The Little Book of Bull Moves in Bear Markets

02/01/2009 12:01 am EST

Focus: STOCKS

Peter Schiff

CEO, Euro Pacific Capital, Inc.

Warning: If you are looking for confirmation that the US stock market is just taking a pause, don't read this book! Often called Dr. Doom by the media—Peter Schiff will quickly disabuse you of that notion.

Schiff has written a no-holds-barred assessment of the cause of the global financial crisis, laying the blame solidly at the feet of the US, primarily the Federal Reserve. Saying that US economic policy makers have "lost their way", Schiff declares that the Fed's policies have been "counterintuitive and irresponsible, creating the credit crisis, destroying the value of the dollar, and fueling staggering price increases in food and energy".

He discusses why this current bear market is not merely a blip in a long-term bull, as many advisors are now saying. Instead, Schiff sees it as a decades-long bear market that will result in a different America—one that has higher inflation, steep interest rates, a weak dollar, rocketing commodity prices, and plummeting stocks, bonds, and real estate.

He supports his premise by taking the reader through historical bull and bear markets, defining the different variations of each, and explaining the mechanisms behind their cycles. He surmises that this current market is very different, and won't spring back like previous bear cycles.

Schiff offers his take on inflation, saying that it's much worse than we are told, because of the government's creative way of estimating the consumer and producer price indexes. In fact, he contends that real inflation is about double the number commonly published.

And he takes issue with the oft-voiced view that once the American consumer regains confidence and begins spending again, that all will be well. Instead, he holds the consumer—with much help from faulty government policies—responsible for a good portion of our current troubles.

I have to say that I agree, to some extent. We must share the blame for our reckless spending and avoidance of the warning signs of the escalating real estate prices, with their accompanying easy credit. And I don't think the fix will be that easy, either.

In his argument that the consumer will not save us, Schiff builds his case upon a major point—that the gradual transformation of the US from a manufacturing behemoth into a service-based economy was the beginning of the end. Now, those countries, particularly in the east, that have taken up our manufacturing slack, are ready to assume global leadership.

Schiff contends that our huge deficits, unfunded liabilities, and tough credit markets are just the beginning. Next, the bond bubble will pop and our tendency to print money is going to cause tremendous inflation.

As a remedy, Schiff advises investors to get out of US stocks and bonds right now. As an alternative, he recommends buying the shares of conservative, dividend-paying stocks that will benefit from their business in resource-rich countries. He particularly likes agricultural, natural resources and precious metals.
 
He devotes a couple of chapters to his strategy of top-down investing, giving examples of countries or regions that look attractive, then moving on to the various sectors he finds appealing. He also discusses emerging markets, but cautions that they aren't for the faint-hearted.

Schiff does make some allowances for a few American industries that may continue to benefit from their exposure to foreign countries, but warns that coming government policies may make it difficult to profit from them.

In conclusion, Schiff paints a bleak picture of what living in the US is going to be like for a few years, and gives a host of advice on 'living frugally'. He even goes so far as to encourage US citizens to "pack their bags" and move out of the US to the developed nations that he believes will have stronger economies over the next few decades, particularly resource-oriented locales, including Canada, Australia, and Norway.
 
Schiff's book may be seen as alarmist to a lot of folks. And while I can't agree with his overall bleak point of view, I think he has made some excellent points about inflation, consumerism, and credit that would be worthwhile for most readers. As well, I am a big believer in expanding investment portfolios overseas, and I think investors will find his research into certain regions of great interest.

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