I’m answering followers’ questions I didn’t get to in my last interview on the Monica Perez Show.
Question:
In another econ/finance podcast (yes they are a dime a dozen), Jacob Dreizin says: “let me just tell you, there’s not gonna be any financial crash… The people who were listening to Peter Schiff in 2008/2009, where are they now? It’s been 15 years, where’s the crash? The government figured out in 2008/2009… they can keep bailing out everyone till kingdom come. It doesn’t matter what the debt is, there’s no limit. There’s no threshold at which it’s all gonna come crashing down… These people who think there’s $80 trillion of derivatives that are gonna come crashing down have no idea how derivatives work.”
Who’s right, Dreizin, or the people who think a financial crash is imminent?
Answer:
In 1959, Polish Economist Robert Triffin predicted that the post-war gold standard system, in which the US acts as banker to the world, would cannibalize itself. Just ten years later, the US was having serious problems maintaining the gold standard, and another two years after that, President Nixon was forced by economic/political reality to abandon gold altogether. History proved him right, but my priority is protecting and growing wealth. Was Triffin right in any way that would help investors do that? No, an investor who predicted a crash and sold their stocks in 1959 missed out on the 60s bull market and a 37 percent return.
EUROPAC Fund manager Peter Schiff started sounding the alarms on the housing market in 2006. There’s a – frankly awesome – video on YouTube called “Peter Schiff was right”, showing multiple television appearances in which he gives his thesis on the housing bubble and is laughed at by the talking heads on Fox Business and CNBC. In 2002, coming out of the crash of the dot-com bubble, he was predicting that stocks would actually go lower, that they were still overvalued. In August 2007 the massive financial bubble, collateralized by bad American and European mortgages, went into a tailspin. Peter Schiff was proven right. But was he right in a way that would’ve helped investors protect and grow their wealth?
In one of those television appearances – 2006 – he mentioned that his crash thesis had been the same for “7 or 8 years”. For half of that time, the stock market entered recovery and was making money for investors once again. Crucially, 18 years after that 2006 appearance, his thesis has not changed. Investors would’ve made money if they’d taken his advice to buy gold in 2006, as it’s gone up almost 300 percent since that summer. But what about investors who tuned into Schiff in 2011? Gold was flat for 12 years up to two months ago. What if investors who tried to short the US dollar since the first time he said it’s going to crash on TV in 2006? It’s up 21 percent since then. Most crucially, what if they’d taken the overall macro view – that US financial markets are doomed – to heart? They missed out on the biggest bull run in history. The Dow Jones index has risen 243 percent since Summer of 2006, far outpacing inflation.
I do believe that in the long run, people like Schiff are correct. The financial world is in the midst of a global experiment in unbacked, debt-based money. There are statistically significant debt levels beyond which countries have historically seen bad economic outcomes. Examples include Reinhart and Rogoff’s 90 percent threshold. But financial markets have seen many crises, and based on historical experience, the stupidest answer to this problem is to dump all financial assets and bet against the reserve currency. Based on historical experience, opening your portfolio to alternative assets, like precious metals and CTA funds, is enough to get investors through the bad times, without missing out on the good times.