While preparing Monday morning's entry, I read and watched a lot of material from Peter Schiff. This guy's predictions scare me. Anyone familiar with him? Care to debunk his claims to set my mind at ease? Vintek, are you out there?

http://www.usnews.com/articles/business ... nario.html

http://www.europac.net/strategy.asp

http://www.newmogul.com/item?id=1002

http://debtprison.net/wordpress/66/dave ... s-economy/

For now, I'll continue my investment plan (broad-based U.S. index funds), and hope that Schiff is just another doomsayer, the sort that always comes out during economic hard times...

I think he's nuts. The media loves to show 'extreme' views, otherwise he would never get on the air. The reality is that none of these guys can predict the future (see Bear Stearns, Merrill Lynch etc etc).

You should consider diversifying out of the US though - if nothing else, some currency diversification is a good idea.

Yeah, I'm here and I'm popping off a quick answer. I'll try to give a more comprehensive answer later, after I get home, if I can think of something to add.

First off, I'm not an economist, so I think JerichoHill is way more qualified than I am to address your concerns. However, since you asked...

I think that what Schiff predicts is a possibility, albeit an extremely small one. By the same token, I think there was an extremely small possibility that the Dow could reach 36000 as outlined in this book published in 2000. With the benefit of hindsight, we can see that it didn't happen.

The point is, one can never underestimate how much and how long the market can be irrational. Remember that Greenspan warned of irrational exuberance in 1996, and the tech bust didn't occur for another 4 years. So basically, you can see trends, but you can really predict the market. I don't think Schiff's predictions at this point will come true, but what do I know?

Looking at the current market is an objective sense, John Bogle says:


So by an objective measure, the market is cheap. Still, the market can stay irrational longer than you can stay rational, so it's not necessarily a sign to back up the truck and load up on stocks. Me, I'm just sticking with my investment plan and buying as my cash flow allows.

In a way, what we're experiencing now is something we've never seen before: a global credit crunch with a greater volatility than we've ever seen. So I don't believe anyone can really tell us precisely what will happen in the future. There will only be people who guess right and people who guess wrong. At the same time, we have seen this kind of thing, over and over. An enormous crash, driven by a bubble that in hindsight, was easy to see. Tulip bulbs all over again.

I'm somewhat skeptical about Schiff's predictions for the simple reason that the US economy, though severely weakened, is still the 800 lb. gorilla of the global economy. One only has to look at current circumstances to understand that this is true. The sub-prime mortgage crisis here is triggering problems all over the world economy. I got hammered both in US and international stock funds. In short, if the US goes down, the rest of the world will not be a safe refuge. We all go down like a bunch of dominoes. Governments all over the world are taking steps in unison to ensure that this doesn't happen. If that doesn't work, they'll try something else. In short, I think that with all the efforts being made, we'll probably be in for some pain, but the odds of Schiff's predictions coming to pass are extremely small.

For some reason, the words "broken clock" flash to mind.

Schiff may be right, but scream "the world is coming to an end!!!" long enough and you'll eventually be right too.

NoBoB, I agree with you. But at the same time, talk like that frightens me. Part of it is my upbringing.

Because I've resolved to be more active in the forums, this might be a good time to share the genesis of this morning's post on investing in a bear market. What I'm about to paste below were my original thoughts. These still may come back as a new entry, but you can see their rough form here:

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Peak oil. Housing bubbles. Bank failures. Stock market crashes. Unemployment. Rising inflation.

One year ago, the stock market was at a record high. On 09 October 2007, the Dow Jones Industrials closed at 14,279. Last Friday, the Dow closed at 8451, and there's a good chance it will drop even further.

Unsurprisingly, my inbox is filled with e-mail from people who wonder what they should do. Here are some typical questions from readers like you:

• "Originally we had planned to open Roth IRAs this weekend, but with the stockmarket being so unreasonable, we have lost our confidence. Wouldn't it be wiser to leave the money in our savings accounts for several more months?"


• "I am 30 years old and since reading your blog, I realize how important it is to get an IRA fired up. However,  now that I'm financially ready,  the market meltdown has confused me completely.  Should I hold tight and just keep saving while I see how this rides out?"


• "I have two 401k plans.  However, the last time I looked at my quarterly reports, I noticed I am losing money.  I know that the US economy has been pretty bad lately, but is there anything that can be done or planned for?"

These are fantastic questions. Unfortunately, there are no fantastic answers. Nobody knows what the market will do. Nobody. Anyone who says they do is full of crap. There are scores of talking heads on the television, and each has her own opinion. Some of them are predicting financial armageddon. I don't listen to them.

Every time this country enters a period of economic turmoil, every time the sock market declines, every time there's a recession, every time inflation rears its ugly head — every time these things happen, the doomsayers sound their [dreadful] alarms.

Every time the storm clouds gather, there are those who proclaim it's Noah's flood.

During the early 1980s, my father was one of those who thought civilization was headed for collapse. (His fear was [tinged] with a touch of nuclear winter — that's something missing from today's crisis.) Though he slogged through the 12% unemplyemnt rate, he managed to scrounge enough cash to buy a few gold coins at $500 an ounce (coins he eventually sold at $350 an ounce). He drove the family to Vanderhoof, British Columbia, where he considered purchasing a house on the outskirts of civilization. To my father, the economic crisis of the early eighties was every bit as real as our current crisis.

I'm not worried about a stock market crash. I have 20 years (maybe 25) before retirement. I'm happy to see a stock market decline because it means I can buy in cheaper.

If you were willing to buy stock a year ago, why wouldn't you be willing to buy it now? If you weren't willing to sell when the market was at 14,000, why would you sell when the market is at 9000? Your objective is to buy low and sell high — not the opposite.

I recently took as much money as I could it and pumped it into FFNOX. I bought in at $24.20. Its current value is $20.01. It's down 17.31% since I bought it. So what? If I had bought it a year ago, I would have paid $32.71. If I get a chance to buy more FFNOX in the next few months, I will. Yes, it's scary to buy as the market is falling, but I know that I'm purchasing a broad-based diversified index fund. And I believe that the market will turn around.

The fundamental rule is: Basic personal finance skills are even more important when times are tough. Make the tough choices now, do what is right, and you can prepare yourself for the future.

Warren Buffett: "Be fearful when others are greedy, and greedy when others are fearful." Others are fearful right now. Maybe it's time for a little greed.


You must know your risk tolerance, and make your investments accordingly. If this market scares you, you may need to adjust your asset allocation. You must diversify. You must educate yourself. Often, fear is a product of ignorance. When we don't understand something, it scares us. But ignorance is easily overcome with education. If the market meltdown makes you anxious, I urge you to do some reading. You must filter out the media noise. You must have a plan. Index funds or individual stocks? Lump sum investing or dollar-cost averaging?

I've covered this subject several times in the past year. I will continue to cover it as long as Get Rich Slowly readers have concerns.

****************

Based on reader feedback that I've been too "personal" lately and not "tippy" enough, I morphed the post into a summary of sound investment practices. I'd still like to bring back this doomsday stuff, though, and talk about my history with it, and how to deal with it.

What I would really like are examples of other doomsday predictions from, say, the 1970s to the present. Surely there must be lots of great examples online from after the tech bubble bursting. I'd love to be able to say, "Look. Here are some actual examples of people proclaiming the end of civilization." I know my father had his favorites, but he's not alive to ask anymore. I'll have to do some research.

Well for all his hyperbole I think he's making a couple valid points. Firstly, the US trade deficit is leading to inflation, and by consuming more then we produce the currency is devalued and we're forced to aquire more debt to pay for goods. Warren Buffet has been known to say the same thing although he doesn't seem to subscribe to the economic collapse theory. I also think the US needs to take a serious look at the gap developing in math and science education in the US compared to other developed countries, in the short term it's not going to make a big difference but long term it's going to force more outsourcing of high paying jobs further agrivating the trade deficit. It seems more like a slow leak then a POP since it's been going on for year.

That being said, I see a lot of hope for change, mostly because people are talking more and more about the dangers of debt and living beyond your means. Dave Ramsey is getting more popular, shows like "Till Debt Do Us Part" and "The Suzy Orman Show" are starting to crop up more frequently and this blog seems to be more and more successful which tells me the American people are starting to take a hard look at their spending habits. Movies like "I.O.U.S.A" are getting made to help educate and spread the word on the dangers of overconsumption and the importantance of fiscal responsibility. I forsee a "trickle up" philosophy in the next 20 years to curb government spending and hopefully help American afford an affluent future.

Any pundit, like Peter Schiff or Jim Cramer, is about getting people to act, to watch the next crisis. Crisis draws ratings.
If you followed their advice.

Peter Schiff is an Austrian economist. That means he's libertarian and exceptionally so, he was Ron Paul's economic advisor. I love my Austrian economics, but many Austrians and Libertarians can be especially wack. I prefer to call myself a rational Libertarian.

On Schiff's main thesis, that we should save more, and that will solve all our problems, is completely baloney. Ask 1000 economists and 900 will tell you that economic GROWTH is the only way to truly improve a society's well-being.

Likely, the advice of Schiff and his appretencies would lead to monetary tightening, putting a brake on an economic car traveling at 55mph. A hard brake.

And hey, JD, this is why I'm here. Resident economist and all that jazz

Linked is an interesting article written by the late Donella Meadows over a decade ago.
http://www.sustainer.org/dhm_archive/in ... 764crashed

An excerpt:

"The new economics would worship something far more satisfying than mere growth, especially since growth is ever more costly on this overfull planet. Actual human needs would be a fine focus. It would admit the novel idea of "enough." It would not have to whip up demand for stuff that no one needs (and that the planet cannot afford) just to keep satisfying bets on growth placed by people who have too much money but think they should keep getting more. Ensuring "enough" for both the poor and the rich would take away the insecurity, desperation, greed and howling fear that drive the booms and busts of the market.

A new economics would reward work and investment, not speculation. It would keep its books straight, counting up environmental and family and community costs as well as money costs. It would find much more truthful indicators of success than the GDP, which is a measure of frantic activity, not of actual welfare. It would redefine "jobs" so that people can be supported for real social contributions -- raising children, learning, teaching, caring, cleaning up, restoring the environment, making joy for others."

JD,

If you want to take a look at some predictions using global models (not just financial meltdowns) that have largely come true from 1970 and some doomsday examples if we don't change course, take a look at the article Counterintuitive Behavior of Social Systems by Jay Forrester -> http://sysdyn.clexchange.org/sdep/Roadm ... 4468-2.pdf.

Please don't confuse what passes as economics to newspapers and TV pundits as what economics actually is...

I think he paints a bleaker picture than what exists but his philosophy is correct. We cannot continue on the debt train without ever running into a financial collapse.

In the case of the government when the baby boomers start retiring then the crap could really hit the fan in spending.

In fact, I would be much at ease if the government would stop spending more than they take in and cut out departments (education, HUD, etc.) in order to do so.

"“There’s a decade of frugality ahead of us,” Schiff writes, sounding remarkably like the average personal-finance blogger. “We need to return to a mind-set of saving up to buy the things we want, rather than charging them now and figuring out how to pay for them later.”"

Yes, yes and yes.

the rest - not so much

I know, I know. . .I'm well aware that this is an old topic and you can flame me all you want -- but I wanted to continue this discussion a little further because I'm writing a paper for my economics class. One of the things required to complete the report is to talk to people via chat/forum (basically, people we don't know) about the current economy. No questions -- just conversation. =)

While this post is over 2 years old, the current recession STARTED in 2008; so this (in my mind) would make for some excellent "hindsight" discussion). Now, going back to the topic at hand, I quoted "sdogg1m" for a reason. While I agree with you, that the articles posted were a little too bleak for their own good, I don't agree with cutting funding to education and HUD. Of course, this is from the moral standpoint that those governmental organizations do a lot of good for people. . .but that's another conversation for another day.

Personally, I think (in 2011), we should be focusing on the debt of the common man. I feel as though many of our problems come from within. The constant use of credit cards, and extreme excess linked to mortgages and loans is ridiculous. In short, I think we're just a wee bit greedy when it comes to finances. We always want MORE -- and believe me, I'm guilty of it too!!! Trust me!!! I haven't been the only one to submit to a credit card relief program.

All I'm saying is this . .Although we experienced an economic collapse, I feel as though our personal spending habits have acted as a catalyst for problems. In a way, you can say that there was some truth to Mr. Schiff's statements. What do you guys think???

Hello Mitch.

Peter Schiff was right in the sense of pointing out various systemic risks that exist in our economy. He gained public credibility (or should I say, notoriety) when he correctly predicted the collapse of the housing bubble and the ensuing recession.

Unfortunately, he went on to make some further (wild) predictions about the impending collapse of the Dollar due to hyperinflation.

Here is a video of him on Fox New predicting $2000/oz gold in 2009. (Yikes, URLs are limited to only 1? Anyways, you can find it on Youtube or Google.) Gold peaked around $1200 in 2009.

Later on, he predicted $5000/oz gold "in the next couple of years". It's been almost a couple of years now, and current gold prices are in the $1400 level.

In May 2010, Peter Schiff returned to Fast Money to predict gold $10,000/oz. Once again, today's April 2011 gold prices are in the $1400s.

So, is Peter Schiff believable? To be fair, it depends on what you want to hear and believe. However, anyone who tells you they know exactly what's going to happen next to the economy, have been proven wrong, and yet, is not only unwilling to admit they are wrong, but instead ups the ante, is someone we either shouldn't be listening to, or should at least do so with a large grain of salt.

To save you guys the trouble, here's the 1 year chart on current gold prices:


(source: goldprice.org)