30 July 2008

When Dr. Doom speaks, we should listen

When CNBC or Fox needs a guest who can be counted on to deliver a thoroughly gloomy outlook for the U.S. economy, they call on "Dr. Doom."

To say Peter Schiff is bearish is like saying Tiger Woods is an okay golfer, or China has a small problem with air quality. The president of Connecticut-based Euro Pacific Capital Inc. is so pessimistic about the U.S. economy that he lives in a rented house and keeps the vast majority of his and his clients' money outside the country, a healthy chunk of it in gold and energy stocks.

"America is finished. We are going to destroy this country. Our economy is just going to unravel," he told me yesterday. "The question is how much money is the world going to lose before it writes us off?"

Apocalyptic forecasts are a dime a dozen these days, so why should anyone pay attention to Mr. Schiff? Because his past predictions have proved uncannily accurate.

When dot-com stocks with no earnings were shooting skyward in the late nineties, he was advising clients to stay away and instead putting money into the unloved energy sector, just in time for the great oil bull market.

A few years later, when the housing bubble was inflating, he was warning about the dangers of reckless mortgage lending and the precarious state of Fannie Mae and Freddie Mac. "If it looks like a bubble, walks like a bubble and quacks like a bubble, it's a bubble," he wrote. That was in 2004, when speculators were still lining up to buy investment properties in Las Vegas.

Ever the contrarian, Mr. Schiff made a bundle shorting the subprime mortgage sector.

So, one year into the credit crunch and with more than $400-billion (U.S.) of mortgage losses piling up on company books, where does Dr. Doom see the U.S. economy heading now?

Unfortunately, into an even deeper hole, one from which it could take years to emerge.

Far from rescuing the economy from the housing debacle, the government's efforts to prop up Fannie and Freddie - which own or guarantee nearly half of the $12-trillion in outstanding U.S. mortgage debt - will only compound the problem by delaying the inevitable day of reckoning. The same goes for plans to help hundreds of thousands of homeowners refinance into more affordable mortgages.

Apart from encouraging the very moral hazard that got the U.S. into this mess in the first place, the government bailout will come with an enormous price tag in the form of soaring inflation, Mr. Schiff argues. He believes government figures vastly understate the true rate of inflation, which he estimates is now running at 10 to 12 per cent. Before long, it could be north of 20 per cent.

"The government doesn't have the balls to raise taxes. It's going to print the money. It's going to destroy the currency," he says.

During the Depression of the 1930s, at least people who held cash made out okay. Because prices were falling, their money actually bought more. But if Mr. Schiff is right and the U.S. is heading into a period of hyperinflation, then even the most prudent savers will see their wealth eviscerated.

With the walls closing in on the U.S. economy, where is an investor to turn? Apart from gold and energy producers, which benefit from a plunging U.S. dollar, Mr. Schiff likes conservative, dividend-paying stocks such as pipelines and utilities. He's especially fond of Europe, Asia, Australia and Canada, where his holdings include Barrick Gold Corp., Goldcorp Inc., Crescent Point Energy Trust, Baytex Energy Trust and Pembina Pipeline Income Fund.

He has two words for Canadian investors thinking now is a good time to shop for bargain-priced U.S. stocks: "Stay away."

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