Barron’s: an interview with Peter Schiff

Peter Schiff, the investor and author, is a controversial figure. He tells of an America that has lost its way through shedding manufacturing and its habit of saving money. His conclusion is that the U.S. is not a place where he wants his clients to be invested and he has many places to allocate their funds outside the U.S.

I don’t agree with everything Schiff says because he paints a rather apocalyptic view of the U.S. debt crisis, credit unwind and housing bubble. However, the major thrust of his arguments are valid and to be noted because it’s a cautionary note regarding buy and hold investing in traditional U.S. equity markets.

This past week, he was interviewed by Barron’s magazine. What follows is merely a snippet of that conversation. See the full article for more details on his thoughts about investing and the U.S. economy.

What kinds of stocks did you like in those days?

Traditional value stocks with dividend yields. I also liked commodities, so I was buying international oil stocks back when oil was under $20 a barrel. The stocks I recommended weren’t doing very well in ’98 or ’99, especially after the Asian crisis, but they started doing better around 2000. I turned really, really bearish on the U.S. when I saw what the Federal Reserve was doing to prevent a recession in the early part of this decade, notably pumping a lot of liquidity into the system.

You continue to be very bearish on the U.S. But haven’t there been other times when there was lots of negative sentiment toward the U.S., only to see another era of prosperity emerge? Such as the late 1980s, when there was concern that Japan would take over the U.S. economy. Look at how that turned out.

Yes, but we haven’t been through anything like what we are going through now. The United States has really been living in a fool’s paradise, or a phony economy, probably for more than 20 years. But our economy has been growing and getting bigger and bigger. We have been able to convince the world to lend us money and to provide us with goods that we don’t produce and that we can’t afford to pay for with exports. And it has got to the point now where the problem is so big, especially since the real-estate bubble. We’ve now borrowed so much money from abroad. Our trade deficits are now very big, and our industrial base and our infrastructure have been allowed to decay for so long, that we are now at a point that we can only survive as an economy thanks to the charity of the rest of the world. They have provided us with all the goods that we can no longer produce because we lack the industrial capacity. And they have to lend us the money because we don’t have any savings anymore.

What’s your take on oil prices?

As oil prices are going up in the U.S., they are not rising nearly as fast in other countries because their currencies are strengthening. Ultimately, when currencies like the renminbi that are pegged to the dollar are allowed to float, I see the Chinese currency rising five-fold against the dollar. That would make oil a lot cheaper in China relative to what it would cost in the U.S.

Speaking of China, how do you see things developing there and its impact on the U.S. economy?

The whole science of economics, as I see it, is how do you satisfy unlimited demand with limited resources? China has more than one billion people. It is not as if Americans are unique in wanting things. It’s not as if the Chinese don’t want dishwashers. The reason they don’t have those possessions is because they don’t have the purchasing power. But they do have that power; it’s just that their government is taking it away from them and giving it to us. But it is Americans who can’t afford these goods, because we can’t produce them. So if the renminbi is allowed to rise, then Chinese factory workers will be able to afford the products they are producing instead of shipping them over here. That’s going to be a major, major boon for their economy.

So it sounds as if the U.S. will be relegated to second- or third-tier status.

The U.S. is in trouble. We are a post-industrial society, which is the same as a pre-industrial society; our manufacturing base has disintegrated. It’s not nonexistent; we still make some things and we are still competitive in some areas. But on the whole, as a nation we are not competitive. We are mainly a nation of a service sector and consumers, and that’s going to have to change. Nor do we have the savings that we need to fund the transition.

What could go wrong with your scenario?

Somehow, the U.S. could buy itself some additional time. We could convince the world — Europe and Asia — that they need us, and that while propping up the U.S. economy is going to hurt them with more inflation, letting the U.S. collapse is going to be even worse. Of course, none of that is true. The truth, in my view, is that the cost of propping us up far exceeds the cost of letting the U.S. economy collapse. But I think we are already in a pretty severe recession.

But isn’t there an argument that once we clean up this housing mess — along with the credit bubble, whenever that occurs — the U.S. will be a lot closer to a bottom, where the outlook begins to improve?

I don’t think that’s true. The resolution to the housing problem is going to mean housing prices are going to be a lot lower than they are now, and most Americans are not going to have any home equity. It’s going to mean that trillions of dollars will have been lost by the lenders. When the home equity is gone, Americans are broke, as they don’t have any savings. All they had was their home equity. They were counting on their home equity, without which they will be unable to pay off their credit cards.

-Barron’s, Gloom and Doom? Nah; Just for the U.S., 30 Jun 2008