Peter Schiff was Right

         Mid 2008, via a link, I stumbled onto the now-famous 'Peter Schiff was right' video on youtube. I was stunned to see this one particular economics pundit who, years ahead of the pack, foresaw the real estate bust, mortgage meltdown, and stock market crash, as well as the financial crisis in its particulars and the economic crisis in general. To be sure, there are always perma-bear gloom and doomers, but unlike some of them Schiff did not simply cite broad statistics and make forecasts of economic indicators or market indices—he knew the intimate details of unsound fundamentals in the credit markets that in hindsight has given his assessment the ring of truth. Mortgage lending really had become a racket. Driven by the insatiable demand of large investment funds for supposedly diversified ‘securitized’ mortgages and other debts, loan originators had little concern for credit worthiness since they were simply selling off the loans. How did Peter see this when the institutional buyers of the loans did not? How did the government, actively encouraging home ownership through Fannie Mae, Freddie Mac, and even with their overwatch agency (OFHEO), not have a clue that many loans were being given to almost anyone? Never mind a down payment or having a job. Having been so right, even as he stood alone on the bear side of many debates, Schiff was a guy I had to learn more about. I wanted to know whether financial Armageddon was on the horizon. I began to research all he had said in his books, and in his many articles and public appearances. A good collection of his recent articles can be found at Seeking Alpha. You can subscribe to his free newsletters or listen to his archived radio shows via his investment firm, Euro Pacific Capital.

Full disclosure policy: I have no relationship whatsoever with Peter Schiff or any firm, agency, individual or other entity mentioned anyplace on this website. Should I ever have any relationship or means to profit from any party mentioned or hyperlinked, I will disclose such relationship at that place.

Peter Schiff is Wrong

         Seeing archived video of this intelligent, articulate economics pundit who correctly foresaw the seriousness of our financial problems with such clarity was an epiphany for me. In public media appearances, at least, there had been nobody else quite like Schiff. The press had given him the moniker "Dr. Doom" because at the time his was a lone voice foretelling the crisis that was on the horizon—or at least one of very few pundits in televised media speaking up. I drew on my finance background to research his conclusions in depth. He had pieced together a lot of salient facts and his reasoning made a lot of sense—at first. But the more I delved into Schiff's theories and predictions going forward, the more I began to see the oversimplification of his models and assumptions. I increasingly saw that predicting hyperinflation was a completely different animal, and vastly more difficult, than what he had predicted thus far—that the unprecedented levels of low grade debt that depended on bubble priced real estate values would have to end badly. It became clear that in the bigger economic picture Schiff ignored many factors that would come to bear on the ultimate level to which demand (GDP) would contract. He made bold and sweeping assumptions about foreign demand and perceptions of the value of the dollar.

         In fact, though I normally hesitate to make any predictions, the more I researched and thought about Schiff's conclusions, the more bullish I became on the United States economy over a time horizon of a decade or more. I remain convinced that those buying a diversified stock index such as the S&P 500 at 2009 levels will see their investment multiply several times over in the 25 to 30 year range. An eightfold total return from these depressed, recessionary levels would not be a stretch, but actually a historical norm! It is likely that this recession will be viewed in hindsight as the opportunity of a lifetime to buy stocks (as was the 1930's from the standpoint of the 1950's).

         Analyzing risk and reward potential in equities is usually akin to peering from the bow of a boat into a fog. Future earnings levels are foggy nearly all the time for most stocks. However, occasionally the fog lifts briefly and the risks relative to rewards become much clearer. We are in a rare hour when the skies are clear on the long horizon. By buying a diversified ETF of stocks (such as ticker: SPY) one needn't attempt picking individual stock winners, and the potential downside now is much smaller than the upside. In the meantime, there is the 3.2% dividend the index pays — a yield which is nearly certain to grow in a compounding fashion in the future.