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Peter Schiff’s Payback
Posted by: Lance on Monday, November 17, 2008

The insufferable Peter Schiff has a video going around, which frankly, is just brilliant. He may be unpleasant at times, but he nailed this thing, and took mounds of abuse while doing so. More importantly, I KNOW HOW HE FEELS!

The resentment, irritation, condescension and, at times, outright hostility to my Cassandra act makes me wish I had a video of my own. Sigh...

Oh well, it pays to remember that Cassandra was right. I was never as sure of myself as Peter, but risk management isn't about knowing you are right, but knowing what could go wrong and whether it wis likely enough to act upon.

As an aside, Peter is no big government type, and he goes to prove that despite the media focusing on Roubini and others (who do deserve a lot of credit) that people across the ideological perspective warned of this. Thus having seen this coming is not the same as being correct about what to do about it, since those who saw the oncoming train differ markedly on that score.

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Previous Comments to this Post 

Having been a long time Cassandra on this myself, at least on this issue I agree — I love the video. But what he was saying should have been obvious to everyone!
Written By: Scott Erb
Impressive that he saw it that clearly, that far out.
Written By: meagain
URL: http://
It’s amazing that this indivdual can be so right and no one, any of the so called "professionals", were able to see it. wow
Written By: Jason
URL: http://
and no one, any of the so called "professionals", were able to see it. wow
Not only did they not see it, they mocked him for having a contrarian viewpoint.
Written By: meagain
URL: http://
Having been a long time Cassandra on this myself, at least on this issue I agree. Yes, my vague pronouncements on "America in decline" were exactly the same as saying that the financial sector was going to collapse, and don’t let anyone tell you differently. And that stuff I said about how the solution was for America to be more like Europe, well, I’m standing by that. Even though Europe is in it as deep as we are, maybe even deeper with higher unemployment and lower growth, still, those Europeans are so darn smart and Bush was so darn dumb that we still ought to emulate them. And how more socialism is going to solve a problem like this is a complicated thing that you must have godlike powers of political science to understand.

I love the video. But what he was saying should have been obvious to everyone! It was certainly obvious to me, and don’t start about how I didn’t actually say the same things he said, just don’t start! I’m so smart these things are all obvious to me, just as I see (and you dense righties don’t) that Jimmy Carter is the greatest stateman of the last century and John Kerry is a stainless hero and the Swift Boat guys are liars, all fifty of them. Oh, and that Iraq is a miserable failure that will never be worth the cost, and don’t start up with how we spent more on a bailout in a month that we spent in five years in Iraq, just don’t start!

And don’t forget how I foresaw that the violence in Iraq is going to increase as the year goes on. That also should have been obvious to everyone, just as it was obvious to me. I mean, I know the year is almost over and all, but I’ve foreseen that the violence is going to increase, and I’m standing by that because we wise leftists can use our godlike post-modern powers of political science to make any set of data *look* like violence has increased, and therefore one of the multiple possible truths is that violence has, in fact, increased. See?

Written By: Ott Scerb
URL: http://ItsObviousImSoSmartButIStillCantGetMyBlogUrlToAppearHere.dolt/idiot/cluelessmoron
Thank God we sold our house, and bought our new house last year. Almost done paying off our credit cards too. An auto loan, and 2 m/c loans will paid off next year. Then it’s save up for a new car for my wife, chip away at our, and add equity to our house with some energy saving renovations.

Almost time to rebalance our 401K portfolios, but other then that, I’m not doing anything with stocks.
Written By: Keith_Indy
having seen this coming is not the same as being correct about what to do about it
No, but is implies an understanding of the problem, which is usually the foundation for devising a solution.
Written By: David Shaughnessy
URL: http://
But what he was saying should have been obvious to everyone!
I will differ with you a bit on that, though it is more a clarification. It should have been obvious to everyone that it was a strong possibility. That portfolios, policy and risk management should have taken account of the risks. Things always look obvious and mechanistically determined after the fact (whether Iraq, the economy, investments, etc.) but in reality the future is inherently uncertain.

So, though I have been making the same arguments as Schiff for a long time, I never thought that it had to happen, certainly in any particular manner. I just feel I was right that it had to be accounted for in the portfolios I construct, and in how policy and personal behavior are conducted. That it has played out so incredibly close to my "base case" has to have some luck to it, even if it seems even to me that it had to happen the way it did. Wisdom born of experience tells me that as obvious as it seems and seemed, it is never really that simple.

For those interested I am trying to get more active again, but my field has been extraordinarily demanding recently to say the least, and I expect to post a good bit more on this both here, and more on the investment side of it, at Risk and Return over the next few weeks.
Written By: Lance
No, but is implies an understanding of the problem, which is usually the foundation for devising a solution.

Obviously, and in Roubini’s case I listen to him closely, and respect his views even if I disagree with some of his prescriptions. That goes for some real heroes of mine, such as Jeremy Grantham. Barry Ritholtz, many Austrians, John Mauldin, James Montier, Andrew Smithers, John Hussman, Robert Shiller and many more saw many of these issues. None got it exactly right, but the root issues were pretty broadly recognized by a great many people. Unfortunately none of us made great guests at dinner parties, we tended to bring the mood down. Same with CNBC and the media, we were the "perma bears" to balance things, which meant about a 10-1 ratio.

I think some people who did not see this as being as big of an issue as it turned out to be have a lot of good things to say. Arnold Kling has conducted a clinic at his blog on how to skeptically analyze this, and is one of the people I would listen to closely on how to move things forward, and with trepidation. He in fact has a better grasp of the things which are really wrong with the housing market for example than Roubini, even though he didn’t see it as clearly ahead of time.
Written By: Lance

Actually, this isn’t a bad time to rebalance. We may not be at the bottom, but long term returns look good for the first time since the early ’90’s. I wouldn’t be aggressive here, I would develop exposure slowly to the market, as some really good opportunities may present themselves if things get ugly enough over the next year.

We are not hedged as we have been anymore, so while we have a lot in cash and alternatives, we are now exposed to the market for the first time in a while. Call me a cautious and careful bull who believes he needs to keep a lot of powder dry.
Written By: Lance
I really liked how he stuck to his guns even when being repeatedly mocked by his colleagues on the programs. He must be feeling pretty vindicated these days. As for the others on those programs, they might be hoping the video disappears down the memory hole.
Written By: jjmurphy
"but in reality the future is inherently uncertain."

That depends on what you are trying to predict and how confident you expect to be. Anyway, uncertainty does not relieve the ’experts’ of the responsibility of making predictions and being held accountable for them. That is why they get paid the big bucks. That is supposedly why the opinion of some MBA analyst at Bear Sterns or Merril Lynch is more valid than mine. If ’strong possibility’ is the best they can be expected to do, who needs them? Heck, even I know there is a ’strong possibility’ that a car company that is not selling cars will go bankrupt, with or without a few billion in ’loans’ from the taxpayer.
Written By: timactual
URL: http://
If ’strong possibility’ is the best they can be expected to do, who needs them?
Thank god for me and my clients they didn’t think that way. They would have gone for the false certainty of Wall Street rather than my warnings about what I thought was likely along with all the uncertainty around exactly how it would play out. They and I would be significantly worse off.

Look, investing, whether by investment banks, banks, builders or stock pickers is about probabilities. My own opinion was that this kind of thing was very probable, but even if it was unlikely the banks should have never risked their future on highly leveraged mortgage securities of dubious quality, in a real estate market that had appreciated that dramatically while employing tremendous levels of leverage themselves.

Not because it had to turn out this way, but because even if unlikely the downside was huge.

At our last investment conference in early February we were all debating how bad it was likely to get. I stopped the conversation by pointing out our behavior shouldn’t be dictated by a belief we had it all figured out:
When you are falling off the roof of a building debating whether the fall is going to be 30 or 60 floors is a little bit beside the point. The solution is the same either way, don’t fall off the roof!
That may not merit the big bucks in your mind, but personally it was one of the best pieces of advice I ever gave. These people were wrong, terribly wrong, not because they didn’t agree with Peter, but because they were unwilling to even look with an open mind at what it meant if he was right. That was true whether things turned out this badly or not. That is Wall Street though, filled more with people trying to figure out what will move investors and claiming the ability to predict the future than what is a wise course of action.

Still, I think the course of events was far more likely than they did. Strong possibilities and getting the risk reward ratio more right than wrong is the stuff that real investing is made of, not certainty. If it were not then nobody could do any better than anyone else, because the obvious would always be avoided or taken advantage of long before it became very dangerous or a great opportunity. The efficient market hypothesis would be true, when obviously it isn’t.
Written By: Lance
Chris over at A Second Hand Conjecture asks a good question that fits in with the discussion of being "right" :

Hasn’t Schiff lost a ton of money not recognizing that the problem was more than just a US financial problem and having his clients invest heavily in overseas stocks specifically asia?
My reply:

Yep, the same guy. I did say he was insufferable didn’t I? Of course, I think he is probably right that Asia is a more attractive place to invest long term, and that dollar based financial assets are in for some tough sledding. There is a lot that I do not agree with, and frankly I think he is likely overboard. While I didn’t address his arguments head on over at QandO, the comments section there will show ways that I disagree with him in his certainty about the right course of action at this point in time. As you know, I am not a fan of overweening certainty. Peter has that in spades and my guess is it will eventually bite him hard.

I will say that his clients have done better overall in the last few years, with much of his short term struggles due to the reversal in the decline of the dollar and his bet on gold. I would not bet against both bets moving in his favor over the long haul.

You are correct in saying that his major failing was not noting how international these problems are, and the international aspects of this I have been pressing strongly. In fact, though I suspect that international investments are priced for very attractive returns, the economic problems are likely to be worse in Europe and many other countries over the next year or two.
I think this goes to show that being right is obviously not sufficient. Peter nailed this, and still lost big money. People with a bit more humility (say myself) hedged and didn’t need to be "right." I ended up being right, in fact much more right than Peter if we go by investment returns.

Of course had I been sure that I was right then we would have made big money (as a select few who were way short financials and mortgage securities did) but the risks there were huge, as markets can stay irrational on the upside far longer than I or my clients could possibly stomach. Often for many years. Downward movements, especially irrational ones, tend to play out much more rapidly as this Fall has demonstrated.

Anyway, seeing a problem is far different than saying you see the whole picture accurately. It is way too complex for that, and humility should keep us from assuming we see every contingency. I always assume there are lots of factors that I am missing, some which may invalidate my outlook. Peters antagonists didn’t get that. Funny that Peter didn’t realize that there were factors derived from his thesis which would lead to large losses anyway. Tough business.
Written By: Lance
"Tough business."

Even tougher for us investors. Evidently the only certainty in the market is the certainty that we will pay commissions, management fees, etc., win or lose.
Written By: timactual
URL: http://
Randolph Duke: "Tell him the best part, Mortimer"

Mortimer Duke: "Regardless whether our client makes or loses money, we still get our commission!
Written By: looker
URL: http://

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