Title: The Little Book of Bull Moves in Bear Markets: How to Keep Your Portfolio Up When the Market Is Down Author: Peter D. Schiff Published: 2008 Length: 263 pages
With the current state of the financial system, I was looking for a book to make sense of it all. I had been reading about the decline of the dollar, the poor state of the financial sector, and the huge deficit the United States is running, and thinking that there were still some people out there who thought that things were going to get better in the very near future. Although I don’t have all that much in long-term savings yet, I was wondering how to keep what I had in there and what markets might be nice to invest in given the current state of the US economy. In the introduction, Schiff states: “The goal [of this book] is to help you preserve and enhance wealth that can be reinvested in America after fundamental economic reform takes place.”
The book was written in early to mid-2008 after Schiff’s book Crash Proof. That book accurately predicted what happened in the last year or so, even though various pundits scoffed at his work. I was excited to read something that contained timely information. One thing that Schiff did not talk about was a potential government bailout plan, although that is probably a subtext with inflation and other government manipulation. He does talk about the 2008 elections and how they might influence policy, and plugs Ron Paul because of his Austrian economic roots and the desire to return the gold standard. He correctly observed that the “smart money” was on Obama, and he indeed won.
Some of the ideas that Schiff presents are quite far out of the mainstream, but contrarian views seem like a good bet when no one else seems to be getting it right. He consistently paints a pessimistic view of the economy, but as he points out in the book, there are numerous entities that benefit from making the system appear rosier than it actually is.
Schiff recommends adjusting your current portfolio first by getting out of things backed by the dollar (cash and bonds) and staying out of US stocks for the next three to five years. One reason is that the market is weak and you are not getting much return after real inflation. He then talks about investing abroad in emerging countries and growing markets, and especially in commodities since they will keep value and possibly rise with the effects of strong growing economies in Brazil, Russia, India, and China. He also discusses finding a job that is stable, and states that all service-based jobs will likely suffer since people will have less money to pay for the services. He even makes the claim that health care costs will go up so much that people in the health care industry will see cutbacks. This was a significant thing that I did not expect. He also mentions emigrating to save money and avoid possible political turmoil, which seems like a bit of a stretch. But while reading the book, it seemed like a reasonable consideration based on what he was saying. If you do, Mandarin might be a helpful language to learn. Schiff also advocates investing in gold and silver.
I especially enjoyed Schiff’s discussion of the biases present in the various institutions that are associated with the economy. Wall Street has an incentive to make it seem like the market is doing well or has bottomed out so that people keep investing so that they get a share of their money. So they encourage people to invest even when they should not encourage them. A mutual fund manager’s priority is to maximize quarterly profits, but this is not the same as maximizing long-term profits.
One of the major points that Schiff hits on is the fact that the US government will likely erode the purchasing power of the dollar further by creating inflation. This seems all the more apparent after seeing the bailout plan, which is essentially an attempt to inject money directly into the financial system through the banks, and support them in other ways financially. This is in direct contrast to the relief checks that Americans got earlier in the year to attempt to increase consumer spending to give more liquidity to the system. Since the dollar is no longer linked to gold, the government can do this transparently. It is basically a tax on everyone that is not well understood, so they can get away with it with less political backlash.
The government has incentive to create inflation for political reasons (stimulate economy, prevent normal, but unpopular, downturns), and also for financial reasons. Government debt becomes more manageable when using inflationary dollars, you can force people into higher tax brackets, and you can finance entitlement programs without resorting to tax hikes. I liked that Schiff talked about how the government tries to focus discussion on taxes instead of inflation. “By focusing attention on a red herring, the government is deliberately diverting attention away from the real rate of inflation and its role in creating it.” The government has this power because they directly influence the money supply through the Federal Reserve.
The government also misrepresents inflation by using bogus indexes to make it appear that inflation is lower than it really is. Plus, the GDP itself is a pretty shaky figure. For example, the GDP goes up when a building is destroyed and then rebuilt, even though there was not a net value gain. It just represents spending. Schiff states: “Uncle Sam is using GDP growth as evidence that a weak, dangerously overextended economy is strong, healthy, and growing, and that Americans should therefore keep spending.”
So what’s Schiff’s bias? For one thing, he’s owns an investment bank that specializes in foreign investments and emerging markets. One thing that I saw that was interesting in his Wikipedia article is that his father has served many years in prison for being a tax protester. This might lead to some of his negative views on government.
There were many strategies presented in the book that I have neither the time, attention, money, or knowledge to perform. I could have safely skipped various parts of the book. Schiff even points out that managing certain assets is a little like day-trading. You can get rich, but it takes a lot of time to pick winners, and the downsides are also large at times.
Toward the end of the book, Schiff paints a rather apocalyptic picture of how the standard of living in the United States is going to go down. He recommends stockpiling goods before inflation gets worse so that you can barter with goods or at least consume them at less cost. Consider a package of cigarettes that goes from $3 to $4. If you purchase it and then consume it, you saved quite a bit of money. This would be a better rate of return than you would get with most investments.
One assumption that seems to be inaccurate (at least in the short term at the time of writing) is oil prices rising through the roof.
I will say that I disagree with Schiff on some points, and don’t fully understand others. But overall, I felt that he made a compelling case, and based on the information that I have, much of it seems to be pretty smart. At the least you can say that he is a realist, which should go far in a post-bubble economy. There was a lot of history, and for that alone this book was an informative read. I liked reading this book, but it’s not for everyone. You definitely need to have a filter on when reading, and there are some parts that aren’t really that relevant to the average investor.