When Dr. Doom speaks, we should listen……

Essay by John Heinzl

When CNBC or Fox needs a guest who can be counted on to deliver a thoroughly gloomy outlook for the U.S. economy, they call on “Dr. Doom.”

To say Peter Schiff is bearish is like saying Tiger Woods is an okay golfer, or China has a small problem with air quality. The president of Connecticut-based Euro Pacific Capital Inc. is so pessimistic about the U.S. economy that he lives in a rented house and keeps the vast majority of his and his clients’ money outside the country, a healthy chunk of it in gold and energy stocks.

“America is finished. We are going to destroy this country. Our economy is just going to unravel,” he told me yesterday. “The question is how much money is the world going to lose before it writes us off?”

Apocalyptic forecasts are a dime a dozen these days, so why should anyone pay attention to Mr. Schiff? Because his past predictions have proved uncannily accurate.

When dot-com stocks with no earnings were shooting skyward in the late nineties, he was advising clients to stay away and instead putting money into the unloved energy sector, just in time for the great oil bull market.

A few years later, when the housing bubble was inflating, he was warning about the dangers of reckless mortgage lending and the precarious state of Fannie Mae and Freddie Mac. “If it looks like a bubble, walks like a bubble and quacks like a bubble, it’s a bubble,” he wrote. That was in 2004, when speculators were still lining up to buy investment properties in Las Vegas.

Ever the contrarian, Mr. Schiff made a bundle shorting the subprime mortgage sector.

So, one year into the credit crunch and with more than $400-billion (U.S.) of mortgage losses piling up on company books, where does Dr. Doom see the U.S. economy heading now?

Unfortunately, into an even deeper hole, one from which it could take years to emerge.

Far from rescuing the economy from the housing debacle, the government’s efforts to prop up Fannie and Freddie – which own or guarantee nearly half of the $12-trillion in outstanding U.S. mortgage debt – will only compound the problem by delaying the inevitable day of reckoning. The same goes for plans to help hundreds of thousands of homeowners refinance into more affordable mortgages.

Apart from encouraging the very moral hazard that got the U.S. into this mess in the first place, the government bailout will come with an enormous price tag in the form of soaring inflation, Mr. Schiff argues. He believes government figures vastly understate the true rate of inflation, which he estimates is now running at 10 to 12 per cent. Before long, it could be north of 20 per cent.

“The government doesn’t have the balls to raise taxes. It’s going to print the money. It’s going to destroy the currency,” he says.

During the Depression of the 1930s, at least people who held cash made out okay. Because prices were falling, their money actually bought more. But if Mr. Schiff is right and the U.S. is heading into a period of hyperinflation, then even the most prudent savers will see their wealth eviscerated.

With the walls closing in on the U.S. economy, where is an investor to turn? Apart from gold and energy producers, which benefit from a plunging U.S. dollar, Mr. Schiff likes conservative, dividend-paying stocks such as pipelines and utilities. He’s especially fond of Europe, Asia, Australia and Canada, where his holdings include Barrick Gold Corp., Goldcorp Inc., Crescent Point Energy Trust, Baytex Energy Trust and Pembina Pipeline Income Fund.

He has two words for Canadian investors thinking now is a good time to shop for bargain-priced U.S. stocks: “Stay away.”

jheinzl@globeandmail.com

July 29, 2008

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5 Responses to “When Dr. Doom speaks, we should listen……”

  1. Big "D" Says:

    Dr. Doom sounds like a really happy guy. I’d be willing to bet he hasn’t spent an overnite with grand-children in the last lifetime, walked in a park without his blackberry or sat on a beach and watched the ocean roar. I’d much rather enjoy the small things in life and the freedom left in America than be labeled the “eternal pessimist”.

    If being like Peter Schiff is considered a “good” thing, I’m not interested in joining the “club”. Yes, I do believe our country is in major economic trouble and I also agree that the housing market is just beginning to suffer but, I’m not about to act like the world is ending. What is the sense of living in a rented house??????? Is it so he can do a quick exit, is it that he is showing he has no roots or is it that he is an “off the wall” looney who happens to have great economic vision.

    I’m not a fan of the current economic policy, nor am I happy with what our government is doing on most fronts but, I’m not about to stop living and obcess on bad news either. Life is much too short to spend the majority of my time here on earth being negative. There are things to be positive about and maybe, just maybe concentrating on some of those would make even Peter Schiff a happier man.

  2. foundingfather1776 Says:

    Dear Big D – we do not understand the points you wish to convey. They seem to be, as best we can tell, as follows:

    1) Peter Schiff is negative on the economy. He is called “Dr. Doom”
    and the “Eternal Pessimist”
    2) Peter Schiff must not be a happy guy.
    3) Peter Schiff has a track record of being right in his analysis, yet….
    4) Peter Schiff must not be happy because he must never take the time
    to relax with friends and family.
    5) I wouldn’t want to be like Peter Schiff.
    6) Peter Schiff rents a house so he can bail quickly so he must not be a
    good person.
    7) I like to be Positive and hang out with Grandkids.
    8) I don’t want to obsess on bad news.
    9) If Peter Schiff recognized life’s little joys he would be a happier man.
    10) Peter Schiff must be unhappy. I wouldn’t want to be like Peter Schiff

    Did we miss anything?

    As I am sure you realize, FoundingFather1776 is a teeny, tiny, little-itty-bitty blogspot in the world-wide-web that seeks to share carefully researched knowledge with its loyal readership. FF1776 is NOT Pessimistic. FF1776 is NOT Optimistic. FoundingFather1776 ALWAYS STRIVES TO BE REALISTIC! For only by telling the unvarnished truth and presenting the information as straightforward and entertainingly as we can, do we benefit ourselves and our readers.

    If a reader lacks the capability to process unpleasant or uncomfortable information without obsessing on it to their detriment; if reading information on Govt. corruption and impending economic collapse drives one into a corner sucking their thumb and rocking to and fro, then it *is* probably best for them to avoid this blog and get all their information from Government fairy-tales and the main-stream media.

    The Government and the mass-media bombard us daily with “Happy Talk News” that is designed to comfort us. For example, according to the Government, inflation is only about 2.5%, the economy is turning around, vaccines are good for us, fluoride helps your teeth stay pretty, wascally terrorists attacked us on 9/11 (but by golly, we are gonna git ‘em eventually…just trust us!) and Obama or McCain are going to make EVERYTHING better! See? It is all HAPPY HAPPY JOY JOY!!

    If you have an expert auto mechanic that informs you your car’s tires are bald and your brakes are shot, do you accuse him of just “being negative” and blithely head out on the turnpike at 70 miles an hour? Or, do you torture yourself with the mental imagery of dying in a horrible fiery car crash and vow never to drive again? Or do you calmly, rationally and effectively take action to replace the tires, fix the brakes and make sure your vehicle is safe and useful?

    Having bad tires and brakes, other than being an annoyance and costing some money to fix, should in NO WAY preclude you from enjoying life, from relaxing with friends and family, or achieving inner peace!

    We assure you that the staff here at FF1776 takes great joy in the art of living. We enjoy life, friends and family very much. One of our biggest joys is turning over the slimy rocks of lies and misinformation heaped on all of us by the scumbags that seek to rob and control the good decent people of this country!

    Watching the exposed worms wither under the glaring light of truth is a joy we shall not soon tire of! Righteous Indignation is a positive tonic to the soul!

    We admire the knowledge, accuracy and courage of Mr. Schiff to boldly “tell it like it is.” We do not know him personally and have absolutely no insight into his state of mind. Perhaps he is a neurotic, unhappy man? Perhaps he enjoys life a great deal? If we evaluate his life by only superficial outward appearances, he *should* be a very happy man indeed. He successfully runs a fund worth hundreds of millions of dollars, he has a best-selling book, he makes frequent media appearances, and he has experienced the unique joy of being proven 100% correct in his earlier predictions whilst watching other pundits who derided him choking on their own bungled analysis. By any “standard” yardstick of what passes for “success & happiness” in America…..Mr. Schiff appears to be doing very well, thank-you.

    Knowledge is power. What you don’t know, CAN hurt you. The Government and Wall Street are NOT your friends! Just keep that in mind. We firmly believe that exposing the devious machinations of those who would harm our liberty, our health, our money or our family is a great ENHANCEMENT to life. Indeed we are happy to use our knowledge to foil their evil schemes and protect ourselves and our loved ones whenever and however we can! We hope that others feel likewise.

    By all means enjoy life and all the wonders it has to offer!

    Kindest Regards,

    FoundingFather1776

  3. Mike Says:

    Interesting Post. I agree, negative or not, the truth is the truth….

  4. Mathew James Says:

    Great post, it was very informative. I think its a must read.

  5. stef Says:

    It’s a good thing you enjoy lolling about on park benches ’cause given your unforgivably puerile optimism a park bench might just become your future permanent address.

    Big “D”? And the “D” stands for? Let me guess… “Dummy!”

    911=USrael

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