Tuesday, May 26, 2009

Short & Long-Term Investing, Peter Schiff & Don Luskin.

Don Luskin quotes, shall we say selectively, from a Times article about his arch-enemy, Peter Schiff. Here is the part that Luskin quoted:

"...[Peter] Schiff's TV bookings are down 75% to 85%, says his younger brother Andrew, who handles p.r. for him. About the only things written about him lately have been negative--the result of financial blogger Michael (Mish) Shedlock's pointing out that Schiff's investment recommendations were money losers in 2008. How could a bear have managed to lose money last year?"

Here are the sentences that followed, that Luskin for some reason ignored:

"Schiff was blindsided when global investors piled into dollars and U.S. government bonds during last fall's panic. But that rush to safety has already abated, and over longer periods, Schiff's decade-old strategy of steering clients out of U.S. securities and into commodities and overseas stocks has been a big winner. His investment record surely can't be the reason for his fall from media grace."

Would anyone interested in being honest and sincere to his readers really have viewed these following sentences as being irrelevant? I think not, confirming again that Luskin is nothing but a con artist.

Schiff was wrong to assume that global stock markets would decouple from the U.S. stock market during the crash. Instead, as always before, other stock markets followed the U.S. stock market when it crashed. Indeed, most of them fell even more than the U.S. stock market. Many investors treat non-U.S. stock markets as high beta assets, meaning that during rallies they will rally more and during crashes they will crash more. So, when the U.S. stock market crashed, most other stock markets crashed even more.

But while his "divest from America" strategy for above mentioned technical reasons proved to be a loss making strategy during 2008 because it ignored these technical factors, it has in fact been a winning strategy during a longer period of time. Because while a high beta asset will fall in value more than other assets during bear markets, they will also rise more in value during bull markets. So, ironically, Schiff's investment strategy was a winner as long as his macroeconomic forecasts were wrong, but it was a loser when his macroeconomic forecasts were right. The reason for that is again that Schiff overlooked technical factors.

The reason why Schiff's strategy over longer periods of time has been better is that market valuations outside the U.S. have been lower.

So while Schiff was wrong about short term market timing (something he never claimed to master anyway) and the short term relationship between U.S. and foreign stock markets, he was nevertheless right about the right long term strategy and about the current economic bust. Which is more than you can say about Don Luskin, who as late as September 14,2008 (the day before the Lehman collapse) dismissed all talks of a recession and recommended buying stocks "with both hands" when the S&P 500 was trading at 1500.

[Note: the editor of this video clip has inserted assertions that it was recorded in June 2008, when in fact it was made in early July 2007, which is even worse for Luskin]


Blogger Sean said...

To my understanding, Mr. Schiff's decoupling thesis has always been a medium-term prediction. Its centerpiece is the eventual recognition by America's largest creditors that America "is broke", as Mr. Schiff describes it, and is incapable of making good on its debts, present and future.

When this eventuality is supposed to occur is not specified, however it seems to turn on the fate of the dollar. To my understanding, Mr. Schiff expects the dollar to be destroyed, and its destruction to be the moment of decoupling.

According to the thesis, once the dollar crashes, America's creditors will suffer as they are now forced to absorb the losses of the bad loans made to America. At the same time - or once the losses have been absorbed - the creditors will change their economies away from exports.

This is the mechanism and timing of the decoupling, according to my understanding of Mr. Schiff's thesis.

Again, in short, the thesis appears to be a medium-term prediction.

5:20 AM  

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