Disinfo Dissection: Shedlock vs. Schiff

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by Giordano Bruno
Neithercorp Press

This article comes from clusterstock.com, a very basic economic blog:

http://clusterstock.alleyinsider.com/

It has now been featured very prominently on several large websites, including Yahoo’s front page. The article is based on ANOTHER blog, by a man named Michael Shedlock. Shedlock owns and operates A FIRM WHICH COMPETES DIRECTLY WITH PETER SCHIFF’S COMPANY:

http://globaleconomicanalysis.blogspot.com/2009/01/peter-schiff-was-wrong.html

http://seekingalpha.com/author/michael-shedlock

In the past, the MSM has simply tried to marginalize Peter Schiff, laughing at his ideas and moving on before anyone has a chance to actually examine them. Lately however, they have reverted to unsubstantiated attacks. This leads me to believe that Schiff has broken through and his ideas are reaching far more people than Main Stream Economists would like.

In this disinfo dissection, Neithercorp will break down the following article as well as the Shedlock Blog, showing how they are propaganda, and why they are disingenuous. Enjoy………

Peter Schiff’s Clients Got Hosed This Year, Too
Posted Jan 26, 2009 11:43am EST by Joe Weisenthal in Investing, Media, Newsmakers

From ClusterStock.com, Jan. 26, 2009:

Sure his on-air sparring makes for some great TV. And his pointed criticism of the stimulus plan is spot on, especially at a time when people believe the answer to our pile of debt is to spend like crazy. But that doesn’t mean Peter Schiff has been an amazing steward of his clients’ cash.

Michael Shedlock punctures the Schiff aura, saying he’s heard from several clients who claim losses of 40%-70% after investing with EuroPacificCapital. How could this be? Hasn’t Schiff been bearish during a horrible year for US equities? Yes, but that negative on US equaties was just a part of his overall strategy.

Shedlock sums Schiff’s complete thesis:

* US Equity Markets Will Crash.
* US Dollar Will Go To Zero (Hyperinflation).
* Decoupling (The rest of the world would be immune to a US slowdown.
* Buy foreign equities and commodities and hold them with no exit strategy.

Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.

Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.

What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.

Bottom line: Not all doomsayers are going to make money in a bad investment. And you can be extremely sharp and insightful with your analysis, but it doesn’t mean your investment theses will pan out. In fact, there’s frequently a disconnect between people who call for doom and their actual results.

SOURCE: http://finance.yahoo.com/tech-ticker/article/163844/Peter-Schiff’s-Clients-Got-Hosed-This-Year-Too?tickers=%5Egspc,%5Edji

OK, lets begin by looking at the originator of this information; Michael Shedlock.

CONFLICT OF INTEREST:

Being that Michael Shedlock runs Sitka Pacific Capital Management, an investment firm which is in direct competition with Peter Schiff’s Euro Pacific Capital, the Blog he wrote and the article based on it are hardly without conflict of interest. Shedlock is playing a dirty game by manipulating information and skewing facts in order to place obstacles in the way of the “Schiff Economic Outlook”. Why? Because Shedlock’s company deals heavily in the U.S. Dollar, and specifically, Treasury Bonds. Schiff’s economic predictions are diametrically opposed to the Shedlock Investment Strategy. Therefore, the more prominent Peter Schiff becomes, the less clientele Michael Shedlock will get. Its quite simple, but lets move forward………..

http://www.sitkapacific.com/

FALSE ASSUMPTIONS

Shedlock makes many baseless or just plain false assumptions in his analysis. He continually acts as if the current collapse has somehow “played out”. That there is nothing more to see. His claim that “Peter Schiff was wrong” is presumptuous, because the collapse is far from over. How can Michael Shedlock or anyone else for that matter state with such unmitigated confidence that Schiff was “wrong” when the Economic Collapse has only just begun? This first idiotic assumption leads Shedlock to make several errors:

DECOUPLING

The first is his denial of a possible “decoupling” of the U.S. and China. Shedlock’s reason for this presumption is that China is so closely tied to the U.S. economy, that they cannot ‘survive’ without us. He states in his blog:

“Please consider US Manufacturing Orders at 60 Year Low, China Contracts 5th Straight Month.

* China’s manufacturing contracted for a fifth month.
* European Manufacturing Contracts At Fastest Pace On Record.
* Russian Manufacturing PMI Shrank the Most on Record.
* U.S. Manufacturing Shrinks as Orders Hit 60-Year Low.

That’s not decoupling, that’s a worldwide recession.”

Shedlock has it all backwards. The World Economy is falling in a unified fashion EXACTLY BECAUSE OF COUPLING. Globalism has tied the finances of all countries together, with the U.S. Dollar at the center of it. As the U.S. economy weakens, it drags everyone else down with it. This is what Peter Schiff has been warning of, and it is the reason why China WILL decouple with the U.S. within the next 2 years. China has already announced a program in which they will slowly be breaking away from the U.S. Dollar, and begin trading internationally using the Yuan, their own currency:

Central bank governor Zhou Xiaochuan was quoted by the South China Morning Post as saying: “The US dollar is unlikely to be stable next year and later.

“And the likelihood of the United States issuing more money in the near future adds to the depreciation risk in US-dollar-denominated assets and trade settlements.”

http://news.bbc.co.uk/1/hi/world/asia-pacific/7799541.stm

http://www.nakedcapitalism.com/2009/01/ny-times-china-cooling-on-us-debt.html

The bottom line is, America is one of the most indebted nations in the world. China by itself holds over $1 Trillion in U.S. debt, along with a currency reserve of almost $2 Trillion. As the Dollar goes into hyperinflation, China will be forced to sell off its Dollar reserves and demand a repayment of debts by the U.S. Treasury. The U.S. Treasury, already far in the red, will be unable to pay off such debts. Decoupling is unavoidable. The damage to China would be an acceptable sacrifice compared to the prospect of staying tied to the U.S. as it sinks into the ocean. You can see a more in-depth analysis of this situation here:

http://neithercorp.us/npress/?p=74

Of course, Shedlock doesn’t mention any of this in his Blog, because he is trying to promote the idea that China is in more trouble than we are. This is utterly false. What this collapse comes down to is DEBT. Who has it, and who owns it. China is not in debt. The U.S. is far into debt. The Yuan will become a much more viable currency, while the Dollar will disintegrate. Economically speaking, China is in a position to survive the coming collapse, which is more than I can say for the U.S.

HYPERINFLATION

Shedlock has this to say about Peter Schiff’s position on Hyperinflation:

“Schiff asks “But what if it keeps falling? What if it’s down 5% next week? And 5% the week after that? And then what if it drops 10%? ….”

That was quite some rant, enough to scare many who listened. Schiff is indeed very charismatic.

He never bothers to ask, “What if it doesn’t?” The answer was not so pretty for his clients. The simple fact of the matter is Schiff was wrong where it mattered.

Schiff has been ranting about hyperinflation for years. The dollar is substantially higher now than it was at the start of 2005. His explanation for the recent rally is there is no “real demand” for dollars, it’s just deleveraging.

I agree that deleveraging is indeed happening.

But why is deleveraging happening? The answer is everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out. Those trades are now being forcibly unwound. The bulk of the carnage is likely over but the losses have been immense.”

Shedlock is completely off the mark. “The dollar is substantially higher than it was at the start of 2005″? Against what? This is a complete falsehood.

The US dollar has now lost more than a third of its value (-35%) against a basket of major currencies since Feb 2002.

http://ftalphaville.ft.com/blog/2007/11/07/8713/the-dollars-slide-13-down-and-falling-faster/

Shedlock may be referencing the Dollar’s recent rise against the Euro, but this short term increase is nothing compared to what the dollar has lost over the past several years. He refuses to look at the long term trend, instead focusing only on the short term favorable positions that happen to pop up. So, what if the DOW is up 200 points tomorrow? In Shedlock’s fantasy world, does that mean the nearly 40% loss in market value the DOW has incurred over the past year ‘doesn’t count’? This is slapdash economics at its finest.

Next, he again makes the claim that Schiff was wrong about Hyperinflation, even though the Economic Collapse has barely begun. His entire premise anchors on the idea that things will stay exactly the same as they are now. This is complete ignorance.

He goes on to pronounce that deleveraging of the dollar has occurred because “everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out” are now jumping ship on their “bad bets”. He presents no basis for this theory. He also does not consider that this is a short term situation caused by the chaos of credit markets, especially in Europe. Again, Shedlock must assume that the current circumstances will stay exactly the same in order for his theories to work.

According to recent reports from Bloomberg, the Federal Reserve has pumped over $8.5 Trillion in bailouts into the economy. This money is printed from thin air. It nearly doubles the size of the National Debt, and it doesn’t even account for the “Financial Blackholes” known as Fannie Mae and Freddie Mac, which continue to leech taxpayer money as Mortgages continue to default at an alarming rate. In fact, U.S. Mortgage foreclosures increased by 81% in 2008:

http://biz.yahoo.com/ap/090115/foreclosure_rates.html

And now that the Federal Reserve has dropped interest rates to effectively zero, money creation will increase exponentially with every passing quarter. How can Hyperinflation NOT OCCUR!?

The absurdity continues:

“Schiff continually compares the US to Zimbabwe. Such comparisons are silly. Please consider Zimbabwe to launch 100 trillion dollar note. Does that sound like anything that is happening or is going to happen in the US? I think not.

However, let’s assume for a moment that hyperinflation is going to happen. Where then could one get the most bangs for their buck to take advantage? The answer to that question is in real estate, where one can buy on 5% down. Nowhere else can one easily get such leverage.

Note that there has never been hyperinflation in history where real property declined in value. Therefore, if Schiff really believes in hyperinflation, he ought to be suggesting that his clients buy houses.

However, Schiff thinks housing prices will continue to crash. So do I. And if they do, you can kiss hyperinflation theories goodbye.

This is a laughable premise by Shedlock. First off, Hyperinflation is unstoppable in an economy that continually prints money out of thin air to cover its debt. This is so simple a child could understand it, but apparently not Shedlock. He then tries to bring in Property Investment, as if it has any bearing on the mechanics of Inflation whatsoever. In a Hyperinflationary crisis, who has the money or opportunity to invest in property? Only the super rich, which I suppose, is the point. Next, he claims that if housing prices continue to decline, then there can be no Hyperinflation? Shedlock fails to realize that hyperinflation of the Dollar has nothing to do with the housing market. He makes the dubious connection based on God knows what. Also, property is not necessarily the best investment in a Crisis Climate. Gold, however, is, because you can take it with you wherever you go. Shedlock is like a naive child facing a reality he has no experience or comprehension of. As a result, his solutions will always fall short of practicality.

Shedlock then boasts that his clients have made substantial gains because his company invests in Treasuries while Schiff’s clients have lost money. Of course, short term gains are not evidence of long term prosperity. Treasuries will decrease in value as our currency inflates and other countries such as China are forced to pull out of the Dollar. It is inevitable. Two years from now I would love to compare the portfolios of Shedlock’s clients verses Schiff’s to see who came out on top. My bet is that Shedlock’s company won’t even exist in two years.

INFLATION VS. DEFLATION CONFUSION

A common misconception by Main Stream Economists is that deflation in markets is proof against inflation of currency. Shedlock makes this same mistake. The problem here is a lack of foresight. Shedlock’s own company guideline states that they do not commit to a “rigid position as to what the market “should do”, Sitka Pacific Capital Management tries to position itself for what the market is doing.” Meaning, Shedlock is not interested in the future, only the present. While a noble attempt to sound rational, this is not a wise foundation for an investor. Investment is about looking ahead. Often much further than just the next quarter. Shedlock is completely incapable of this, and he will lead his clients to ruin.

Inflation takes time. While certain markets, such as oil, deflate due to lack of demand, others remain in stasis. Go into any grocery store and see if prices have moved substantially downwards. You will find that prices have actually gone up in many cases, even though energy prices are down. Shedlock claims that Deflation is “not debatable”. As a consumer, I beg to differ. Wherever he seems to be finding deflation, it is having very little effect on actual retail prices, and in markets that DO have noticeable deflation, like oil, Shedlock will soon find that this is only temporary. Why? Because inflation has not kicked in yet! It takes a little less than a year for newly printed currency to circulate fully through the economic machine. Shedlock jumps the gun over an over again. Deflation in markets does not mean that Inflation of the Dollar is not occurring.

http://www.infoplease.com/ipa/A0001519.html

As a finale, Shedlock claims that he has “heard” from two clients of Peter Schiff’s investment company, Euro Pacific Capital. According to these two anonymous sources, Schiff has lost them a great deal of money. He then produces an alleged portfolio of one of these clients. I find this story hard to swallow. One, because I fail to see any reason why these two “clients” would be afraid to come out in the open and go on the record. What, are they afraid Peter will have them killed? It really makes very little sense.

Two, anyone who invests with Schiff should know that it will be for the long term. Investments in commodities and Foreign Currencies come to fruition AFTER inflation has kicked in, not before. Why would anyone invest with Schiff, then pull their money out just as the collapse was BEGINNING? Short term losses do not necessarily translate to a lack of long term gains. This is basic investment strategy, and Shedlock completely ignores it.

So lets be painfully clear, we are only at the onset of what will be the worst Financial Meltdown in history. Denying it will not make it go away, and will not protect your savings. Shedlock represents the many shortsighted and impotent investment strategists in this country. His views are completely illogical when applied to the greater picture, but as long as he only accepts facts that support his position and ignores all those that contradict it, he will fool himself and others into believing they stand on solid ground. Only after the collapse has moved into its middle phase (which should occur in the next 6 months) will he realize his folly. Certainly, some of Schiff’s clients may lose money, but will they lose everything like those who invest with Shedlock? Or those who have no plan at all? I suspect they will be in a much better position than the rest of us.

MORE ARTICLES AND VIDEOS FEATURING PETER SCHIFF:

http://www.neithercorp.us/nforum/geopolitics_economics_history/peter_schiff_on_the_coming_hyperinflationary_depression-t681.0.html

http://www.neithercorp.us/nforum/geopolitics_economics_history/peter_schiff_post_election_radio_show-t616.0.html

http://www.neithercorp.us/nforum/geopolitics_economics_history/peter_schiff_predicted_market_collapse_as_fox_news_correspondents_laughed-t578.0.html

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