So, we’re finishing up the eighth straight week of the bear market rally of March-April 2009. Everyone’s asking how long it will last. Last week, Schiff mentioned the rally in passing, but this week he addressed it head on. Simply put:
- both some bears and some bulls are wrong going ahead
- stocks are up in nominal terms, but US stocks are not reflecting real growth.
- all foreign markets are currently outperforming US markets, by 500% in the case of China.
- it’s still important to buy gold because the nominal rise isn’t going to last and the US currency crisis will be exported to the rest of the world eventually
- despite that, foreign stocks are still going to do better relative to U.S.
- stock markets and underlying economies are two different things
Here’s a brief recap of Schiff’s latest radio broadcast for May 6, 2009:
“we are not headed for a global depression. This is an American depression…. most of the world will benefit from not having to support America.”
Slowly we’re going to see a decoupling of US markets from world markets. This decoupling has already begun.
The Dow Jones is up 10% in last month – yet at the same time, the Hang Seng is up 50%, showing five times more earnings than US markets. According to Europacific (Schiff’s brokerage), some of the Chinese stocks are moving up 5-10% daily. In fact, 2009 is starting off to be the biggest year ever for foreign stocks. Chna’s economic data is currently much better than that coming out of the US.
Regarding the weak US dollar, there was a reversal two weeks ago from its highs, dropping by a total of 4%, which is quite a lot in forex terms. That’s a 2% drop per week. Meanwhile, the commodity currencies (Canada and Australia) in the same two weeks have risen by 8%. Crude oil finally got above $56, the highest since Nov. 2008. Schiff predicts the next major target will be around $70 bucks and that we could get there within a few months. Gold stocks hit a new multi-month high Wednesday, up 20% in the last week alone. Most Canadian energy trusts have doubled off their lows in the past several weeks. Some have even tripled off their lows of October-November 2008.
Schiff’s Economic Forecast Going Ahead
We’re gonna see a flight from currencies. From cash into assets. The bulls had the wrong diagnosis for the disease. In the short-run, the bulls are going to think they’re right, because cash is going to be a bad place to hang out for safety in. Yet, Schiff is a bear and he’s never been telling anyone to stay in cash. US stocks won’t go up as fast as the dollar is going down. And US stocks will not go up as fast against other stocks in the rest of world. So Shiff says “don’t express your bearishness by seeking safety in US dollars. If our markets are going to go down, why should our currency go up? Stocks aren’t rising because of the economy. Stocks are going up because people are losing confidence in cash.”
If the rally continues, to 9500 or 10,000 (DOW), the dollar should keep falling, and ultimately can fall hard. Well, the dollar will suffer when everyone’s going out of cash and into stuff. “I don’t see how the US market can outperform.” No matter how you slice it, whether you’re bull or bearish, invest in foreign stocks,” Schiff recommends. Schiff also recommends that you keep buying gold, even though stocks have gone up so much, because the risks with US cash are still too high. People need to move their cash out of the sidelines.
“If U.S. stocks go up, foreign stocks are just going to go up even higher. Don’t worry about holding stocks and the stocks going down, worry about holding cash and the cash value going down. Don’t think about losing money; think about your money losing purchasing power.”
At the end of each broadcast, Schiff also always takes several questions from listeners. I’m amazed at how much detail he usually goes into to answer most callers and how he basically treats all callers equally. Sometimes Schiff gets cut off or has to rush because the show is ending, but for the most part he’s great, even giving directed personal advice sometimes (only because a caller asks for it). Here are some of the questions and answers heard this week, just to give you an idea. (I’ve abbreviated the questions and answers themselves.)
Eric in New Jersey: I’ve heard that some libertarians, Milton Friedman-types are against the gold standard because it supposedly caused the Great Depression. Is that true?
PS: Gold is not the reason we had a depression. Politicians always want to blame our problems on gold. They don’t like the gold standard because it imposes discipline. Without it they can pretend new money doesn’t cost anything. It’s all nonsense. The depression was caused by the government interfering with market’s attempt to rebalance the economy. Hoover and Roosevelt made the Depression last longer.
Shawn in Toronto: I just bought some silver at 9.70/oz. with a 20% premium because of the US-Can $ exchange rate. If the Canadian dollar rises how is the price of silver affected?
PS: I expect the Canadian dollar to rise, but I expect gold and silver to rise even faster, so you should be ok.
There’s always people talking about a shortage; ultimately it will happen; eventually there’s gonna be a rush to get into gold and silver. I think they’re going to be remonetized; and people are going to realize that if they’re going to want to buy anything in the future, they’d better buy gold and silver right now. Because who knows what their paper’s going to buy, especially the US dollar.
Mark in Illinois: I have $10,000 in credit card debt; I’m losing $500/mo on a property; I have $8,000 in personal savings. Should I pay down this credit card debt?
PS: Under normal circumstances I’d say yes, but 7.9% interest not that terrible. (a) don’t keep money in savings and pay credit card debt. As far as penny stocks go, if they’re real legitimate – don’t buy these while you have credit card debt, because it means you’re buying stocks with your credit cards and that’s a real gamble. At some point, the credit companies can raise your rates to 18-20% and your stocks might go down. I don’t like adjustable rate debt. Get rid of your credit card debt and keep your savings in gold or silver. That’s even better.
Kim in Illinois: I’m concerned about investing in China due to their human rights record; also concerned about the home destruction by the banks, and HR1207. What do you think of these developments?
PS: Look, why would we take a house that’s already been built, the materials and labor spent, and then spend more money to demolish them? Why not just give them away? Or find someone who can afford the maintenance and property taxes? And the government is still trying to encourage builders to buy; and yet they’re simultaneously destroying homes. The terrorists are not in the middle east, they’re right here in Washington DC. Our own politicians can harm us more with cheap money and bad regulations. They’re taking away our liberties and freedoms. Supposedly that’s why we’re afraid of the “real” terrorists in the first place, but that’s what the government is doing. I wish foreigners would stop lending money to our government. Our government is driving us into debt; they’re encouraging us to spend more. The more money our government gets, the worse will be the problems they create.
As for China, China is a communist country in name only. Their economy is capitalist. It’s a better capitalism than here in the U.S. And when the Chinese government stops artificially holding down the yuan, the Chinese will be paid more for their labor and won’t be making only fifty cents an hour anymore. That’s gonna happen. That’s why I’m investing in stocks linked to Chinese market.
Mike in New York: because of the impending currency crisis, will there be a buying opportunity?
PS: If there’s a currency crisis, you’ll have to have already bought. You can’t hold onto your currency hoping to buy things in an currency crisis. You have to get out of the currency before the crisis. It’s going to be a global currency crisis, but the dollar will lose more value than all others. Buy natural resource stocks with good earnings.
Fred in New Jersey: Regarding the inflation scenario: what do you think about Summers and Rice on the debt-to-GDP ratio? They’re not worried about debt so much as GDP growth.
PS: This is all nonsense. These two guys didn’t even the see crisis coming. Our GDP number is all a bunch of fluff, not real. It’s made up by statisticians. The debt-to-manufacturing GDP ratio is enormous. Debt relative to domestic savings is more important too. Other countries have more personal savings. Their governments can borrow from their own citizens. But In the US, not only is the government in debt, but all the citizens are in debt. So when the US government wants to borrow money, it has to borrow it from the Chinese. It has to borrow it from the Japanese. Plus, our debt is financed short-term. Most other countries in the world are not that stupid. We’ve got an adjustable rate – a third of US gov’t debt comes due next year. So if there’s a spike in short-term interest rates, look what happens to the cost of servicing this massive national debt. The gov’t is making the same mistake we made with adjustable rate mortgages. Soon the teaser rate is going to expire. So tune all this stuff out. It is all propaganda. Whatever they’re saying, you can rest assured the opposite is true.
What asset class is going to be the next bubble?
PS: They’re finished blowing bubbles. All the inflation is gonna show up in commodity and resource prices. Stocks and real estate prices will rise in nominal terms but will fall in real terms. On a real basis, our assets are gonna get crushed. I still expect the DOW to trade at around one ounce of gold. Right now it’s at about 9 ounces of gold. It started at 43 ounces in 2000. This bear market ain’t over. If you’re gonna buy gold, don’t let people talk you into collectibles and numismatics. The markups are too large. And there are many disreputable dealers in the industry. So make sure you go with some of the top gold and silver dealers.
Elton in Ottawa: why are the stock market numbers and economic data not in line?
PS: sometimes the stocks with the weakest fundamentals have the best rallies because you have all this short covering. it’s all nonsense. Pay attention to the fundamentals. The stock market going up isn’t going to change in the US fundamentals. You can’t judge an economy based on nominal stock prices, especially when there’s so much inflation. These people never even understood the economic problems before the collapse. I think the bubble has burst. I don’t think we’re creating another one. It can’t be blown back up.
There’s still alot of upwards momentum left in this market. The bigger risk is being too afraid to be in stocks, and then waking up one day and finding out you’re broke. Don’t think you’re going to ride this out in cash. All the major foreign markets are outperforming the US markets right now, and this is going to continue./
Schiff also updated us on a couple of important pieces of news:
(1) He’s now posting his own vlogs (video blogs) directly onto YouTube under a new channel which he created for himself so that his posts can all go together, saving others time and hopefully directing more attention to the posts themselves. The new, official Peter Schiff YouTube channel is SchiffReport.
(2) EuroPacific is soon going to be enabled to buy physical bullion. Amazingly, you will soon be able to purchase physical coins and bars directly through Schiff’s brokerage. Up to this point they have only been dealing with pooled accounts in the Perth Mint. This seems to be another sign of how serious Schiff is not only about his prognostications for the US economy going forward, but also regarding the amount of awareness throughout the public regarding what’s happening. He’s clearly expecting others to start buying much more gold en masse.
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{ 3 comments… read them below or add one }
I like Peter Schiff thoughts on the US dollar etc. I’ve made some great returns on gold and silver myself.
I don’t know if this blog talks about risk management (disability… pitfalls of some term insurance etc.) If you are interested drop me a line.
regards,
Brian
Hi Brian, congrats on the gold and silver returns. I’m not an insurance expert, so would love to hear your thoughts on it.
Hi ME,
There is a great book I can loan you which is called Unintented Consequences by Lenord A Reiner (he is a financial advisor in the US). Even though this book was written in the US the taxes are similar to Canada. On page 115 he talks about the pitfalls of term insurance (it does have a place!). The best return on term is insurance is the first day you buy it paid your monthly premium and die! What a great return! Most poeple don’t think that way though. Lets say you pay $500 per your for your term insurance (at age 25). Had you not bought the term an invested the the $500 got a average return of say 5% by age 65 that would be $3,679 by age 85 that would be $9,980. What if you could have both, the coverage and the money? And get the money tax free? The media tells us to buy term and invest the difference but they don’t tell us that there is opportunity cost because the worse day of term insurance is when you stop paying and you die (for your beneficiaries)! The reason term is so cheap is the insurance companies only pay about 1% of all term policies! It’s like accident insurance, it’s cheap because the claims are under 1%! Anyway drop me a e-mail if you want the book. The lost opportunity costs (besides insurance) is not talked about in the websites I have seen. Most people believe saving more or spending less is the answer, yes it helps but what about other things that cost a lot of money over time?
cheers,
Brian