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Expansion Continues

August 6, 2006
Prophet of Doom?

By Julie Fishman-Lapin
The Advocate

Peter 
SchiffIf you listen to Peter Schiff and you're a traditional investor with most of your allocations in U.S. stocks, bonds and real estate, you'd better have a life preserver handy.

"The United States' (economy) is like the Titanic and I am here with the lifeboat trying to get people to leave the ship," said Schiff, president of Darien-based Euro Pacific Capital, a brokerage firm that specializes in trading foreign equities.

Schiff is so bearish on the U.S. economy and its markets that he's in permanent hibernation. And when he talks investment strategy, he sounds like a man on a rescue mission.

"I see a real financial crisis coming for the United States,"Schiff said. "I am helping my clients protect themselves."

Schiff likes the Titanic metaphor. Everyone thought the ship could never sink, just like most people think the U.S. economy can't, he said. But people were wrong about the Titantic, and they are wrong about this country's economic stability, he said.

Schiff sees a mammoth iceberg ahead that's going to obliterate the U.S. dollar. The investors' lifeboat, he said, will be to put their money into non-dollar assets and foreign currency.

Besides being down on the dollar, Schiff said U.S. equities are substantially overvalued and bond prices are on the verge of collapse.

Whereof he speaks

Here's his take on real estate:
"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, widespread corruption in the appraisal industry, rampant fraud among sub-prime lenders and the moral hazards associated with loan originators reselling loans to buyers of securitized products who perceive minimal risk and an implied government guarantee, has produced the mother of all bubbles."

It's a mouthful. And Schiff practices what he preaches. He rents his Stamford home and doesn't own real estate.

Schiff isn't negative on all investment strategies. He's bullish on gold, oil, commodities and foreign currencies. He searches for stable, undervalued equities abroad that pay handsome dividends.

Dividends are key to investing in stocks, Schiff said.

"I look at it as old-fashioned investing -- real, absolute returns over the life of an investment," he said.
"The idea that stocks are going up and because of that you don't need a dividend, that is the con Wall Street has got everybody to believe," Schiff said.

Thirty years ago, when a broker called a client, the client would ask what the dividend yield was. Today, the first question a client has is, "What is the price?" he said.

They've got it backwards, Schiff said.

"Appreciation is the icing, the dividends are the cake," he said.

Dissing Greenspan

Schiff is not one to mince words. He calls it exactly the way he sees it. For example, he had a particular disdain for former Federal Reserve Chairman Alan Greenspan, whom he has likened to Pinocchio and Mister Magoo, the near-sighted, clumsy, billionaire cartoon character.

"During Greenspan's tenure, America was transformed from the world's largest creditor to its greatest debtor, from the world's mightiest industrial power to a second-rate service provider, and from a nation of responsible savers to one of reckless spenders," Schiff wrote in one of his frequent commentaries.

Whether people agree with him, Schiff's iconoclastic view of the economy is getting noticed, and he is being heard. He's a regular guest on CNBC, where he has been nicknamed "Dr. Doom."He is a frequent personality on Bloomberg television and is quoted by major publications. At 8 p.m. Wednesdays, Schiff hosts the live Internet radio show "Wall Street Unspun."

Nuclear option

Investors pay attention to Schiff, who often startles them with the strength of his opinions, though some feel his "sky is falling" theories are dead wrong.

His viewpoints are extreme compared with conventional thinking -- particularly in this investor-rich region of the country, said Deborah Weir, president of Wealth Strategies, a financial consulting firm in Greenwich.

"He will be like an atom bomb on Darien,"said Weir, past president of the Stamford Chartered Financial Analyst Society.

But no matter how radical the belief, it's healthy for investors to hear different investment philosophies, Weir said. "People have to be aware of points of view that are different than their own so they can test their own thesis."

Ronnie Braun, Connecticut chapter president of the American Association of Individual Investors, agreed.

"It is extremely important to have different voices . . . It is definitely a wake-up call. It forces you to think about things that you may not have though of before. That is how you learn, that's how you correct your mistakes, and that's how you become smarter," she said.

Schiff, who was born in New Haven but raised in Manhattan and Miami, returned to Connecticut two years ago from Newport Beach, Calif., to open his firm's East Coast office.

Today, Darien is where the company is headquartered. The company has offices in Newport Beach, Phoenix and Medford, Ore.

A former Lehman Brothers broker, Schiff, a graduate of University of California at Berkeley, launched Euro Pacific Capital 10 years ago when he acquired a broker-dealer in Florida that had no clients or revenues. Schiff reincorporated the business in California, and after close to a decade on the West Coast he moved the company to Connecticut in a quest to hire more like-minded brokers.

There are only a few brokers in the country who think like him, he said. The best way to find them was to go where the pool of brokers is biggest -- the Metro New York region.

Schiff remains in hiring mode, expanding the Newport Beach and Darien offices. Eventually, Schiff said, he plans to open a satellite Manhattan office, as well as an office somewhere in the Midwest.

Proof of the pudding

Skeptics of Schiff's opinions may want to look at his track record. He predicted $70 oil, when it was still trading below $30. And during the late 1990s, Schiff forecast a bubble burst. While investors were gorging themselves on dot-com and technology stocks, Schiff's warnings went mostly unheard.

"I was one of the few people out there trying to get people to get rid of Nasdaq and tech stocks," he said.

He blames Wall Street for the bubble burst. The Street's investment advisers and brokers were either not smart enough to foresee it or they didn't care because they were making a buck, he said.

"So either they were foolish or they were crooks," he said. "Now Wall Street is doing the same thing with the United States economy as a whole. We don't have a viable economy. We are like a dot-com."

A viable economy grows by saving and underconsumption, he said.

"In America, we've turned that on its heels," he said. "We are borrowing and we are consuming."

That means the rest of the world must produce for us and lend us their savings, he said, and for things to remain status quo, those countries will have to continue to do that without expecting to be repaid.

"I am not going to make the leap of faith that the world will do that," he said, adding that the repercussions will be severe for all Americans.

The exchange value will plunge and the dollar will lose the lion's share of its value, Schiff said. The country will be forced to get by on its domestic savings. But there are no domestic savings, he said, adding that consumers will pay bitterly.

"The whole economy is going to implode," he said. "We will be in a difficult transition back to viability."

"The fact that things get produced won't change. What will change is who will consume it. It won't be us. There will be a massive transfer of purchasing power away from the dollar," Schiff said.

Over there

Investing in foreign markets and other non-dollar assets will protect investors in the future. But the economy doesn't have to unravel to benefit from investing abroad now, he said.

The U.S. stock markets are grossly overvalued, Schiff said, and "when you look around the world, you have a better chance to find undervalued markets."

People who invest in foreign stocks have significant advantages, Schiff said.

* First, he said, true to his investing style, stocks will have a dividend yield typically from 6 percent to 15 percent. So that's an automatic gain.

* Second, there's the currency translation, he said. If the dollar declines, the investor benefits from currency appreciation. If that is combined with the stock going up, the returns are even better.

"The best returns are when the dollar is falling and stocks are rising," he said.

Over the past few years, Schiff said a typical account with his firm is up from 20 percent to 40 percent annually.
Weir said she has seen the investor appetite for overseas investing increase. Last winter, she spoke at an American Association of Individual Investors meeting in New York City and several people asked her whether it was time to think about foreign equities.

"People are concerned that the Fed might tighten too much and drive the country into a recession," she said.

Braun said while investors are increasingly looking abroad to diversify their portfolios, most opt to play it safe when they invest in other countries.

"It's hard enough to pick a good stock in the United States,"she said. "I think people feel more comfortable with foreign investments by doing them with mutual funds."

Schiff said he is conservative in his foreign stock picks and only invests in select countries.

"A lot of countries get ruled out right away because we don't want to jump out of the frying pan into the fire," he said.

Countries that make his list have mature markets, transparent earnings and good accounting rules. They also have sound currency, a more lenient regulatory environment than the United States and lower taxes.

Euro Pacific Capital focuses on Europe, Asian countries such as Hong Kong, Singapore and Japan, and resource-heavy countries such as Australia, New Zealand and Canada.

Forewarned, forearmed

Though many shrink from his gloom-filled warnings, not everyone is put off by Schiff's dark predictions.

"There are a lot of people who react to this in a positive way. And they become our clients," he said.

Schiff said he doesn't advertise or use cold-call techniques. His clients find him, he said.

"They are individual investors who are thinking more themselves. They are not buying Wall Street's standard pitch." he said.

He understands why people may shun his opinions, but Schiff said they really should open their ears and minds to what he has to say.

"There are some people who don't want to hear it. I am saying something that is negative. But I am not negative on everything. I am negative when negative is warranted. It's better to be forewarned than to be caught off guard."

Check the background of our investment professionals on FINRA’s BrokerCheck.

Investing in foreign securities involves risks, such as currency fluctuation, political risk, economic changes, and market risks. Precious metals and commodities in general are volatile, speculative, and high-risk investments. As with all investments, an investor should carefully consider his investment objectives and risk tolerance as well as any fees and/or expenses associated with such an investment before investing. International investing may not be suitable for all investors.

Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. The fluctuation of foreign currency exchange rates will impact your investment returns. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money.

Our investment strategies are based partially on Peter Schiff's personal economic forecasts which may not occur. His views are outside of the mainstream of current economic thought. Investors should carefully consider these facts before implementing our strategy.