Peter Schiff vs. Donald Luskin

Donald Luskin has posted a youtube video of a debate on CNBC between him and Peter Schiff, as well as comments from himself, Schiff and some of Luskin's readers. Both Luskin and Schiff can broadly be described as libertarians, but their view of the U.S. economy could hardly be more different.

Donald Luskin is one of the most bullish analysts around, while Peter Schiff is the by far most bearish analyst I know of. He is in fact so bearish that he makes me look like a bull in comparison!

The debate was somewhat pitted against Schiff. Not only did he have to argue against Luskin, but also against another guest called Jim Awad whom I hadn't heard of before and who also was bullish. Moreover, the two news anchors also argued the bullish case.

The big problem with the debate was that both sides used the invalid argument that if something has increased in price in the past they will do so in the future too. The 4 bulls tried to use the more of 20% increase in the S & P 500 the latest year as evidence for their case, while Schiff used the weaker development since 1999 and the stronger development in non-U.S. market. While strong price movements in some directions can sometimes be a indicator of a trend which may go on for a while more, it might also not be the last move in a trend. And from a fundamental point of view, stocks will be less worthy of a buy if they rise in price (and vice versa).

Peter Schiff was wrong to argue that the United States is a burden on the rest of the world, and that the rest of the world wouldn't suffer if the U.S. fell into a deep recession. Nevertheless, while expressed in a misleading way, this argument also contained the valid point that countries that today intervene in the currency markets by accumulating massive amounts of dollar assets would gain by ceasing to do so (see here my analysis of how much and why China would gain. This analysis also applies to other countries accumulating foreign exchange reserves), while the U.S. would lose if they did so.

Schiff is thus right that the sooner the rest of the world realize that it is isn't in their best interest to subsidize the U.S. economy through these interventions, the more bullish will the case for non-U.S. stocks be relative to U.S. stocks.

Donald Luskin's personal attack on Schiff for promoting himself and his book was hardly fair, especially since 1) There's nothing wrong with doing that 2) I have a hard time believing that he didn't hope to attract some people to his firm Trend Macro Analytics by sitting in a room with his firm's name clearly visible in the background. And he is just being childish when he publishes a reader letter criticizing a misspelling of a single word in Schiff's online follow-up letter.

Schiff (in the online follow-up letter) makes a good point with regards to the effects of the inability of people like Luskin to see the negative effects of Fed inflating on the U.S. economy:

"The main problem with guys like you is that you purport to advocate free market capitalism, yet you have little understanding of basic economic principles. As a result, when our phony economy comes crashing down the public will look to the left for solutions. It is a real shame as more government will only make our situation worse. The mindless cheerleading of phony conservatives like you has done more to hurt the causes of liberty, limited government and free market capitalism then anything from the left."

On the other hand, Luskin was the funnier of the two in the debate. Here is his explanation of why the stock market rallied on Monday:

"If you need any better explanation for why stocks were up so much today. Pick up a copy of the New York Times, go to the opinion pages, look at Paul Krugman's column - he's got this end-of-the-world column about how the subprime mess is going to drag the whole economy down. He even quotes Bill Gross saying the same thing. If there was ever a buy signal, we got it. You want to buy 'em with both hands here my friend."