In Defense of Peter Schiff – A Response To Mish

One of the best and most well read investment bloggers, Mish of Mish’s Global Economic Trend Analysis, ripped into Peter Schiff last night in a lengthy tirade on his blog titled “Peter Schiff Was Wrong”.

One thing that Mish gets right and many Schiff fans might not know is that Schiff’s portfolios did not perform well in 2008. EuroPacific doesn’t post performance data but the anectdotal evidence suggests that many of Schiff’s clients were down substantially last year. Fortune Magazine substantiated this in an article from Friday writing:

Ironically, though, the year that Schiff became a star prognosticator on TV was also one of the worst periods ever for his clients. In most cases the foreign markets he likes got hit even harder than the U.S. in 2008 (Australia’s ASX 200, for instance, fell 41.3%, vs. 38.5% for the S&P 500), and even more surprising to Schiff, the U.S. dollar rallied strongly as investors rushed to the perceived safety of Treasuries.

The reason is pretty obvious. Schiff subscribed to the decoupling theory, the idea that emerging markets like China and Latin America would be somewhat immune to the problems in the US. As we all know now, this was dead wrong.

I said it was wrong my “How To Invest In The Coming Bear Market” Report (Jan 9, 2008) and noted the beginning of its unravelling back in January: “Recoupling: The Real Significance Of This Week’s Action”, Top Gun FP, Jan 24, 2008. So did Mish: “Global Decoupling Myth Shattered In Equity Selloff”, Global Economic Trend Analysis, Jan 22, 2008.

Schiff recommended large exposures to foreign equities, with a particular emphasis on commodity stocks linked to global economic growth, and these got crushed even worse than US equities overall.

Mish also rips into Schiff for his hyperinflation call. Mish points out that the dollar has recently been one of the best performing currencies. Mish is also in the school calling for deflation rather than inflation. So he says Schiff was big-time wrong on this score as well.

Here I’m going to have to side with Schiff. The dollar is benefitting for now as a safe haven in a time of fear and crisis. (Even so, gold, which Schiff recommends, continues to perform well and this dissonance will likely be resolved at some point). But I do believe Schiff is right about the long term trends. The Fed is printing so much money and the Federal government running such huge defecits that serious inflation is almost surely going to be the long term result.

In the Fortune piece, Schiff himself makes this same argument, that he is early, not wrong:

None of this shocks me. Oftentimes in the short run markets are irrational. And my problem has always been that I see things too clearly and too far in advance. Other people don’t understand what I do, so the markets might not validate what I’m saying right away. But they will eventually. In the end the fundamentals are going to prevail, just as they did in the housing market.

I also believe that, longer term, the decoupling thesis is correct. The big trend is economic vibrancy and growth moving away from the US and Western Europe and towards Asia, Latin America and other emerging markets. The timing is important for investment performance, but longer term I do think Schiff has this one right as well. (On this see, for example, “American Power Is On The Wane” (subscription required), Paul Kennedy, The Wall Street Journal, January 14, 2009 – anyone who wants to read this e-mail me and I’ll send you a link).

That’s why I think that even though it’s useful to point out that Schiff’s clients have been hammered in 2008 and he has gotten some things wrong, for the most part he’s been money and he deserves most of the praise and recognition he’s been receiving. He made his points loud and clear and in a very public way when very few others shared his sentiments and some even went so far as to laugh and mock him on public television (see the YouTube Video “Peter Schiff Was Right”). Peter Schiff never backed down and the course of events has proven him right.

UPDATE (Tuesday 1/27, 1:30pm PST): Abnormal Returns linked to this post in today’s Link Post.

You can also see a letter from Peter’s brother Andrew Schiff, Director of Communications at Euro Pacific Capital, in this post: “Peter Schiff Fights Back”.

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