The Dow was worth 20 ounces of gold both in 1929 and 1980, but bottomed at near one ounce of gold in 1932 and 1980. The recent bear market began with the Dow priced near 43 ounces of gold, and is worth less than 12 ounces today, on its way to re-test the 1932 and 1980 lows. In other words, the Dow, despite a nominal rise from 380 in 1929 to about 11,000 (at the time of publishing) has actually lost almost half its real value, when measured from its peak price of 80 years ago. That's the danger of overpaying in bull markets, says Peter D. Schiff, demolishing the myth that buying stocks at any price always works, provided one's time horizon is long enough.
In the latest in the Little Book Big Profits series Schiff looks at historical downturns in the financial market, to analyse what investment strategies succeeded. His prescience and foresight are remarkable; he saw the bubble comprising ‘the entire US economy’ earlier than others and also realised how vulnerable the economy was— built on a phony foundation of debt-financed consumption. While most economists marvelled at how much money Americans were spending, he was shocked by how much they were borrowing. CNBC dubbed him Dr Doom, as he argued that 70 per cent of GDP growth was consumer spending on imported goods, using borrowed money, which was not wealth creation as the term economic growth implied, but wealth destruction.
Schiff's views are worth listening to because he actually predicted, in an earlier book, that the sub-prime market would collapse and spread to the general mortgage market. Now he says the coming decade will see rising inflation, higher interest rates, soaring commodity prices, a weakening dollar, declining markets in stocks, bonds and real estate, and recession. The current economic backdrop, therefore, calls for a fresh approach to investing and his advice is to stay out of cash and bonds— because inflation will be high and the dollar is crashing. Put spare cash in gold, silver, a non-dollar money market fund or foreign equity portfolios, he says, preferring foreign equities because, in his view, some amount of decoupling is possible. “There’s a bull market somewhere,” is his opinion and he suggests buying high dividend stocks, in developed economies such as Australia, Canada, Singapore and Norway, that derive their earnings domestically or through trade outside the United States. As for emerging markets, he feels there is sense in investing there because despite the risks, they are indisputably the wave of the future. He has no hesitation, he says, dubbing them a bull move in a bear market, provided it was clear that only professionals should play.
The President of Euro Pacific Capital Inc also recommends commodities— natural resources, raw materials, agriculture, gold and silver. Schiff traces the historical correlation between the commodities and the financial markets, which have typically moved in opposite directions. He believes that the secular commodity bull market is in the early stages and will last at least another decade. This time, however, it will be driven, he says, by global developments of an epochal magnitude— the industrial revolutions taking place in India and China. It would have been interesting though to have got his take on whether he still holds the same view on commodities, now that oil prices have come off so sharply, as have prices of steel and other metals.
The book isn’t just about giving advice on how to keep your portfolio up when the market is down; the author has insights on how inflation and GDP work and also puts the government’s economic policies in context. Schiff doesn’t pass up an opportunity to bash the Fed, Wall Street, hedge fund managers or mutual fund managers. He believes in calling a spade a spade and has actually cautioned readers from heeding Wall Street’s cries of a commodity bubble. Every chapter has some background and some relevant historical perspective which make it easier for readers, who may not be so familiar with the financial world, to grasp how the different markets work and how they are connected. For instance, there is a primer on commodities, futures contracts with tax implications and also six ways in which one can play the gold and silver markets. While the book has been written for investors in the US, the trends that Schiff forecasts for commodities will hold for investors anywhere in the world, as will the rules for buying an exchange traded fund. An interesting read that captures an eventful 2008 and, more importantly, guides readers on which way the different markets could be headed, the book may not be a ‘true masterpiece’ as Marc Faber has described it but, without doubt, has some useful insights.
The Little Book of Bull Moves in a Bear Market
Peter D. Schiff
John Wiley & Sons
Price: $19.95 (USA)
Number of pages: 263