Has the Schiff Hit the Fan?

February 16, 2009

On January 25, 2009, the Schiff hit the fan when a popular and highly respected blogger, Mike Shedlock, took aim at rock-star financial guru Peter Schiff and his salient Peter Schiff fan club. According to “Mish,” as Shedlock is known, “most of the praise heaped on Schiff is simply unwarranted, and I can prove it.”

Much of Schiff’s fame derives from the now legendary “Peter Schiff Was Right” video, which was created and promoted by his Internet admirers and as of this writing has been viewed over 1.1 million times. Without a doubt, Schiff has become a hero for hordes of knowledge-seeking liberty activists who desire economic truths as well as a visible voice for their cause. These activists are not shy about openly supporting their guy. Until Peter Schiff, there was practically no one in a position to appear on national TV shows and combat the parade of misinformation consistently trotted out by government propagandists, the mainstream press, and their predictable economic advisors who are determined to shill for a new implementation of a tried-and-failed Keynesian paradigm.

And it’s important to point out that most of the praise Schiff is receiving is, in fact, not coming from people who attempt to dissect every investment strategy proposed by Peter Schiff. In reality, the ballyhoo is loudest amongst his fans”people who tend to be ordinary, middle-class Americans who are not financial professionals. Schiff’s fans are disgruntled about an increasingly oppressive U.S. monetary policy, the imploding economic landscape, the push toward financial socialism to prop up Wall Street’s debauchery and fraud, and the contrived lies that spring forth from Wall Street’s gang of government benefactors. These are the issues that Schiff addresses so well, hence his devoted following.

Accordingly, this article will not attempt to show whether or not Peter Schiff was wrong”or will be wrong”about the dollar, foreign equities, decoupling, U.S. treasuries, or any other alleged Schiff investment position targeted by Mish. Investment strategy is not my expertise, and besides, Mr. Schiff handled that task very well in one of his latest columns for Taki Magazine. So I”ll leave it to the investment gurus to hash out that argument. Instead, I think it’s more practical to try to understand why it is that Peter Schiff is being attacked and why some financial professionals who hold similar views (openly endorsing or being sympathetic to Austrian Economics) are condemning his pervasive popularity. Mish is a case in point; he’s a registered investment advisor representative for Sitka Pacific Capital Management, and he maintains an exceptional blog that offers valuable insight, especially concerning the global economic crisis and its many facets of doom. Mish is a guy I admire.

I was thus surprised when I encountered the following statement from Mish paired with a graphic of a client statement from Schiff’s firm, Euro Pacific Capital, which displayed substantial losses. Mish challenges Schiff with this:

Perhaps I have stumbled on the worst of Schiff’s portfolios. There is one way to find out.

I challenge Schiff to post the average returns for his clients on a year-by-year basis, just as Sitka Pacific does. That is the only way to see just how right (or wrong) his investment thesis is.

Mr. Shedlock needs to enlighten me. I am not a money manager nor am I anywhere near the level of these two gentlemen concerning investment strategies and trends. However, I do work for a broker-dealer, and for business reasons I have read the Investment Advisors Act of 1940 in its tedious and dry entirety. Mish is a registered investment advisor whereas Schiff “s Euro Pacific is a brokerage firm, and these two businesses are guided by different sets of rules. A brokerage firm is regulated under the Securities Exchange Act of 1934 whereas the Investment Advisors Act regulates registered investment advisors. Schiff responded in his TakiMag column:

The blogger in question implies that all of my clients are down by levels similar to the account he cites. He has asked me to refute his allegations by providing broader performance figures for more clients. But, since Euro Pacific Capital is a brokerage firm and not a Registered Investment Advisor, I am prohibited by regulators from providing any details on the investment performance achieved by my clients. The blogger in question makes his challenge knowing full well that I am legally prevented from accepting it. He then uses my failure to refute his false claim as validating its accuracy.

In fact, in the February 2, 2009, issue of Fortune magazine, in an article titled “He Saw it Coming,” the author, Brian O”Keefe, states that “he [Schiff] has applied to become a licensed investment advisor so that he can actively manage clients” money for the first time.” Mish is a registered investment advisor, and certainly he knows that Schiff runs a brokerage business, so why the impracticable challenge? Private investor Antony Herrey, in private correspondence, noted:

Let’s get the facts right regarding Peter Schiff. He runs a brokerage firm, like a Merrill Lynch or a Charles Schwab, and is not an investment manager. His clients were independent brokerage account holders and made their own decisions about what to buy, hold, and sell.

Peter has publicly admitted ruefully that he failed to foresee early enough last year how sharply foreign stock exchanges and precious metals companies would decline, but you cannot hold him responsible for losses borne by customers of his company.

Too many of us”and most of us occupy our own glass houses”are unfairly casting stones at Peter Schiff. Remember, he does not “put” clients into any investments because his clients are independent investors free to accept or reject any suggestions he offers. Peter would never claim he’s been right on everything all the time. Last September 12 Peter sent my company (Newport Property Corporation) an “Important Message from Peter Schiff” in which he began as follows:

“In the last few months, many of the investment portfolios recommended by Euro Pacific Capital have experienced the most adverse conditions that I have seen in ten years. At present, the troubles are continuing. Driving the declines has been weakness in foreign currencies that are important to our investors. Some have fallen nearly 20% against the U.S. dollar, pushing down the dollar value of stocks in those markets. Simultaneously oil and gold have seen significant declines from their highs in the early part of 2008, which has punished the share prices of commodity-related stocks. The resulting paper declines in our portfolios have been painful to watch. As I’m sure many of you are aware, all of my own investments adhere strictly to our philosophy, so my concern is not academic.”

Robert Blumen, a frequent contributor to the Mises.org web site, reviewed Peter Schiff’s book, Crash Proof: How to Profit from the Coming Economic Collapse in July 2007. In private correspondence, Robert noted,

His book is a very Austrian analysis of economic conditions in the US and globally over the last few years. He identified the economic problems very incisively, using the Austrian Theory of the Business Cycle and incorporated other useful other insights.

Another thing that I think he deserves credit for is going on the financial TV shows devoted to pumping and promoting the bubbles, where he was subjected to scorn, ridicule, arrogant guests and co-hosts, was laughed at, and generally was the object of derision and mean-spirited humor. He stuck to his guns and most of his predictions of how the bubble era would end were correct.

Following Mish’s blog post, Donald Luskin, a contributing editor to National Review and chief investment officer of Trend Macrolytics, LLC, started piling on. In a short swipe at Schiff, Luskin referred to Schiff supporters as “Schiffbots.” The Schiff-Luskin scrap goes back at least as far as the summer of 2007 when they both appeared on CNBC’s “Kudlow & Company” and Luskin referred to the bears as “being delusional” and described his interaction with Schiff as akin to a “debate with Michael Moore.” Amazingly, during this appearance, Luskin also states that those individuals who promoted an “end of the world doom” (unpopular truths are always equated with some “end of the worldism”) with their warning of a subprime implosion were sending the bulls a “buy signal,” and thus he proceeded to tell viewers to “buy “em with both hands.” Luskin, who appears on television often in order to promote himself and his business, even took a swipe at Schiff for promoting his own book, in spite of the fact that Luskin appears on camera with his company’s logo very visible in the background. And while he jumps on the fact that some Euro Pacific investors” portfolios are down, Luskin doesn”t mention that he himself has done far worse damage managing other people’s money.

Luskin, as a follow-up, attacked Schiff on his blog, referring to him as a “blowhard braindead permabear.” In fact, in July 2007, Luskin was still sarcastically dissing anyone who believed a subprime crisis was coming and he proceeded to shamelessly attempt to embarrass his detractors on his blog by stating, “now we know for sure that the subprime crisis has passed.” This is the same Luskin who, in August of 2007, said “the bull market lives” and “there’s no recession on the horizon.” Of course, Schiff has his many critics who have disagreed with him on ideological grounds or challenged his record of accuracy concerning his investment strategy, which is reasonable. However, the Luskin case stood out in that it was one-sided and loaded with personal invectives. Time and time again, Schiff was the target of obsessive potshots from Luskin, on his blog, including the many reader emails Luskin posted that also chastise Schiff.

In effect, the bears were making the doomsday calls on the economy not because they concluded “the world was coming to an end” (a favorite Luskin phrase), but because they understood that the foundations on which the boom economy was built were beginning to collapse, and government policy prescriptions could no longer prop up the white-picket-fence-and-roses panorama that had been peddled to the American public.

These incidents, with one “perma-bull” after another”Luskin and Art Laffer (of Laffer Investments) come to mind”calling Schiff delusional and maliciously attacking him for his prediction of oncoming economic cataclysm because he understood of the fundamentals of economics, repeated itself over and over again on television and in the print news.

Perhaps that is why people like to say, “Schiff was right.”

I think Schiff stated his case appropriately in his January 29 Takimag column when he said that Mish is “confusing short-term market fluctuations with long-term economic trends.” Mish’s analysis is based on the assumption that Schiff’s predicted collapse has already played out, thereby implying that scores of Schiff’s predictions never materialized and therefore Schiff has been wrong on many counts, as listed at the end of Mish’s criticism. Mish’s strategy appears to be shortsighted while Schiff is, and has been, focused on a longer-term course of events while admitting that the short term will be subject to unpredictability. I”m not picking one strategist over another here, but rather, it appears that Schiff is being analyzed in a context that is unfair to his clearly stated hypotheses based on long-term trends.

Schiff followed up with an additional response, which was summarized by Aaron Task:

“¢ The “game” is only over if the clock stops on 12/31/08 and clients are forced to sell positions for a loss, which isn’t the case. In fact, he says clients are taking advantage of the dollar’s temporary strength to continue their “exit strategy” from dollar-based assets and into foreign currencies and stocks at depressed levels.

“¢ He’s not a market timer and is positioning clients for a “major collapse” of the dollar”which he very much still believes will occur…

Again, though I don”t care to weigh in on the “right” or “wrong” of Schiff’s investment forecasts (not my specialty, and not the purpose of this column), I think Schiff’s position, here, is appropriate.
Additionally, Mish, a man well versed in Austrian economics, failed to address the innumerable effects of unpredictable government intervention on the markets, and how that can make forecasting seem more or less unwinnable. Thus, when assessing Schiff’s strategy, shouldn”t Mish have looked at the unparalleled events that have occurred in just the last few months?

These are not ordinary times, with garden-variety government intrusions pushing their way through markets, upending certain segments of the economy while leaving others intact. Instead, we are witnessing the New Deal on steroids. The government has taken over the mortgage industry by taking control of Fannie Mae and Freddie Mac; nationalized the banking industry; forced itself unto financially-sound community banks; commenced its move to nationalize the domestic auto industry; and has given a small group of apparatchiks the power to spend billions of dollars as they please to buy”or not buy”assets at arbitrary prices that have no real prices on the free market. On top of that, one colossal spending plan after another”including the latest “stimulus” swindle”has been thrust upon the private sector economy that is trying to “correct” itself by flushing out past economic distortions brought about by an extended and unsustainable boom period.

Therefore, interventions on a massive scale, rogue nationalization, and the perversion of price systems have thrown economic calculation into chaos. Economic calculation, the use of a price mechanism to facilitate economic planning and the rational distribution of resources, is necessary in order for entrepreneurs and various capitalists to make decisions concerning the most efficient use of limited resources. Government has disrupted this very necessary condition, making it nearly impossible to predict market events and timing. In fact, predicting which way the investment winds will blow at a time when government is just heating up its “new” New Deal seems analogous to throwing darts at a board while blindfolded. Many people will throw darts, and since there are always winners and losers, some will do better than others.

Peter Schiff is being demonized for being a star and seeking the attention of the media in order to gain an audience for his many prophecies. Indeed, his self-assured polemics find their way to TV shows, websites, blogs, and online newspapers everywhere, and on top of that, he’s become a household name on YouTube. He’s a huge success, he’s everywhere, and he likes it.

Now remind me why that’s a problem.

Peter Schiff, like all of us, should seek out and pursue those activities that best utilize his talents and adhere to his personal desires. There are far more people who are capable of running a broker-dealer business as opposed to being skilled at battling with established giants on television and in print, day after day, revealing conclusions that most people will find unpleasant or unacceptable. Instead of worrying about his reasons for being a celebrity, listing his personal faults, or inaccurately exposing his inability to nail his long-term predictions in the short term, I think we should cheer him on as he basks in the limelight. Peter Schiff has taken the intellectual power of Austrian economics to a mainstream audience and has been able to explain the most catastrophic economic events of our lifetimes by invoking Austrian business cycle and monetary theory, along with a free-market philosophy that challenges the prevailing interventionist orthodoxy. He has a unique ability to explain complex problems to an audience that has never before been exposed to such unabashed truths in the popular press. Lay people who have become acquainted with Schiff’s dissection of popular economic fallacies presented by the establishment have come to understand the perils presented by a centrally-planned, interventionist economy.

What’s the secret to his popularity? Peter Schiff is easy to comprehend because he doesn”t converse like an academic economist using garbled terms and ambiguous interpretations. He also doesn”t pontificate in mathematical equations “ he speaks to common people with a clear message that, like all of Austrian economics, makes sense to intelligent individuals whose formal education in economics or finance may be limited. Even if his success were to come to a halt tomorrow, he has done much to advance the cause for liberty, including his fervent support of Ron Paul for president. Whether his detractors like it or not, Peter Schiff is the guy who gets the invites to the podium, and along with that, he can fill the seats with people who are intrigued by his unflinching message.

More or less, I think Peter Schiff is a welcome extension of the Revolution started by Ron Paul and his supporters, and he brings hope to a whole host of individuals who keep pressing onward in their desire to challenge the establishment and offer solutions as put forth by the free-market Austrian school. Schiff, then, has become a front-and-center ambassador of Ron Paul’s philosophy for a sound economic policy.

In a few short months, mainstream financial pundits have gone from the dismissive cuss “Peter Schiff Is Delusional” to the embarrassing admission “Peter Schiff Was Right””and finally to the face-saving assertion “Peter Schiff Was Wrong.” Euro Pacific portfolios can be scoured for signs of weakness, but Schiff’s economic philosophy can simply no longer be ignored, even by the talking heads of BubbleVision. For many of us, it’s cause for celebration.

Photo: Time, March 30, 2007.