That's my current pick as well. OXR.AX
Barron's: When did you turn bearish on the U.S.?
Schiff: A long time ago I worked as a retail broker at Shearson Lehman Brothers and I was selling tech stocks, and I was generally bullish. I had difficulties with some of the problems in our economy, but I was recommending U.S. stocks. I left Lehman in 1991. In the mid-1990s, when I was working for a small broker-dealer in California and then for my own firm, I started getting concerned about the dollar. So I began getting some clients invested in some foreign stocks -- just to get out of the dollar a bit. The dollar had a big drop, and then it started to rally in the late-1990s, in conjunction with the tech bubble. It was all part of foreigners' efforts to try to participate in the Nasdaq's bubble.
What kinds of stocks did you like in those days?
Traditional value stocks with dividend yields. I also liked commodities, so I was buying international oil stocks back when oil was under $20 a barrel. The stocks I recommended weren't doing very well in '98 or '99, especially after the Asian crisis, but they started doing better around 2000. I turned really, really bearish on the U.S. when I saw what the Federal Reserve was doing to prevent a recession in the early part of this decade, notably pumping a lot of liquidity into the system.
You continue to be very bearish on the U.S. But haven't there been other times when there was lots of negative sentiment toward the U.S., only to see another era of prosperity emerge? Such as the late 1980s, when there was concern that Japan would take over the U.S. economy. Look at how that turned out.
Yes, but we haven't been through anything like what we are going through now. The United States has really been living in a fool's paradise, or a phony economy, probably for more than 20 years. But our economy has been growing and getting bigger and bigger. We have been able to convince the world to lend us money and to provide us with goods that we don't produce and that we can't afford to pay for with exports. And it has gotten to the point now where the problem is so big, especially since the real-estate bubble. We've now borrowed so much money from abroad. Our trade deficits are now very big, and our industrial base and our infrastructure have been allowed to decay for so long, that we are now at a point that we can only survive as an economy thanks to the charity of the rest of the world. They have provided us with all the goods that we can no longer produce because we lack the industrial capacity. And they have to lend us the money because we don't have any savings anymore.
What's your take on oil prices?
As oil prices are going up in the U.S., they are not rising nearly as fast in other countries because their currencies are strengthening. Ultimately, when currencies like the renminbi that are pegged to the dollar are allowed to float, I see the Chinese currency rising five-fold against the dollar. That would make oil a lot cheaper in China relative to what it would cost in the U.S.
Speaking of China, how do you see things developing there and its impact on the U.S. economy?
The whole science of economics, as I see it, is how do you satisfy unlimited demand with limited resources? China has more than one billion people. It is not as if Americans are unique in wanting things. It's not as if the Chinese don't want dishwashers. The reason they don't have those possessions is because they don't have the purchasing power. But they do have that power; it's just that their government is taking it away from them and giving it to us. But it is Americans who can't afford these goods, because we can't produce them. So if the renminbi is allowed to rise, then Chinese factory workers will be able to afford the products they are producing instead of shipping them over here. That's going to be a major, major boon for their economy.
So it sounds as if the U.S. will be relegated to second- or third-tier status.
The U.S. is in trouble. We are a post-industrial society, which is the same as a pre-industrial society; our manufacturing base has disintegrated. It's not nonexistent; we still make some things and we are still competitive in some areas. But on the whole, as a nation we are not competitive. We are mainly a nation of a service sector and consumers, and that's going to have to change. Nor do we have the savings that we need to fund the transition.
What could go wrong with your scenario?
Somehow, the U.S. could buy itself some additional time. We could convince the world -- Europe and Asia -- that they need us, and that while propping up the U.S. economy is going to hurt them with more inflation, letting the U.S. collapse is going to be even worse. Of course, none of that is true. The truth, in my view, is that the cost of propping us up far exceeds the cost of letting the U.S. economy collapse. But I think we are already in a pretty severe recession.
But isn't there an argument that once we clean up this housing mess -- along with the credit bubble, whenever that occurs -- the U.S. will be a lot closer to a bottom, where the outlook begins to improve?
I don't think that's true. The resolution to the housing problem is going to mean housing prices are going to be a lot lower than they are now, and most Americans are not going to have any home equity. It's going to mean that trillions of dollars will have been lost by the lenders. When the home equity is gone, Americans are broke, as they don't have any savings. All they had was their home equity. They were counting on their home equity, without which they will be unable to pay off their credit cards.
But don't U.S. companies that do business abroad benefit from all of the trends you have outlined?
Yes, they are going to benefit to the extent that they can generate higher sales abroad. But ultimately the shareholders are not necessarily benefiting just because a multinational company earns more dollars. If the dollars have less purchasing power, they are not necessarily better off. The way I see it, we are just putting our goods on sale to sell more of those goods. But if you want to look at U.S. corporate earnings in terms of euros, barrels of oil or gold bullion, these companies are not necessarily seeing a real increase in earnings.
Plenty of investors and financial advisers have decreased their allocations to U.S. stocks in recent years. Why not do that instead of completely writing off the world's largest economy?
Individuals can make their own decisions. I don't see a way for the U.S. economy to avoid a major retrenchment. There's no way that U.S. assets are not going to be marked down relative to foreign assets. Therefore, I would rather invest in the rest of the world. There are plenty of people who for the whole decade of the 1990s were investing everywhere but Japan, which is the second biggest economy in the world. Why were they excluding Japan? It was obvious that it was in decline. I'm saying the same thing about the United States. I don't care if it is the biggest economy in the world; it is in decline. There are going to be a lot of losses in the United States, so why don't I avoid it? Worst-case scenario: I miss out on the U.S. market. But what are the odds that it is going to outperform all the other major markets that I am investing in? And I can't see how the dollar is going to be moving up over time.
Why keep your business open here? Why not set up shop in Asia?
Right now my business is helping Americans to preserve their wealth from a collapse of the U.S. dollar. If I were to go to a different country, obviously I would have to come up with a different business. I don't think people in China need to protect their wealth; they are going to do great. My business works better here. I could try to run the business from overseas, say the Cayman Islands or Australia, but I have friends and family here. I'm optimistic.
I've supported political candidates in the U.S., including Ron Paul, who ran for the Republican presidential nomination this year. I'm not writing America off. But I'm trying to educate people so that they understand that when this economy does collapse, it is not because of capitalism but that it's because of too much government.
What kinds of stocks do you look for?
The dividend is the most overlooked and important component of equity investing. Capital appreciation is great, but that's the icing; the cake is the dividend yield. I look for good dividend yields, but I want to get them in currencies that are gaining in value so that my clients can maintain their purchasing power here. These companies are playing into the growing purchasing power of the rest of the world -- not the shrinking purchasing power of the United States. The rest of the world has been selling us goods and hoarding our Treasuries and mortgage-backed securities. They are not going to be doing that anymore. They are going to spend their earnings on themselves.
How about a few stocks that you like?
One of the mining stocks that I have been buying, although it has pulled back a lot, is Oxiana [ticker: OXR.Australia]. Oxiana and Ziniflex, another Australian mining company, just merged. Another holding is an infrastructure play called Road King Infrastructure [1098.Hong Kong], which is listed in Hong Kong. It's also pulled back quite a bit. I also like Singapore Petroleum [SPC.Singapore]. Those are three names I've have been buying recently. One is a play on the growing infrastructure in China, while the other two are ways to invest in resources. A lot of people look at me and say, "Peter you are gloom and doom." I'm not gloom and doom.
Well, you are pretty gloomy on investing in the U.S.
I'm very negative on the U.S. economy. But I'm very optimistic on a lot of other economies. A lot of people tell me, 'Peter, this doesn't make any sense. How can you be so dire and gloomy on the U.S. and yet so positive on the rest of the world?' That shows you I'm not just gloom and doom. I recognize that contrary to popular opinion, the U.S. economy has been a drag on the global economy, and that when the rest of the world stops subsidizing us, growth abroad will actually improve as a result.
Surely you see some light at the end of the tunnel for the U.S.?
It is a long tunnel and the light is far away. But, yes, in the end I'm still optimistic that we can one day dig ourselves out of this hole. Look at the Germans and Japanese. They lost World War II, but here they are. We didn't lose a war, but in many respects we did in that our factories have been destroyed even though they weren't bombed.
What's a reasonable plan for the U.S. to right the economic ship?
We are going to have to replenish our savings. We are going to have to rebuild our industry. We are going to have to repair our infrastructure. All of that is possible, though it's not easy. It's going to be very difficult given the current level of government we have, along with the types of taxation and regulations we have. To really rebuild the economy, we are going to need cooperation from government and the government is going to have to get out of the way and make itself a much smaller burden on society, which means major reductions in government spending, taxes and regulations.
Thanks, Peter.
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