April 17, 2009

Not All Economists Agree
by Peter Schiff

In a speech this week summarizing his administration's economic policies, President Obama grossly overstated the support these policies enjoy by claiming, "economists on the left and right agree that the last thing the government should do during a recession is cut back on spending." There are a great many economists who were surprised to learn that, apparently, they now agree with the President.

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it's the reason we are now headed for an inflationary depression.

We do not need, nor should we attempt, to replace lost demand. As Obama himself pointed out in the same speech, Americans have been borrowing and spending too much money. These actions created artificial demand, underpinned by the illusion of real wealth in overvalued stock and real estate markets. Given his intelligence and rhetorical training, it is hard to fathom how President Obama cannot notice the inherent contradiction in his argument.

While Obama commended millions of American families for making the hard choices to reduce spending, pay down debt and replenish savings, he later outlined the government's intention to spend every American household deeper into debt, thereby undermining all the good that personal austerity would have otherwise produced.

Obama also made the clear-eyed observation that the foundation of our economy was unsound and that a sturdier one needed to be laid. To do this, he even asserted that we need to import less and export more. This has been one of my fundamental points. Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed.

However, by interfering with this process, Obama prevents the very transformation he acknowledges must take place. When the government spends what individuals save, private investment is crowded out. Society is deprived of the benefits such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all our cement?

This brings up an oft-repeated, but oft-forgotten, point: government does not have any money of its own. It only has what it takes from the rest of us. If individuals repay their debts, but their government takes on additional debt, we are all simply swimming against the tide. All forward progress is lost as private debt is replaced by public debt, which must be repaid by private individuals. Whatever gains individuals hope to achieve are negated by the higher taxes or increased inflation necessary to repay their share of a larger national debt.

Obama claims that much of the additional debt is not going to finance consumption, but rather "critical investment". This is a vain hope. In the first place, much of what he categorizes as investment, such as additional spending on education, is not investment at all. Yes, an educated workforce is important, but throwing more government money at education will do nothing to achieve this goal. Spending money on education and calling it an investment squanders resources that otherwise would have financed real investments. In the second place, to the extent some government money is invested, those investments will likely be less efficient than those the private sector might otherwise have financed. There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. "Five year plans" didn't work in the Soviet Union and they won't work here. If the government simply builds bridges to nowhere, society gains nothing.

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success. Obama himself proves this by allocating still more funds to government-run schools and student loan subsidies. Other examples, such as Amtrak, the New York MTA, the U.S. Postal Service, Fannie/Freddie, and countless others, prove this process is never-ending - until perhaps the bureaucracy collapses under its own weight.

When it comes to government making tough choices, Obama talks a good game, but refuses to actually make any. However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It's unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read my just released book "The Little Book of Bull Moves in Bear Markets." Click here to order your copy now.

For a look back at how I predicted our current problems read my 2007 bestseller "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.

More importantly, don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com. Download Euro Pacific's free Special Report, "Peter Schiff's Five Favorite Investment Choices for the Next Five Years", at http://www.europac.net/reports.asp. Subscribe to our free, on-line investment newsletter, "The Global Investor" at http://www.europac.net/newsletter/newsletter.asp. And now watch the latest episode of Peter's new video blog, The Schiff Report, at http://www.europac.net/videoblog.asp.

Faber Says S+P 500 May Rise to 1,000 on Bank Earnings (Update3)

By Rita Nazareth and Ken Prewitt

April 13 (Bloomberg) -- The Standard & Poor’s 500 Index may rise 17 percent to 1,000 in the next three months as government spending boosts bank profits, investor Marc Faber said.

U.S. stocks probably reached their bear market low when the S&P 500 fell to 666.79 during trading on March 6, Faber, who publishes the Gloom, Boom and Doom report, told Bloomberg Radio in an interview from Thailand.

Financial shares may increase further after the S&P 500 Banks Index jumped 25 percent on April 9, the biggest rally since at least 1989. Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among more than 30 S&P 500 companies scheduled to announce results this week.

“You have essentially a government that gives financials free money at the expense of the taxpayer,” Faber said. “With this free money, they may actually have decent earnings in the near future.”

Banks in the S&P 500 are forecast to post an 86 percent drop in first-quarter earnings, according to analyst estimates compiled by Bloomberg. Profits are projected to fall 57 percent in the second quarter and 52 percent in the third before rebounding 277 percent in the year’s last three months.

Bank of America Corp. surged 15 percent to $11.02 in New York while Citigroup jumped 25 percent to $3.80, leading a gauge of 80 financial stocks to the biggest gain among 10 industry groups. The S&P 500 rose 0.3 percent.

Outlook

Citigroup shares can “easily rebound” to $5 or $10 before drifting down again and possibly being wiped out, Faber said. The stock has fallen 83 percent over the last 12 months and has lost 43 percent of its value so far this year.

The S&P 500’s surge in the past month was triggered by speculation corporate profits will rebound following the government’s $12.8 trillion in pledges to rescue the financial system and stimulate the economy. Citigroup, Bank of America and JPMorgan said last month they made money at the start of 2009, while Wells Fargo & Co. posted higher-than-estimated earnings last week.

“We’re now starting to see some clarity,” said Greg Woodard, portfolio strategist at Manning & Napier Advisors Inc., which manages $16 billion in Fairport, New York. “If some of the negative earnings news disappear, we’ll see an improvement not only in the financial sector but in the stock market as a whole.”

Bank of America climbed above $10 per share for the first time in three months as expectations the government may nationalize the company eased and estimates on home loan profits rose.

‘Overbought’

“The market very near term has become somewhat overbought and the correction should essentially follow, but I doubt it will go and make new lows in the intermediate future,” Faber said. “The lows in early March at 666 in the S&P will hold and we’ll have another push up into July.”

Faber said in an interview with Bloomberg Radio on April 7 that the S&P 500 may drop as much as 10 percent after climbing 24 percent from 676.53 on March 9, its lowest close in 12 years. The index lost 2.4 percent that day, then climbed 5 percent over the next two. The 5 percent to 10 percent “correction” would be followed by a rally into July, Faber said in the interview.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net Ken Prewitt in New York at kprewitt@bloomberg.net;

Last Updated: April 13, 2009 17:05 EDT

China Slows Purchases of U.S. and Other Bonds

• ose
  • Linkedin
  • Digg
  • Facebook
  • Mixx
  • My Space
  • Yahoo! Buzz
  • Permalink
  • By KEITH BRADSHER

Published: April 12, 2009

HONG KONG — Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.

China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

China has lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.

In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being.

Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend. A resumption of growth in China’s reserves in March suggests, however, that confidence in that country may be reviving, and capital flight could be slowing.

The main effect of slower bond purchases may be a weakening of Beijing’s influence in Washington as the Treasury becomes less reliant on purchases by the Chinese central bank.

Asked about the balance of financial power between China and the United States, one of the Chinese government’s top monetary economists, Yu Yongding, replied that “I think it’s mainly in favor of the United States.”

He cited a saying attributed to John Maynard Keynes: “If you owe your bank manager a thousand pounds, you are at his mercy. If you owe him a million pounds, he is at your mercy.”

Private investors from around the world, including the United States, have been buying more American bonds in search of a refuge from global financial troubles. This has made the Chinese government’s cash less necessary and kept interest rates low in the United States over the winter despite the Chinese pullback.

There have also been some signs that Americans may consume less and save more money in response to hard economic times. This would further decrease the American dependence on Chinese savings.

Mr. Wen voiced concern on March 13 about China’s dependence on the United States: “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

The main worry of Chinese officials has been that American efforts to fight the current economic downturn will result in inflation and erode the value of American bonds, Chinese economists said in interviews in Beijing on Thursday and Friday.

“They are quite nervous about the purchasing power of fixed-income assets,” said Yu Qiao, an economics professor at Tsinghua University.

Economists said there was no sign that the Chinese government had deliberately throttled back its purchases of overseas bonds to punish the United States for pursuing monetary and fiscal policies aimed at stimulating the American economy.

While those policies may run a long-term risk of setting off inflation, they also may benefit China if they rekindle economic growth in the United States and thereby revive China’s faltering exports.

The abrupt slowdown in China’s accumulation of foreign reserves instead seems to suggest that investors were sending large sums of money out of mainland China early this year in response to worries about the country’s economic future and possibly its social stability in the face of rising unemployment.

Evidence of such capital flight included a flood of cash into the Hong Kong dollar. Mainland tourists were even buying gold and diamonds during Chinese new year holidays here in late January.

China’s reserves have soared in recent years as the People’s Bank bought dollars on a huge scale to prevent China’s currency from appreciating as money poured into the country from trade surpluses and heavy foreign investment. But China’s trade surpluses have narrowed slightly as exports have fallen, while foreign investment has slowed as multinationals have conserved their cash.

Jun Ma, a Deutsche Bank economist in Hong Kong, predicted that China’s foreign reserves would rise only $100 billion this year after climbing $417.8 billion last year.

Some economists contend that slower growth in Chinese foreign currency reserves is not important to the economic health of the United States, even though it may be politically important. In the first quarter, instead of the Chinese government sending money out of the country to buy foreign bonds, Chinese individuals and companies were buying many of the same bonds.

“The outflow would mostly end up in the U.S. anyway,” even if China is no longer controlling the destination of the money, said Michael Pettis, a finance professor at Peking University, in an interview on Thursday.

Heavy purchases of Hong Kong dollars by mainland Chinese residents early this year also have the indirect effect of helping the United States borrow money. The Hong Kong government pegs its currency to the American dollar, and stepped up its purchases of Treasury bonds this winter in response to strong demand for Hong Kong dollars.

But China’s economy appears to be bouncing back from the global economic downturn faster than its trade partners’ economies. If that proves true, the result could be an increase in imports to China while its exports recover less briskly. This would limit trade surpluses and leave the People’s Bank with less money to plow into foreign reserves.

Inflationary Depression

Peter Schiff Interviews Marc Faber

Dr. Marc Faber runs his own business, Marc Faber Limited, which acts as an investment advisor and fund manager. He publishes a widely read monthly investment newsletters The Gloom Boom & Doom report which highlights unusual investment opportunities, and is the author of several books including Tomorrow's Gold – Asia's Age of Discovery which was first published in 2002 and highlights future investment opportunities around the world. Dr. Faber is also a regular contributor to several leading financial publications around the world. A book on Dr. Faber, Riding The Millennial Storm, by Nick Vittachi, was published in 1998. In late February, Euro Pacific President Peter Schiff interviewed the eminent economist Marc Faber by telephone from his office in Hong Kong.

Q: Marc, many thanks for taking the time for this interview from your busy schedule. I'd like to start with some macroeconomic questions, and then talk about some of the investment implications of the larger macro questions. Let's start with the stimulus and bailout, which is very much on everyone's mind. What do you think are the long-term effects of the stimulus and bailout proposals on all the Western countries, including the U.S.?

MF: Well, first of all, there are lots of academic studies on bailouts and stimuli; and also on money-printing. And, in terms of fiscal spending, bailouts usually don't work. When the government sits in and tries to offset sagging private demand with government demand, it usually does not work. This is the pattern we have seen in the past. The long-term effect on the US economy from all the bailouts and deficits is basically that government's debt will rise very substantially and the balance sheet of the Fed will expand. Many people think that the global recovery will begin in late 2009. I seriously doubt that. I think it will be at least two years from now, worst case maybe 10. And when we do start recovery, interest rates will rise and inflationary pressures will be enormous.

An economy always fluctuates around the trend line. If you try to postpone recession the way the US government has tried to do, then one day you will have a much bigger problem. If you postpone recessions through deficit financing, or through easy monetary policies, then obviously you have very strong debt growth as we have had in the US. Debt as a percentage of GDP has expanded from 130% in 1980 to 360% today. This does not include the unfunded liabilities arising from pensions and from Medicare and Social Security.

The best that the government could have done would have been to take a more severe recession in 2001, and then all the excess that followed would not have occurred. Now, we have an environment where the patient has died; no matter how much stimulus there is, it's not going to revive the economy.

Q: Does this mean that in the longer term we're going to see an inflationary environment?

MF: There is no other way for the US but to inflate. It's not a desirable policy, and it has in the end disastrous social consequences. But given that we have a money-printer at the Fed and an Administration that wants to expand the role of government as a percentage, the result will be, unfortunately, inflation.

Q: Are we looking at the same kinds of inflation we saw in the late '70s, or not quite as bad?

MF: My view is that, eventually, we will see a much higher inflation rate than in the '70s. In the short term, because of the collapsing asset market and increased savings rate in the US, we will see deflationary pressures. But in the long run, we'll have a much higher inflation rate. That will be negative for US bonds and equities.

Q: Not a pleasant picture. Are there any other bubbles on the horizon?

MF: Basically, we always have bubbles and investment mania in the world. Even in the 19th century, under the gold standard, from time-to-time investment manias and bubbles developed in railroads and in canals and in real estate, just to name a few. Under a fixed monetary, or gold, standard, where the quantity of money cannot be increased indefinitely; there is a natural limit to the scale of the crisis. Usually when there's a boom in one sector of the economy, you have some kind of deflation somewhere else; that was also the case in the 1970's. We had a boom in commodities, but bond prices collapsed.

What Mr. Greenspan and Mr. Bernanke have achieved is historically quite unique. They have managed to create a bubble in everything, everywhere in the world: in real estate, equities, commodities, art, worthless collectibles; even bond prices continued to rise as interest rates fell due to the loose monetary policy. Since 2007 and 2008, everything has collapsed. But government bond prices continue to rise, and went ballistic between November 2008 and December 2008, when 10- and 30-year Treasury yields collapsed. So my view would be that this was the last bubble they managed to inflate. From here on, the government bond market will fall. In other words, the trend will be for interest rates to actually go up.

Q: If you were the Chairman of the Fed or the Secretary of the Treasury, what would you recommend now to the Congress?

MF: I think the best move would be to resign, but that aside...

Q: Unlikely.

MF: The problem is that no officials in the US are telling the truth. Let me give you an example: The elderly statesman in Singapore, Lee Kuan Yew, immediately said in last September, "we're going to face very tough times; we have to tighten our belts to stay competitive." This is something no president in the US will say: that you have to want for a few years, tighten your belts, and endure some pain in order to safeguard the country's economic health – for the sake of your children and for the sake of the nation as a whole.

Neither party in the US nor any elected government official dares to tell the electorate how disastrous conditions in the country have become. Ill-conceived policies by the last few administrations, Republicans as well as Democrats, were designed to stimulate consumptions. As a result of these policies, we will now have a period of subpar growth for quite some time. The government's policy should have been to stimulate capital formation, education, and R&D, and to encourage people to save.

If I had been Fed Chairman, I would have kept interest rates at a much higher level after 2001. I also wouldn't have cut interest rates as aggressively as Mr. Bernanke did after September 18, 2007. Don't forget, low interest rates actually hurt savers. There are a lot of people in America, like retirees, that have money on deposit, and now don't get much interest on their deposits. So it basically forces them to speculate.

If I were at the Treasury, I would let the financial institutions that overly leveraged themselves and gambled with other people's money, like AIG and Fannie Mae and Freddie Mac, go bankrupt. You can still protect depositors and the policyholders of these companies. But let the system, through the market mechanism, deal with the problem.

Q: It looks like Iceland's on its way to bankruptcy. Do you think there are any other countries that are going to be in a similar shape to Iceland? Which countries are vulnerable?

MF: I'm sorry to say I think the whole world is an Iceland. I think we have countries like Britain and Ireland and Switzerland that have problems similar to Iceland, though they're not as bad as Iceland. Basically, Iceland became a huge hedge fund. They raised money in the international capital market; they then leveraged that money to buy assets all over the world. So, when asset prices stopped rising, banks and institutions in Iceland had a major problem. Banks were some of the worst offenders. They raised money from depositors, and by issuing bonds and certificates of deposit. Then, they gambled on poor investments, believing that markets couldn't fail. They are children of the bull market. But when asset markets started to turn down, they were screwed. The value of their assets had declined, whereas their liabilities remained at the same level. That's why so many banks are insolvent.

Q: Can America learn anything from Japanese stagflation, the "lost decade" as many people call it?

MF: I think the Japanese had a peculiar situation. First of all, the stock market in Japan was probably more overvalued than the US market in the year 2000 or in the year 2007. Also, the real estate market was in "cuckoo-land" in Japan. The good thing about Japan after 1990, when the recession hit and a period of no-growth began, is that the typical household never suffered very badly, for the simple reason that prices for assets, things like golf course memberships, nightclubs, housing prices, etc., all went down. So, their salaries didn't rise any more but stayed at the same level, and everything fell in price – we had deflation. So the typical household actually increased its standard of living.

In the US, the problem is that the household sector is terribly indebted. That wasn't the case in Japan. In Japan, the corporate sector was indebted and the banks and real estate companies were overleveraged, but not the household sector. And the household sector in Japan still had a savings rate of around 12 percent when the recession started. In the US, the household sector had stopped saving out of current income throughout the 1990s. In 1990, the saving rate was nine percent; then it went to zero. Now, the savings rate will have to go up. The household sector will realize that savings out of illusory asset price gains, like stocks and real estate, are not permanent; and therefore, if we want to have money for retirement, we have to save money from current income. And that has, of course, a negative short-term impact on the economy.

Q: Marc, I'd like to ask you now a few investment questions. I assume that your investment philosophy flows directly from your economic point of view. If you were a US-based investor with a five-year investment horizon, how would you allocate your assets now, and might you make a change with them in a year or two?

MF: It would depend obviously on the cash flow of that particular investor, his risk profile, if he has real estate or a pension account, or is he well-insured and this and that; so there are many different factors to consider.

Q: Let's assume he owns his own home, he's not overly leveraged, and he has a job.

MF: In general, I don't like stocks. The Japanese market, as an example, is at the same level it was in 1981. So it's 30 years behind. If the US just went down to the level of 1990, the S&P would be at 300. It indicates that the Asian markets are at either 20 year lows or 30 year lows. The dividend yields on Asian stock markets is about three times the bond yields in those countries. Relative to the US, Asia is quite inexpensive. So I think that, yes, emerging economies will be a place to look, and I would allocate probably now, ten to 20 percent into emerging economies.

Also, the commodities have totally imploded. The shares of mining companies and exploration companies and resource producers have also totally collapsed. Since November 21st, however, some stocks like Freeport-McMoran and Newmont have roughly doubled in price. They're not quite as attractive as they were two months ago. And I would still own some gold, say ten percent in gold.

Q: Now, would that be in physical gold, or would that be in an ETF, or individual mining companies?

MF: The mining companies are cheaper than physical gold, but the mining industry has its own set of problems. I would own physical just as insurance, because we cannot trust central bankers anymore – every person has to be his own central bank. I have a negative view of the US dollar in the long run, as I expect a revival of inflation. To some extent, I think real estate will protect you; in particular, I would prefer to have real estate in the countryside, rather than in the city.

Q: Would you consider, as a US investor, real estate overseas? I know there are some REITs in Singapore and in Australia that have a terrific yield.

MF: Yes, these yields will come down because they will have to cut the dividends. But say in Singapore you have REITs that yield 15 percent. So even if they cut the dividend, I think they will still be good, because the bond yield in Singapore is less than two percent. Even at five percent yield, in what I would consider a very solid currency in a very solid country, REITs would still be attractive. Singapore is probably the richest country in the world, everything considered.

Q: Global equities ten to 20. So that adds up, if you figure about 20 percent for resource stocks, to about half of the portfolio. Would you have the rest of your money in cash?

MF: Yes, in cash.

Q: Which currencies?

MF: Well, in the short term, I think the US dollar is okay. But obviously at some point it won't be okay. But right now, I don't see how the US dollar will totally implode.

Q: Do you prefer the Asian markets in general over the US markets.

MF: I ought to have mentioned this before: in Asia the valuations are more compelling, because the markets are back to 20 year lows or 30 year lows, and because the dividend yield is three times the bond yield. We have in Asia a lot of companies that serve the domestic markets. They produce cigarettes or beer or food. They're not going to be affected that badly by the global slump. The valuation of the stocks may be affected, because obviously there is liquidation; but I think that their fundamentals are sound, and that they'll survive under any environment; and that you will make money, and in the meantime, you're receiving the high dividends.

Q: In general, would you say that dividends in Asian companies are more sustainable than yields with US companies?

MF: As I said about the Asian REITs, they will probably have to cut the dividends. But if you produce, say, food in Thailand, I don't see that the global recession would have a huge impact on food sales in Thailand. It would have some impact, but not huge; so these dividends are relatively safe in many cases.

Q: In terms of commodities, do you prefer any sector over another? Agriculture or energy or metals or...

MF: Well, I think that oil is now again at a relatively low level and I would probably play the oil market by buying oil exploration companies. And I think agricultural commodities have come down a lot again, and maybe there are some opportunities there. But as I said, I'm not an expert on each commodity. I think sugar is quite attractive at this level. The problem is for the individual to play the commodity markets if he doesn't have a commodity-trading account and he can't buy and sell, he gets stuck because he has to stay the course. And so for individuals the best way to play commodities is to buy a good mining company, a good oil company, or a good exploration company, or just physical gold. I don't believe that individuals are very successful at investing in commodities and commodity-related structure products.

Q: Okay, Marc, I think this would wrap it up, but I'd like to ask you one question. If you had to leave one message with our readers to take away from all this, what would that be? What would be the big takeaway for them?

MF: We live now in an environment of very, very high volatility, because on the one hand you have the private sector that has tightened lending conditions, and wealth has been destroyed, and households will save more and be more prudent financially than they've been; in other words, credit or liquidity is tightening.

Then on the other hand you have these clowns in government that think that they can solve any problem. As Mr. Geithner said recently, "we know how to fix the problems." Well if he knew so well how to fix the problems, why did he let the problems happen in the first place? He was the New York Fed Chairman when the conditions were created! And Mr. Bernanke was the Fed Chairman since, I think, 2005, and he was the architect of this ultra-expansionary monetary policy. They have no credibility at all, and in my opinion they're going to make matters worse. And the worse the economic conditions will become, the more Mr. Bernanke will throw money at the system; and that will lead to huge volatility in the market. You can have rebounds in individual stocks, and in whole markets, of 30 percent in one month, then they can drop 20 percent in a month; don't forget, between November and the end of the December, the 30-year Treasury ran at 20 percent; and from its peak at the end of December it dropped 20 percent.

There is huge volatility and the same will happen in equities. And that's why I think it's very difficult to make long-term predictions. When you have a perfect free-market, it's difficult to predict the future. But when you have a market that is disturbed by government manipulations and money-printing, it's impossible to make any predictions.

Q: Well said.

April 2, 2009

Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse.

Copyright © 2009 Euro Pacific Capital

Peter Schiff Archives

'Agriculture is the best place to invest'

Lindsay Williams for Resource Investor speaks with Jim Rogers, co-founder of the Quantum Fund, about the financial woes hitting the US markets - and where to put your money.

Jim Rogers started the Quantum Fund with George Soros a couple of decades ago, probably three decades ago actually. He's a legendary investor. He's a bestselling author and he's a prolific commentator and never a day goes by when you don't see him on Financial Times Television or Bloomberg or listen to him on the wireless.

Jim, before we get into what's happening with commodities, which is one of your favourite subjects, what do you think about the recent market action?

Not very surprised. The only surprise to me is why didn't it start sooner? I'm afraid we're going to see much worse before the year's over. America's going to be in its worst recession for some time. We've had the worst housing bubble we've had in American history, maybe even world history. So, unfortunately, it's not good news. There are still many problems to be revealed and more losses to be taken.

It really does appear to be so. I wonder what Mr. Bernanke's going to be doing. But what it amounts to is the same policy that they've always employed when they get a small so-called crisis; instead of letting the cycle run its natural course, they chuck money at the problem. Do you think he's going to do it again?

Of course he is and it's just going to make it worse, you very astutely pointed out instead of just letting the cycle run its course - the Japanese tried for 15 years to keep propping up, you know, zombie companies, etc, and it took them 15 years and they're still aren't out of the woods. They should just go ahead - recessions are common. We've been having them every five or six years since the beginning of time. They're good. They clean out the previous excesses. They let the system start over with a sound basis.

I mean, obviously, some people get hurt, but we have a lot of safety nets in place now throughout most of the world, so that it's not the end of the world. The amount of money spent trying to prevent a recession in the end costs a whole lot more than just letting the world have its recession then get on with it.

I've been writing an article on Allan Greenspan and his tenure for a local magazine, Jim, and I've been surprised at looking at some of the quotes that have been attributed to Greenspan ever since he took over as Fed Chairman in 1987. I'll just read one to you if I may briefly. It says - he said the following back in 2003-04, "Innovation has brought about a multitude of new products such as sub-prime loans and also niche credit programmes for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit scoring models and other techniques of efficiently extending credit to a broader spectrum of consumers." I mean the more I read about Greenspan, the more I realise he's at the root of our current problems.

Oh no, of course he is. I mean he's laid the foundation for the demise of the Federal Reserve. Between Greenspan and Bernanke, we may see the Federal Reserve fail. We've had three central banks in America. The first two failed. This one's going to fail too. I mean if you really - we could spend a whole programme, a whole year of programmes, reading quotes from Greenspan and you would realise what a fool he's been.

In my book, "Investment Biker," I wrote that the man was a fool. I've been on TV many times talking about, oh, he just sat and watched CNBC and repeated it and said, "This is the way the world is." He never got it right, Lindsay. What was so astonishing to me was that his PR machine made some people think he was a smart guy. He never got it right in his entire investing career. I could go back over many of his failures too, but let's go on with the programme.

But briefly, before we leave the subject, do you think that Bernanke is just going to become another Greenspan?

He's worse. All he knows is to print money. His whole intellectual career has been spent studying the printing of money. America's now given him the printing presses and all he knows to do it to run them. He doesn't know about markets. He doesn't know about foreign currencies. We know now he doesn't even know about economics. I mean, he's got a PhD in economics and he was a professor of economics, but he doesn't have a clue about economics.

I will quote you - I hate to quote you, but one more time - I was watching him testify before congress and I almost fell out of my chair. He said under oath, so we presume he wasn't lying, that he was just a fool, he said if an American only buys American products, it does not matter to him if the value of the U.S. dollar goes down. He will not be affected. I was looking at the man to see if he was lying, giving government propaganda, but then I could see he didn't even really understand.

He didn't understand if, you know, even if say I'm an American, Lindsay, and I only buy American tires. Well if the price of foreign tires goes up, obviously the price of American tires are going to go up too. Plus, if the dollar goes down, the price of rubber's going to go higher, etc.

So the man doesn't even understand economics. He's going to print money. He's going to throw money out the window. The dollar's going to go down further and further and further. Inflation's going to get worse and worse and worse throughout the world - the world, not just America - and we're going to have a worse recession in the end.

He says that the inflation problem is a lesser problem than a slow-growth cycle. What would be your comment on that analysis?

Well, no. You know better than that. Inflation damages everything. It distorts all economic planning, all economic decision making. A slow economic profile or whatever he called it - we get over recessions. They end. But once you start embedding inflation into the entire nation's economy, that's one thing. Then it changes everything. It changes currencies. It changes foreigners' perceptions of their own economy, their own currency, their own cost of doing business.

You know, what he's doing is going to do - he's trying to save a few guys on Wall Street, a few friends on Wall Street, but what he's really going to do is damage 300 million others- well not just 300 million Americans - he's going to damage the whole world. But he doesn't care. He's just looking to save his friends on Wall Street, and he thinks he'll go down in history as a smart guy. Going to go down in history as one of the two gigantic failures of central banking.

Let's say that there is a recession as you seem to believe the U.S. already in recession and that recession will come deeper. Does that change your view on commodities, because if there's a recession in the states then it could affect, obviously, world growth and therefore the growth of commodity demand? Does that worry you?

Maybe temporarily it'll cause a slowdown in commodity demand, but that makes the long term bull case even greater because if all of a sudden the commodity producers think, "Well, this is not real," then they're not going to go out and open that new zinc mine and they're not going to go out and look for that expensive oil. They're not going to spend a lot of the money they might have spent otherwise.

It just prolongs the whole secular bull market. No, absolutely. You have corrections and consolidations in every bull market no matter what the asset. You always have. That's the way markets work. Nothing goes straight up, Lindsay. You know that. So if commodities go down for a quarter or a year or two, it's not the end of the bull market. As I said earlier, it's probably going to make it even last longer.

The bull market in commodities is - has been - has had various cycles, various components to it. The agricultural one is the one that you picked quite a while ago. And more and more commentary that I read says it could last for decades. So I mean it's a very simple equation. There's more demand and there's less supply. Are you becoming more confident of agriculturals?

Well, I've been buying them in the recent past, a few weeks ago. I bought more ags, yes. Agriculture is the best place - one of the few places - where I would put money in the investment markets right now. I'd buy agriculture. I'd buy the renminbi, the Swiss frank, the Japanese yen, but beyond that, there's not much I see that I would be buying. Agriculture's still extremely depressed on a historic basis. There are very sound and strong fundamental changes taking place for the better.

People who say it's going to go on for decades, I'm dubious, if you don't mind my saying so because I mean, I've seen this before in bull markets and read about many of the bull markets. None of them have lasted forever. This one probably won't either, but if it lasts another 10 or 15 years I'll be quite happy.

Looking back at Wall Street now, I just noticed, Bank of America came out with its earnings. Its earnings have dropped, it says here, 95% after $5.28 billion of mortgage related write-downs. The American investments banks were one place you said you didn't want to be about a year ago. Do you think they're starting to show some value now that they've been so badly whacked?

Well, what I actually said a year ago was that I'd sell them short and I'm still short. No. They don't show value at all. If they rally, I'm going to short more. I mean Bear Sterns still sells at $77.00. Merrill Lynch still sells at $53.00. You know, in real bear markets, Lindsay, these stocks are going to sell at $10, not specifically those two, but all - go back and look at previous bear markets. Investment banks get killed for many, many, many reasons. Their inventories go down, their customers dry up, everything goes bad and the stocks sell at, you know, very, very, very low prices. Let them rally. I'm going to sell more.

The argument that I get from a lot of fund managers in South Africa when it comes to the argument over banks is that they're historically on very low price earnings ratios and their multiples are low and they come up with every single excuse in the book as why we should be buying them and every day I see them going down further. So what you say you can throw that sort of historical analysis out the window? In a bear market, they're the ones that are going to suffer?

Of course they are. I mean first of all, the earnings are phoney earnings. I mean the balance sheets are phoney balance sheets. They quite openly acknowledge these days that they have something they call tier three assets. Well, tier three assets are assets that they don't price because they can't price them and so far, the accountants have let them get away with that. Well, soon, the accountants are going to make them admit that those tier three assets don't have much value and you're going to see huge write-downs.

And remember, the stocks are down now, Lindsay, because of what's been going on in sub-prime, etcetera. Wait until they start getting affected by the bear market. They haven't even been affected by the bear market yet. But when customers dry up, trading volumes dry up and mergers and acquisitions dry up and the earnings will really dry up.

You paint a very gloomy picture for the future, Jim. I noticed in one of the....

Oh, no, no, wait. What's gloomy? Hold on. What's gloomy? That was gloomy for Wall Street. I told you if you're a farmer, you're about to get rich. What are you talking about gloomy?

Gloomy for those poor Wall Street people.

There are a lot more farmers in the world than there are Wall Street bankers.

Yeah, well said. I noticed you, in an article in one of the news wires that you'd sold your townhouse in New York. Are you clearing out?

Well, I've moved to Singapore. We've moved to Asia. So, clearing out? Yes. I've moved to Asia. I don't have any - I don't have a home anywhere in America anymore. I'm still an American citizen, but no. We've left.

If you want to get into the agricultural market, what is the most efficient way to do it if you don't have the wherewithal to be able to utilise, you know, the Chicago Board of Trade and things like that. Are there indices that one should look at without having to monitor them every day, a simple way of getting in, in other words?

Well, Lindsay, I mean many academics and many consultants have demonstrated over and over again the best way for most people to invest in anything, stocks, currencies, whatever, is through an index. I'm not the first to come up with that and you either. That's been demonstrated too many times. People who invest in indexes outperform 80% of active fund managers year after year after year.

The best thing for most people to do is buy an index. I mean first do your homework and decide, "Yes, I want to buy stocks. Yes, I want to buy American stocks. Yes, I want to buy commodities," whatever it is. And then if you decide you want to buy that asset class, the best way to invest, no matter what the asset class, is to buy an index.

Mortgage delinquencies soar in the

U.S.

SOROS SEES END OF DOLLAR AS WORLD CURRENCY...