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Was Peter Schiff Right?

There’s no need to rehash the details already captured beautifully in the viral “Peter Schiff Was Right” YouTube videos. The verdict on that is clear. Peter Schiff nailed 2008. But how has he done since? Critics point out that we haven’t had the inflation he predicted, and US bond prices have not only not crashed but actually made new all-time highs. Is Peter Schiff still right?

It’s important to clarify that when Peter Schiff talked about inflation, he was using the Austrian definition of inflation, which is monetary expansion. Is this a cop out or some sneaky way of dodging the facts as they have actually played out? Absolutely not, and I can prove it. If one believed that the official inflation figure, the CPI, is what would rise, one could play that by investing in TIPS–Treasury Inflation Protected Securities. But rather than advise his readers to invest in TIPS, Peter Schiff in Chapter 8 of CrashProof warns against them, writing “However, buying TIPS is a perfect example of trusting the fox to guard your henhouse. The basic problem with TIPS is that they are indexed to the consumer price index (CPI), which does not reflect actual inflation, but rather the government’s highly understated version of it.”

So what did Peter recommend? The title of Chapter 9 of his book holds a hint, “Gold Rush–Be the First Person o Your Block to Stake a Claim.” Even if you measure gold in the most unfavorable way possible, from its peak price before the ’08 crash to the recent lows we’ve just come out of 4 years later, you see more than a 50% increase, which yields an average annualized growth rate of around 10%. Fairer measures would be to look at peak-to-peak or trough-to-trough gains which show annualized growth of 20%. And, finally, if you were an ace trader who nailed the bottom and top, and held the entire time in between, your annualized growth rate would be north of 30%. I think those price increases qualify as high.

As to bond prices, it is true that Peter predicted they would fall, but specifically he predicted a bubble in the bond market. The fact that bond prices have risen to new highs actually supports, not damns Peter’s case. The fact that his critics misrepresent Peter on this point is so inexcusable that it doesn’t warrant my effort of citing a written source. The bond bubble is mentioned, plain as day, in radio ad for his brokerage firm. It doesn’t exactly require a lot of digging.

But debunking the critics isn’t enough for me. I would like to really go out on a limb and take this one step further and say I believe Peter Schiff was more right than even Peter Schiff gives himself credit for. Peter Schiff admits the one thing he got wrong was that he didn’t foresee the world flooding into the dollar as a result of the ’08 panic. My defense of Peter on this is that his niche is in building conservative portfolios for weathering economic crisis.

Recall last week when I wrote about USEC Inc (NYSE:USU), talking about how it was a terrible company, but that nonetheless I thought its price would rise. As of this writing, USEC’s stock price is up 37% in less than a week. Because this company is so fundamentally weak, it is not a conservative investment vehicle. If we measured the performance of the S&P, the Dow, Gold, Silver, Oil, and so in, in terms of the number of shares in USEC it could buy, this past week would look like a bloodbath. Does that mean in retrospect everyone should have sold everything to buy USEC shares? Not if you’re a conservative investor.

So I draw an analogy between USU and the USD. Yes, in hindsight, if we were wily speculators, the dollar was the place to be in late ’08. Since we measure prices in dollars, it looks like people who followed Peter’s advice and bought at the peak got killed, but a conservative investment advisor like Peter Schiff would have been wrong to recommend being in dollars. The performance of Peter Schiff’s strategy during any other time and the speed with which a Shiff portfolio bounced back is further evidence supporting my case.

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