Bull Moves in Bear Markets

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.

This article is about Books, Economics, Investing, News