Wednesday, November 19, 2008

The Patriot and The Restoration of Order

"Also, it is important not to confuse a desire not to go down with a sinking ship with patriotism. Such "patriots" who stand on the deck saluting the flag as the ship sinks will likely be of little assistance to other survivors left treading water. Only by attempting to position ourselves safely aboard sea-worthy lifeboats now will we be able to participate in any future rescue efforts. Protecting our wealth today should allow us to repatriate it tomorrow, thus enabling us to help rebuild a viable American economy."

"What nearly all politicians on both sides of the aisle fail to understand is that the current contraction and credit crunch is necessary to restore order to an economy that is horribly out of balance. Years of misguided fiscal and monetary policy and market-distorting regulations have resulted in reckless borrowing and spending on Main Street, pervasive gambling on Wall Street, and rampant fraud and corruption at every intersection. America’s borrow and spend economy, and the bloated service sector that evolved around it, must be allowed to topple, so that a more sustainable economy grounded in savings and production can rise in its place. Any government efforts to delay the adjustment and spare us the pain will backfire, turning this recession into an inflationary depression. Of broader concern however is the sharp turn in ideology, and what it means for the future of our nation. If this is a permanent shift, then America will lose any resemblance to the economic titan it was in the 20th Century. Our standard of living will decline sharply, our economy will be ravaged by inflation, tens of millions will be unemployed, more individual liberties will be surrendered, and rugged individualism will be supplanted by the nanny state. In short, Latin America may extend north to the Canadian border."

Peter Schiff, President Euro Pacific Capital, Author "Crash Proof" 11/17/08

His strategy:

His outlook:

U.S. Stocks

We believe that in general U.S. equities remain substantially over-valued, and that despite nominal new highs for some popular stock market averages, they remain in long-term secular bear markets when adjusted for inflation. As such we are bearish on the broad U.S. stock market, and only find value in certain carefully selected U.S. equities, generally those companies that are export oriented and/or commodities based, including mining and oil and gas.

U.S. Bonds

We believe that the U.S. bond market is in the process of forming a significant top, in what has been a major long-term bull market. Once completed, we expect bond prices to collapse. Given the highly unfavorable long-term risk reward situation, we recommend that investors maintain minimum exposure to any long-term debt instruments, be they treasury, municipal, or corporate. Those holding U.S. dollar denominated debt instruments should restrict ownership to only the highest quality, short-term maturities. Even those high income investors seeking tax-favored yields are cautioned that avoiding the inflation tax, which stealthily confiscates principal, is more important than avoiding taxes on mere income.

U.S. Residential Real Estate

If it looks like a bubble, walks like a bubble, and quacks like a bubble, it's a bubble. The combination of artificially low interest rates, foreign central bank intervention, an irresponsible Fed, excessive credit availability, the proliferation of low or no-down payment, adjustable-rate, interest-only, and negative-amortization mortgages, a can't-lose attitude among speculators, validated by ever rising "comps," the complete abandonment of lending standards, wide-spread corruption in the appraisal industry, rampant fraud among sub-prime lenders, and the moral hazards associated with loan originators re-selling loans to buyers of securitized products who perceive minimal risk and an implied government guarantee, has produced the "mother of all bubbles." When it finally bursts, it's not just real estate speculators and home owners who will suffer, but the entire U.S. economy, its banking and financial systems, and anyone with U.S. dollar denominated savings.

The U.S. Dollar

We believe the U.S. dollar is in a major long-term bear market, and as such recommend keeping exposure to the dollar at an absolute minimum. All long-term savings and investments should be denominated in select foreign currencies against which we believe the dollar is likely to fare the worst.


We believe that Gold is in the early stages of a new, secular bull market. Conservative investors are advised to have a portion of their savings allocated to physical bullion, while speculative investors are advised to own shares of carefully selected mining companies, both domestic and international.


Like gold, we believe that commodities in general are in the early stages of a new bull market, and that conservative and aggressive investors should seek out appropriate ways to gain exposure to this sector.

Foreign Stocks

We believe that unique opportunities exist in many carefully selected foreign equities, particularly those that have minimal exposure to the United States, and are in no way related to U.S consumers, financial services, or technology. Many foreign markets are counter-cyclical to the U.S., and have recently emerged from long-term bear markets. In many cases valuations are low, yields are high, and prospects for earnings growth are favorable.

Foreign Bonds

Given our bearish outlook for the dollar, bond investors should concentrate their holdings in instruments denominated in select foreign currencies. However, given our global outlook for higher interest rates and rising inflation, shorter maturities are preferable. However, given current U.S. tax law, we believe that those seeking conservative, income generating investments should concentrate on high dividend paying, carefully selected foreign property stocks, utilities, energy trusts, and natural resource based companies.

The U.S. Economy

We believe that the growing imbalances in the U.S. economy, its twin budget and current account deficits, its lack of domestic savings, and the erosion of its industrial base, have now reached a point where a severe recession, culminating in a substantial decline in the over-all American standard of living, is imminent. The Federal Reserve, Congress, and the President, for political expedience, are likely to continue seeking to delay this adjustment, unfortunately in ways which will exacerbate its severity, making the inevitable recession that much worse, and increasing the probability of a hyper-inflationary outcome, which would render the U.S. dollar, and all U.S. dollar denominated financial assets, practically worthless in terms of real purchasing power, potentially creating a situation of extreme financial, political, and social unrest.

The above forecasts are made with much regret, as we realize that they foretell significant hardships for millions of our fellow Americans. However, it is our mission to help spare as many of our countrymen as possible from suffering this fate. In fact, we feel that it is our patriotic duty to help as many Americans as possible to safely protect their wealth though the acquisition of foreign assets. It is only through such actions that at least some Americans will retain ownership of financial wealth which may be repatriated in the aftermath of the collapse.

We remain hopeful that dire economic conditions will at least create a climate in which America can finally return to her constitutional traditions of sound money and limited government, providing a foundation upon which a sounder economy can one day be rebuilt. If out of the ashes of this collapse, the spirits of our founding fathers can rise again, it may one day be possible for America to reclaim her former glory, and once again be that shining city of which Ronald Reagan so eloquently spoke.

In our opinion the U.S. economic ship of state is in danger of sinking. As the problems with her hull are structural, current efforts by government officials and central bankers to plug up the holes will make it difficult to keep her afloat. Though we remain hopeful that she may one day be returned to a sea-worthy condition, there is nothing collectively that we can do to alter her fate, or that of the millions of Americans ignorantly dancing the night away on her decks. However, individually we can take defensive action to protect ourselves and our families by getting off the ship. In our opinion the lifeboat of choice is a carefully selected portfolio of relatively conservative*, high-dividend paying, non-U.S. export dependent, foreign equities.
Such investments provide three potential sources of protection. 1. They pay good dividends, many of which qualify for the lower dividend tax currently in effect. 2. More importantly, as these dividends are paid in currencies other than the U.S. dollar, their value will rise as the dollar falls, as will the principal value of the underlying shares. 3. They provide the potential for true capital gains, as the shares themselves may appreciate in terms of their local currencies.


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