The Little Book of Bull Moves in Bear Markets
End of the road
By Steven Martinovich
It's probably coming as a relief to many people who have seen their investment portfolios or retirement plans take a battering in 2008 that, at least according to many experts, the second half of this year will likely see an economic recovery. For all the problems that the credit crunch, failing businesses, falling stocks and everything else caused us, as recessions go this wasn't one of those generational multi-year hammerings like the one we experienced during the late 1970s and early 1980s.
And if you believe that Peter D. Schiff has a bridge he'd like to sell you that's been financed with a subprime loan and denominated in U.S. currency. The reality, he argues in The Little Book of Bull Moves in Bear Markets: How to Keep Your Portfolio Up When the Market is Down, is that the worst is yet to come for the American economy. Painting an apocalyptic picture that is in some ways worse than the Great Depression, Schiff believes that the next decade or two for Americans will be extraordinarily painful thanks to interconnected problems that will all come into play at about the same time.
Schiff devotes the first third of his book describing just how nightmarish the American economy will really be. He argues that U.S. Federal Reserve policies have set the stage for what could potentially be a new Great Depression, one that sees rising inflation and a falling U.S. dollar shackled together, meaning that instead of the falling consumer prices of the 1930s, Americans will see the opposite. That means that the standard of living for all Americans will radically fall over the coming years – particularly given that credit will dry up. Since the American economy is primarily consumer-based and dependent on credit, large sectors will grind to a near halt.
Complicating matters is the fact that the U.S. government – who Schiff doesn't spare its share of opprobrium – faces a staggering $50 trillion in unfunded liabilities over the coming years from Social Security and other social programs. Much of the debt that America is saddled with now belongs to foreign nations like China, nations which will eventually decide it's in their best interests to cut the super power lose to fend for itself – particularly since the populations of these nations will begin buying their own goods rather than ship them off to the U.S. and subsidize them for American consumers. As they become more economically powerful, their buying power will increase and make life even more expensive for Americans.
A reader would be forgiven for being exhausted and terrified after Schiff's opening chapters – as well they should be. He does, however, have an answer: foreign investment in anything not dependent on the U.S. economy or denominated in U.S. dollars. Schiff argues that for a number of reasons commodities – particularly gold – and foreign stocks are good bets for Americans to hedge against inflation and preserve their wealth. Nations like China, India, Canada, Australia and New Zealand, among others, are prime spots for investment until the U.S. economy restructures itself – particularly by becoming a manufacturing and saving nation again – and becomes a buying opportunity once again. He also offers some advice that is valuable even during times of economic strength including paying down your variable rate debts as quickly as possible.
Laissez-faire conservatives will undoubtedly appreciate many of Schiff's arguments. He believes that the U.S. government has harmed the economy with its out of control spending. He urges free market reforms which include tax cuts and reduced spending. Unlikely to occur during the coming Obama presidency – which he addresses – is badly needed deregulation and an end to the massive government programs like Social Security. Given that a majority of Americans actually support the auto bailout, it's unlikely that Schiff's calls will actually be heeded.
So how successful is someone likely to be following Schiff's advice? Forgetting for the moment that Schiff was one of the few to predict the current economic mess – to the derision of many economists – much of what he proposes is reasonable. He urges a considered approach to investment strategy, clearly explains your options and why he believes foreign investment to be the best approach. Although commodities prices have currently collapsed with the global economic slowdown, it is hard to believe that as China and India continue to grow – shorn of the need to prop up the American economy – that they won't rise once again and to levels even higher than we saw during the past few years.
Figuring out trends is easy from hindsight – we can all see now that the U.S. economy has been tottering for years, if not decades, on the brink of a massive fall. The strength of The Little Book of Bull Moves in Bear Markets is, however, that it teaches the reader that all won't be lost if they go into the coming maelstrom prepared with knowledge and the willingness to act upon it. How successful Schiff's investment advice will be can only be judged from the future. He should be congratulated now on sounding the alarm that any recovery in 2009 will only be short-term and that the American economy faces an unprecedented challenge on recovering its long-term health. Until then, get ready to tighten that belt. A lot.
Steven Martinovich is a freelance writer in Sudbury, Ontario, Canada.
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