...Debating for the Bears

11/04/2005 12:00 am EST

Focus:

Peter Schiff

CEO, Euro Pacific Capital, Inc.

Opposing Joe Battipaglia in our bull/bear debate, was Peter Schiff, chairman of Euro Pacific Capital. While some may find his extreme pessimism disturbing, it is valuable for all investors – bulls and bears, alike – to carefully consider and understand his assessment.

"We believe that US equities remain substantially over-valued, and that the major US stock indexes are in the early stages of long-term secular bear markets. As such we are bearish on the broad market, and only find value in certain carefully selected US equities, generally those companies which are export oriented and/or commodities based, including mining and oil and gas.

"We believe that the US bond market is in the process of forming a significant top, in what has been a major long-term bull market. Once completed, we expect bond prices to collapse. Given the highly unfavorable long-term risk reward situation, we recommend that investors maintain minimum exposure to any long-term debt instruments, be they treasury, municipal, or corporate.

"If it looks like a bubble, walks like a bubble, and quacks like a bubble, it's a bubble. The combination of artificially low interest rates, foreign central bank intervention, an irresponsible Fed, excessive credit availability, the proliferation of low or no-down payment, adjustable-rate, interest-only, and negative-amortization mortgages, a can't-lose attitude among speculators, validated by ever rising ‘comps’, the complete abandonment of lending standards, wide-spread corruption in the appraisal industry, and rampant fraud among sub-prime lenders has produced the ‘mother of all bubbles’. When it finally bursts, it's not just real estate speculators and home owners who will suffer, but the entire US economy, its banking and financial systems, and anyone with US dollar denominated savings.

"We believe the US dollar is in a major long-term bear market, and recommend keeping exposure to the dollar at an absolute minimum. All long-term savings and investments should be denominated in select foreign currencies against which we believe the dollar is likely to fair the worst. We believe that gold is in the early stages of a new, secular bull market. Conservative investors are advised to have a portion of their savings allocated to physical bullion, while speculative investors are advised to own shares of carefully selected mining companies, both domestic and international. Like gold, we believe that commodities in general are in the early stages of a new bull market, and that conservative and aggressive investors should seek out appropriate ways to gain exposure to this sector.

"We believe that the growing imbalances in the US economy, its twin budget and current account deficits, its lack of domestic savings, and the erosion of its industrial base, have now reached a point where a severe recession, culminating in a substantial decline in the over-all American standard of living, is imminent. Unfortunately as Americans there is nothing that we can do to alter the self-destructive economic course our nation is traveling, or mitigate the severity of the consequences once the finale destination is reached. Fortunately as investors however, there is much that we can do to lesson the hardship for ourselves, and even profit from the crisis.

"My advice is to move as much of wealth as possible out of harm's way, bys keeping exposure to US dollar denominate assets to an absolute minimum, as well as exposure to companies dependant on a continuation of America's excess consumption. It is also important to own conservative, high dividend paying foreign assets, which can deliver reliable income streams denominated in currencies other than the US dollar. My recommendations include internationally diversified holdings of utilities, property trusts, natural resource companies, oil and gas trusts, select value stocks, high quality foreign bonds, mining shares, and precious metals."

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