587.25. So, you actually *save* $412 by taking out a loan to buy something for $5000, if you can get a 6% interest rate.
What if you wanted to do something more dramatic? Say, you want to buy a house at 6% interest for 30 years, for $200,000. Your monthly payment on the house is $1199.10.
Using the same 10% inflation, when you pay off the house at the end of 30 years, it only ends up costing you $137,777 of the 2008 dollars that you borrowed in the first place.
Paying off debts because inflation is high makes no sense at all. If you owe someone 1000 dollars, it’s in your best interest for those dollars to be worth as little as possible.
After saying all that, I’ll go ahead and admit that I personally don’t believe inflation is anywhere near the levels cited, and even if it was, it certainly wont stay there long-term.
November 4th, 2008 at 12:20 pm
He sounds like a Chicken Little to me. Of course the system is corrupt, stocks are overinflated and finances are generally mismanaged by most - tell me something I don’t know.
With all due respect when you’re living in the U.S your global perspective is vastly different from those of us who live outside of it. (I too have lived in the US). Here in Australia we have socialized medicine and extensive welfare but house prices have risen 300% in the last decade, our dollar fluctuates wildly every time someone farts lately and there isn’t the population here to support the discount prices Americans pay for goods in general. Did I also mention we’re taxed to buggery?
You don’t know how good you’ve got it. So what the economy is in correction? - it needs it.
November 4th, 2008 at 12:22 pm
Among Schiff’s errors is this:
In the event of a financial meltdown (similar to this one) it would be futile to move out of the country, as the markets of most countries have done worse, yes WORSE, than that of the USA. Russia, Brazil, Europe, China, etc. etc.
November 4th, 2008 at 12:59 pm
Excellent post J.D. We simply can’t predict the future. If we could, then (hopefully) all of our problems would already be solved — or at least, there would be a plan that we all agree would do the trick.
November 4th, 2008 at 1:05 pm
The trouble with Mr. Schiff, and Howard
Ruff and Ravi Batra before him, is that
they ALWAYS are forecasting doomsday.
Whether we have a ‘great depression’ starting
tomorrow, or starting in 35 years, they
would take credit for having predicted it.
Trouble is, if you can’t time your predictions
as a doomsayer, you are worse than useless,
as a source of investment advice.
LoL
November 4th, 2008 at 1:38 pm
I follow Nouriel Roubini’s economic advice. It’s not rosey, but it’s not end-of-the-world scenarios. He was right about the housing meltdown and exactly how it played out, and was laughed at by his colleagues. No one is laughing anymore, and now is the most sought after economist in the US and abroad. Governments are listening to him.
Based on his predictions, I reallocated my new 401K contributions away from index funds and into cash allocations. (My interpretation - he didn’t say to do this.) I haven’t been disappointed. He predicts a stalled economy, the worst yet to come, a second market crash, DOW at 7000, then a slow recovery in late 2009. He’s not exactly sugar coating anything, but he doesn’t see a Great Depression scenario either. If he starts recommending buying foreign currency (which I don’t think he has), then I’ll probably spend it all on cocoa, tea, coffee and sugar to barter with.
November 4th, 2008 at 3:08 pm
Great post and discussion. I have not read Mr. Schiff’s work. I do believe times are serious and will likely get more so. I don’t buy into the sky is falling, but I do believe that however serious things do get, the folks who believe that shopping once a month or using less toothpaste are “extreme” will really have a tough time. I know you’ve posted before on the law of attraction and what a bunch of BS it is, but I do believe that buying into this mentality totally does bring more doom and gloom to us personally and certainly can cause the fear and huge drops we’ve seen in the stock market and dips in the business climate. Using common sense and following so much of the great advice that is posted here will help us all get through this period.
November 4th, 2008 at 4:07 pm
Shiff’s doom and gloom prediction is excessivelyh pessimistic. Worse it seems to be built on shaky or unsubstantiated data.
** Our government debt is high in terms of total dollars and that makes everyone nervous. But if you look at our debt relative to the national GDP its not that bad. Our debt is about 70% of GDP. We had higher debt levels during the 1940’s and 50’s.
see: http://zfacts.com/p/318.html
Many other countries have higher debt/GDP: Japans debt is 170% of GDP, Norway is 83%
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
** I’ve seen people saying inflation is under reported but I haven’t seen them substantiate it. Where does he get 8-10% from?! Food prices are up lately for sure so people seem to easily believe inflation is higher than CPI. But home and car prices are down lately and we spend more on either housing or cars than on food. I just don’t belive a 10% inflation number especially when it is never substantiated.
** Saying the dow should track to the price of an ounce of gold seems totally arbitrary and like something he pulled out of thin air.
November 4th, 2008 at 6:50 pm
“The U.S. Dollar is in the midst of a prolonged collapse against other world currencies.”
This would’ve been great for my company’s earnings if this had been true. Probably most of other tech companies as well. Great for my job security too - and that of so many people - after all if the dollar is (very) low, it would be much cheaper to hire Americans than Indians, Chinese, or Eastern Europeans.
This one statement shows flaws with the guy’s arguments. Lower dollar is actually beneficial for many American companies and if it falls sufficiently low than cheap foreign workers would no longer look that cheap.
“It took 25 years (not months) to recover from the last Depression.”
If you count from market top in 1929, but not if you dollar cost average throughout the period. Also, keep in mind that Dow at the time didn’t include some companies that did well during the depression. The graph may have looked a bit different if, for example, IBM had been on the list for the whole period. Instead it was removed from the index at some point and not put back until years later. It was one of the companies that did quite well in the 30s. Procter and Gamble did well too.
Additionally, everyone seems to forget that during the Great Depression there was huge DEFLATION - prices fell by 40% in the US between 1929 and 1933. If you consider that, market returns don’t look that back (excluding the crash itself) - after all if market fell by less than 40% during this period, its returns beat the inflation… If you consider that some back depositors lost everything during the same time, market did better than banks too. As to the gold - there was gold confiscation in 1933. Sure you got “something” for it, but since the dollar was devalued shortly after gold confiscation, you lost some money there as well.
Additionally, there are a number of differences between now and then. Back then the government raised rates in 1929 hereby making it difficult for companies and banks to get loans. There was no international co-operation as it is now when most countries try to work together to resolve this. There was no FDIC, so when banks went belly up, depositors lost money. Then there was a tariff that made foreign goods expensive for Americans who already couldn’t afford the American goods - let’s hope whoever new president is he wouldn’t repeat the same mistake. There was also no unemployment insurance, so people couldn’t even afford to buy food or clothes which led to more bankruptcies.
Nobody really knows what is going to happen, but the repeat of the Great Depression is pretty unlikely, IMHO.
November 4th, 2008 at 9:51 pm
To the folks who think this is likely to blow over “in a couple of years” I submit to you a term you’ve probably not heard before: “peak everything”. Good coverage at the following link. I suggest watching the chapters on money as debt and fractional reserve banking as well. The peak everything stuff is in the middle chapters.
http://www.chrismartenson.com/crash-course
The two-bit summary is that we, as a society, are over-leveraged and there’s not enough planet left for us to get out of the situation by economic growth alone.
November 4th, 2008 at 11:12 pm
@Jim: I submit to you exhibit A:
http://www.shadowstats.com/
November 4th, 2008 at 11:17 pm
As a Ron Paul voter, a believer in Austrian economics, and a fan of Schiff, thanks for posting it.
I wholeheartedly agree with your advice to NOT blindly listen to everything Schiff says. Instead, listen to it, study it, and then make an informed decision. What I really respect about Schiff (and you posting this) is not that our economy is guaranteed to collapse, but that so many people deny ANY possibility that it could. We need to be prepared for all eventualities. Sure, the market might recover and things could be golden for years to come. But there IS a possibility we’ll get massively screwed.
November 5th, 2008 at 4:23 am
Hi all,
I’m a student of Austrian economics (like Peter Schiff) and I see a lot of misinformation. Obviously, I can’t cover everything.
People who believe annualized inflation is 3%, guess again. The government for nearly 2 decades has artificially been surpressing those numbers. Is it a conspiracy? Not really. Government creates inflation, but they don’t want to anyone to know that
go to ShadowStats for proof of this.
The best resource I can possibly link you to is Chris Martenson’s crash course. I approve of almost everything he has covered and from an Austrian economic perspective, he is dead on.
I am not a doom n’ gloomer despite attempts by the mainstream media to portray any Keynesian-naysayers as such.
Under no circumstances should anyone invest without knowing why you’re investing. I read Peter Schiff’s book, along with many, many others of economics (Mises, Rothbard, Ron Paul) and the works of Philosophers (Bastiat von Bismark, etc). Based on a retrospective analysis Peter Schiff is dead on. You should study (fast) and make a decision yourself. Pardon my adhom attack, but some of the clowns posting here haven’t even a clue as to what they’re talking about. How do I know that? I hear such things as % of GDP, 3% inflation, USD is strong. All I can (efficiently) is watch this course:
http://www.chrismartenson.com/crash-course
Most of the major statistics he’s using are dead-on. Still not convinced? How about listening to the EX-COMPTROLLER of the United States. Go watch IOUSA.
Peter Schiff has accurately forcasted the Nasdaq bubble, housing bubble, price of gold.
Always diversify, and don’t forget to watch the crash course here. I have no ties to them whatsoever. I’m just “passing it forward” because I think it’s THAT good.
November 5th, 2008 at 8:26 am
Any investor that is depending on market direction will suffer regardless of Obama’s economic plan. The time to move this economy will be measured in years, not quarters. Those who think we are returning to a Bull market are sorely mistaken.
Investors need Defined Risk Strategies that will perform in any market condition.
http://www.swanconsultinginc.com
November 5th, 2008 at 8:37 am
I have been a get-rich-slowly lurker for over a year now and this site has helped me tremendously with personal finance.
Im glad you posted something on the current economic crisis and im glad you are not trying to ignore the issue. Sure personal finance is somewhat seperated from economics but lets face it, we are in unpredictable and tumultuous times. We have to adjust our personal finance accordingly.
Robert Kiyosaki’s famous words are “savers are losers”. First of all, I dont completley agree with his statement but I also partly agree. I dont agree because having a savings is a lot better than having debt, but on the other hand inflation is much higher than anything you will earn in a high-yield savings account. I can guarantee that. Ask anyone who buys groceries and they will always say that it costs more and more.
Peter Schiff is full of gloom and doom but I have been following him for over a year and he has predicted things that have happened and its just eery. Im glad you decided to post something about Peter Schiff because he is very popular now, but you are right that you just have to process his information and take what you feel is right from it. I think he purposefully chooses the “scare” tactic to wake Americans up to the fact that this crisis is real.
November 5th, 2008 at 1:11 pm
The numbers on Shadowstats are based on their reinterpretion of the CPI information using different methodology. Their theory is that CPI is understated because methodology changed. Maybe I’m missing something but from what I see, Shadowstats doesn’t present real data, they just take the CPI number and recalcuate it. They might as well just take CPI and multiply by 2 cause its the same effect. They present an alternative theory but no hard data to back it.
They claim that for the past 10 years we’ve had annual inflation rates of 8-12%. If that is true then that means that average prices have gone up over 150% since 1998. Does this pass a sanity check? Are average consumer prices 150% higher now than they were 10 years ago? There are certain items that are much higher now than a decade ago (gasoline & milk). But on average prices have NOT gone up that much. Look beyond gasoline and milk. 10% average inflation for the past decade is simply not supported by reality.
November 6th, 2008 at 12:50 am
If we are facing some sort of crisis, my completely amateur prediction is that we’ll be facing a long, slow squeeze. Most Americans will see a slow decline in purchasing power and the economy will stagnate for quite a while. In other words, stagflation seems like a much more likely scenario. Anyway, in the long run, we’re all dead.
November 6th, 2008 at 12:20 pm
Hm. While I do take our economic problems seriously, and think additional crashing is very possible, I think one of the best pieces of advice is still not to put all of your eggs in one basket. Don’t assume either that the economy will be fine, or that it will thoroughly crash. Maybe put some money into foreign currency/investments, but not all. Now, if I just had some eggs…
November 7th, 2008 at 4:20 am
I realize these “Little Books” have a fair bit of good information inside, but I’m sick of them. I read the Little Blue Book that Beats the Market and thought it was too “pop finance” for me. This one sounds like he’s trying to do a little “pop scare tactics.” I’ll pass—but thanks for the review.
November 7th, 2008 at 1:54 pm
I think he has some good..valid points. you summarized those well, I wouldn’t consider his a total nonsense and vice versa.
November 8th, 2008 at 11:14 am
@Jim: The problem with our GDP is that about 70% of it is based on consumer spending, the borrowing and spending culture we’ve seen is coming to a close.
November 13th, 2008 at 6:37 pm
While I enjoyed reading Peter Schiff’s book, and agree with his predictions, I’d like it better if he discussed the topics and gave solutions without the frequent in-book commercials for Euro Pacific.
Reading it and then taking it upon myself to research alternatives to his high priced company has been a great learning experience.
Best advice is to do as Peter says, “take it with a grain of salt”.
November 28th, 2008 at 11:45 am
The claims that commodities are down and that the dollar is strenthening are correct but it *doesn’t* prove that Schiff was wrong. We are currently in a period of deleveraging, where companies sell off assets quickly to raise cash. Cash is liquid and companies need it to pay their bills to survive the crash. This is the reason for the massive sales at retail stores, etc. Demand for the dollar is high.
But once this period of temporary deflation stops, the dollar will fall like a stone. The federal reserve has promised more than 7.4 trillion dollars in bailouts and that money hasn’t even really had a chance to hit the market yet. 7.4 trillion is more than the entire country spent on World War II when adjusted for inflation. The size of this amount of money is unfathomable and will continue to debase the dollar. It will be interesting to see if inflation has kicked in 6 months from now.
What I’m really trying to say is that this deleveraging is temporary - it cannot continue perpetually, and when it halts, Schiff’s predictions were right.
Don’t write the article claiming that “because commodities are up right now, Schiff was WRONG!!!!”
It’s like saying because Bear Stearns stock went up by 1% a few days before it collapsed, that people who were warning of its collapse were wrong. “Well, it’s price is up today, so their predictions have already been proven wrong.” A little bit of hyperbole, but you get my point.
November 28th, 2008 at 12:38 pm
Don’t write the article claiming that “because commodities are up right now, Schiff was WRONG!!!!”
David, if that’s all you got from this post, then you may want to re-read it. For one, it’s not a case of all or nothing. It’s not “Schiff is all right” or “Schiff is all wrong”. He’s made a lot of predictions about a fantastically complex world economy. On some he’s been more right (and more wrong) than others. His results as a prognosticator are mixed, but that doesn’t stop his proponents from touting his successes while ignoring his misses. That seems disingenuous at best.
November 28th, 2008 at 12:56 pm
@J.D.
But the crux of the article is toward the end when you offer your own views on the book in the section “Prophets and losess.” No one is claiming Schiff is some sort of prophet, but you repeatedly hit on being reminded by him of the father of the girl you dated who predicted the world was doomed to nuclear destruction. One paragraph of the review is devoted to stating how commodities are down with respect to stocks, and how these data show that Schiff has “been proven wrong,” concluding that “In some ways, this book demonstrates the problem with proclaiming yourself a prophet, in believing your own hype.”
I recognize that this paragraph or two isn’t the entire article, but I don’t think it’s possible to proclaim that he’s been proven wrong based on the temporary effects of deleveraging. With respect to touting ones correct predictions and ignoring the wrong ones, even Schiff himself has admitted that if people followed his advice given earlier in the year and sold their positions now, they would have lost money, which is what you’re getting at in the article.
I don’t know, maybe I’m making too big a deal out of a paragraph or two. I think Schiff is on to something, but I suppose only time will tell if his predictions come to fruition.
November 28th, 2008 at 1:40 pm
Hi, David.
You write: No one is claiming Schiff is some sort of prophet. Yet from my experience, this is exactly what is occurring all across the internet. It’s strange. One cannot mention Schiff’s name without his supporters proclaiming that he predicted the current financial turmoil (though he only predicted a part of it), and that his other predictions are going to come true. So, to me, people are claiming that he’s a prophet, and Schiff not least of all. This bothers me.
My point isn’t that “Schiff cannot predict the future” but that “nobody can predict the future”. I don’t mean to be down on Schiff, because I genuinely like a lot of what he writes, and think we’d be better off for listening to him. However, I’m skeptical of anyone who thinks they know where the world economy is headed and pretends to offer detailed information on the subject. It’s just speculation. And as speculation, it’s no better from Schiff than from anybody else. Schiff isn’t the only one to have called the collapse of the housing bubble or the decline of the stock market — he’s just the one who is best marketing his past predictions.
Also, I do not devote an entire paragraph to commodities. I devote two sentences, one of which is a simple statement of facts so that people don’t have to look them up. (Meaning: I only call Schiff on the commodities thing in one sentence.)
Again, the real point of this piece is that during every period of economic turmoil, there are prophets of doom. During the late seventies and early eighties, my father bought into their fearmongering, and he lost money because of it. When I speak with folks who have been investing for a long time, they say the same thing: there are always people who think the economy is on the brink of collapse. And someday the economy will collapse. If you think now is that time, then listen to Schiff. I prefer to be optimistic. I don’t think the economy is headed to hell. A rough patch sure, but not to the extent that Schiff is predicting…
December 28th, 2008 at 9:57 am
Mr. Schiff’s dad is in prison for writing books about circumventing paying your taxes. He’s got a chip on his shoulder for good reason. (The Fed and the IRS were created at the same time by the same men)
The Fed is 51% privately owned. (something I didn’t know until a few months ago) The Fed is for-profit and owned mostly by foreigners.
I’ve got a sneaking suspicion the owners of the Fed have a plan to destroy the dollar eventually. Once destroyed, they’ll introduce a world currency, or they’ll start with the Amero.
WATCH ON GOOGLE VIDEO: The Creature From Jekyll Island
I’m not pleased about my recent realizations. I have lost faith in America, and I do not see things getting better.
Leaving is definitely an option I’m keeping open.
Politicians, like Bush, Obama, Clinton, have been prescreened before taking office to make sure they are not going to fight the Fed.
The last president to fight the Fed was Kennedy. He printed U.S. Notes, and we know what happened to him.
April 1st, 2009 at 7:16 am
“I’m not going to dump my stocks to buy gold (in fact, I just made a large stock purchase at the end of September)”
And how is that working out for you???