Wall Street Journal: Right Forecast by Schiff, Wrong Plan?

by | Jan 31, 2009 | Peter Schiff | 2 comments

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    On the heels of Mike Shedlock’s recent attack the Wall Street Journal published an article about Peter Schiff’s company, Euro Pacific, and the recent results their clients experienced during the foreign market down turn.

    The published article, available by subscription, can be found here.

    The full cached version of the article is here (for now)

    It seems Mr. Schiff has pissed off some more people with his forecasts, and now the main stream media is getting on board. Of course, it could be a legitimiate story, Mr. Schiff’s clients have reportedly lost 40% – 50% of their portfolio values in the last 6 months.

    Mr. Schiff’s Darien, Conn., broker-dealer firm, Euro Pacific Capital Inc., advised its clients to bet that the dollar would weaken significantly and that foreign stocks would outpace their U.S. peers. Instead, the dollar advanced against most currencies, magnifying the losses from foreign stocks Mr. Schiff steered his investors into.

    Most [clients] had one thing in common last year: heavy losses. A number of investors said their Euro Pacific portfolios lost 50% or more in 2008, worse than the 38% drop in the Standard & Poor’s 500-stock index last year. People familiar with the firm say that hardly any securities recommended by Euro Pacific brokers gained ground in 2008.

    When global markets were soaring, many Euro Pacific investors’ accounts experienced strong performance. For several years, investors saw returns in excess of 20% a year as foreign stocks and commodities surged, according to people familiar with the firm.

    In 2008, investors nervous about the state of the U.S. economy who were impressed by Mr. Schiff’s track record poured money into Euro Pacific, nearly doubling the number of accounts to 16,000. But many did so at the worst time possible, much like investors who piled into Internet stocks as the dot-com bubble peaked.

    At least the Wall Street Journal points out that many of Mr. Schiff’s clients, who lost money last year, lost money as a result of buying into the markets at ‘the top.’ Had they waited until, say, last November, or even right now, those same stocks Euro Pacific recommends might be a steal.

    Mr. Schiff, 45 years old, says the downturn in his strategy is a short-term setback. He argues that it is only a matter of time before the dollar collapses, pressured by massive government bailouts, triggering outsize returns for his investors.

    “I think the dollar is going to get destroyed,” he says. Investors with the staying power to wait out what he sees as a temporary phase of irrational confidence in the dollar will reap huge rewards, he argues.

    Critics say Mr. Schiff’s strategy is much riskier and more aggressive than many investors realize. David Yeske, managing director of Yeske Buie, a Vienna, Va., money manager, says Mr. Schiff’s investment strategy was a focused bet on a single outcome, rather than risk management for investors looking to protect assets from an economic collapse. “He’s a speculator; he thinks he can see the future,” says Mr. Yeske, former chairman of the Financial Planning Association. “That’s not really risk control.”

    I’m not sure if Mr. Schiff’s focus is on one specific strategy. Yes, the dollar would need to weaken for you to make money on the currency side of foreign investments, but it is important to remember that you are also betting on foreign equities markets growing at a more rapid pace than US markets. Even if the dollar were to double in value and your foreign stocks lose 50% of their value in dollar terms, some investments, like commodities or China in general, may return yields over 3 – 10 years that will far exceed your dollar losses. Also, it seems unlilely that the dollar will hold up that strongly in the coming years, given the trillions the Fed has been printing.

    One of Peter Schiff’s clients had this to say:

    “It’s curious,” says one longtime client of Mr. Schiff’s who works in finance. “His thesis of how things are going to collapse and crumble and fall apart isn’t effectively executed in [my] account.” The account, which is largely invested in gold, mining and infrastructure stocks from Canada to Australia, was down roughly 35% last year, the client estimates. The Australian dollar weakened 19% against the U.S. dollar in 2008.

    while I agree that short-term, these investments have gotten hammered, all of the signs now (and historically) point to this being a very strong long-term investment. We should see mining, precious metals and infrastructure stocks go through the roof in the next 3 – 5 years. All of the government sponsored “bail outs” world-wide will stimulate infrastructure development globally, especially in China and the US, so naturally we’re going to see big gains in equities prices and dividends in these areas.

    My suggestion is, that if you are looking for short-term gains, Euro Pacific may not be the company for you. Sure, you might see short-term gains with some stocks, but this economic climate is anything but predictable short term, so be prepared to hold for several years.

    Mr. Schiff says one year’s poor performance doesn’t prove he was wrong. He has admitted in notes to clients that his investment thesis hasn’t performed as expected, particularly with respect to the U.S. dollar. But he holds fast to his convictions and has been telling investors to scoop up a number of depressed stocks.

    Some clients are inclined to agree. “The decoupling he talked about has not happened,” says Barbara Hearst, a clothing entrepreneur who splits her time between Charleston, S.C., and Bridgehampton, N.Y., and has invested with Mr. Schiff since 2000. But “longer term or medium term, I don’t discount what Peter says.”

    Realistically speaking, how long will China and the rest of the world be dependent on the US economy. They now see the dangers of tieing their economies to the US. It is only a matter of time before smart countries decouple from the US, and when this happens, we should see a period of sustained growth in Peter Schiff’s investments.


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