I read The Little Book of Bull Moves in Bear Markets by Peter Schiff. Peter Schiff is President of Euro Pacific Capital, a broker/dealer in Darien, CT specializing in international markets. He is known on Wall Street as a permabear which means he has been bearish on the U.S. economy and stock market for a long time. He also wrote the book Crash Proof: How to Profit From the Coming Economic Collapse in 2007 in which he predicted the economic recession in the U.S. We all know by now that prediction was correct. This new book The Little Book of Bull Moves in Bear Markets was written in the first half of 2008.
I picked up this book because I’m interested to see what Mr. Schiff has to say about what one should do in a bear market after he successfully predicted the recession and the bear market. If it delivers what the book’s title says — bull moves in bear markets — everybody should want to know what those moves are. Unfortunately although he correctly predicted the bear market, his recipe for what people should do didn’t turn out too well so far. Maybe those moves will eventually work, but we won’t know until years later. It just shows how difficult it is to make predictions. You can see the recession coming but you can still prescribe the wrong moves. You have to be right in what will happen and in what to do. Being right in one but not the other doesn’t help you make money. Here are a couple of things Mr. Schiff said in this book:
1. There will be hyperinflation in the United States. The U.S. dollar will collapse. Sell U.S. dollar-denominated cash and bonds. Foreign economies will decouple from the U.S. economy. Buy dividend-paying foreign stocks. Instead of hyperinflation, we are having deflation right now. U.S. dollar went up against most major foreign currencies. Foreign equities also dropped 40% or more, not much better or even worse than U.S. stocks. Staying in U.S. dollar cash and bonds would’ve been the correct move.
2. Buy gold and silver. Invest in commodities and stocks of commodity-producing companies. Continuing on the theme of hyperinflation, Mr. Schiff suggested buying commodities including gold and silver, and buying stocks of commodity-producing companies. At the time he wrote this book (July 2008), commodities were at their peak. They collapsed big time since then. Stocks of commodity-producing companies also dropped like a rock. Look at the performance of some funds which invest in commodities and stocks of commodity-producing companies, and compare to S&P 500:
|2nd Half of 2008|
|SPDR Gold Shares (GLD)||-5%|
|iShares Silver Trust (SLV)||-39%|
|iShares S&P GSCI Commodity-Indexed Trust (GSG)||-63%|
|Vanguard Precious Metal & Mining Fund (VGPMX)||-64%|
|Vanguard Energy Fund (VGENX)||-50%|
Only gold performed better than S&P 500. Peter Schiff correctly predicted the bear market in U.S. stocks, but moving from S&P 500 to commodities and stocks of commodity producing companies would’ve been a disaster. Maybe commodities will eventually turn around. I added a commodities fund to my portfolio in December 2008, after commodities already collapsed, not when they were at their peak as Mr. Schiff suggested.
I also have problems with the actual implementations recommended in the book. Perhaps the book is targeted at an audience with much higher net worth than the average investor. Even if you believe the predictions, the actual implementations are much more elaborate than what the average investor cares about. According to Mr. Schiff, it’s not enough to buy foreign stocks through a mutual fund or ETF. You have to buy individually selected foreign stocks directly on the foreign stock exchanges. It’s not enough to buy gold or silver through an ETF like GLD or SLV. You’ve got to buy gold bullion, bags of silver coins minted before 1968, or gold certificates issued by Perth Mint in Australia. Of course you need Mr. Schiff’s firm for doing those!
Despite the bad timing and the overly elaborate implementations, the underlying theses presented in the book are not without merit. Whether they will turn out to be true or not is anybody’s guess. Maybe inflation will pick up again. Maybe in the long run the U.S. dollar will depreciate against foreign currencies. Maybe foreign equities will perform better than U.S. equities. Maybe commodities and commodity-producing companies will do better than the rest of the economy. Maybe. Maybe not. Mr. Schiff gave the reasons why he believe they will go that way. He explained his point of view very well. It is a point of view that I don’t want to dismiss out of hand. Others may have different beliefs and equally convincing arguments. I don’t know who will be right. That’s why I diversify between U.S. and international markets including emerging markets. That’s why I invest in Treasury Inflation Protected Securities (TIPS) and commodities.
Rating: ***. You will learn something although don’t bet the farm on it.
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[Update] Here’s a much more detailed rebuttal of what Peter Schiff said in this book, by Mike “Mish” Shedlock of Sitka Pacific: Peter Schiff Was Wrong.