Peter Schiff and Robert Prechter

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Peter Schiff and Robert Prechter

Quite an exchange: part 1 and 2

 

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Re: Peter Schiff and Robert Prechter

Investorzzo

Thanks for the post.  I've been waiting for a hot inflation/deflation debate like this for a long time.  Only problem is that both men were pretty passionate and kept interrupting each other.  

 

Brian

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Re: Peter Schiff and Robert Prechter

I've listen to the deflationist camp quite a bit and they make some good points. However, I just can't imaging that as this whole thing unfolds and either implodes or explodes that my dollars will be worth more. In fact I can't imagine the dollar playing much of a roll in the economy at all.

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Re: Peter Schiff and Robert Prechter

Johnny

i think that ultimately with peak oil, the dollars will lose their value.  This discussion made me really think that inflation versus deflation is very much  a political decision.  In my heart I still think that we are going to see inflation.   Prechter just believes that the Fed and the govt will ultimately decide to let deflation occur.  Remember that Mish is a deflationist as well and apparently in 2008, his clients did much better during the crash than Peter Schiff.   So these guys shouldn't be ignored.   So my wife and I are positioning ourselves to be protected from inflation and deflation.

Brian

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Re: Peter Schiff and Robert Prechter

I guess that is true. Who knows what backstage machinations could be going on.

As I've said before. Time will tell.

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Re: Peter Schiff and Robert Prechter

Two Beers with Steve podcast recently had Erik Townsend (remember him? Erik, Come back!) for a discussion on inflation/deflation/hyperinflation.  Erik had some interesting views that I hadn't heard elsewhere. 

Podcasts are available on iTunes, or here is link on Two Beers website:

http://traffic.libsyn.com/twobeerswithsteve/Episode_69_-_The_Argument_Ag...

 

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Re: Peter Schiff and Robert Prechter

I enjoyed this discussion.  I like Schiff a lot but I think Prechter is the better debater.  Schiff just comes off like a partisan host that talks over his guests.  It is just very hard to believe that USD could increase in value under the current conditions but Prechter makes an interesting argument ( here and in Conquer the Crash ) that keeps me thinking. 

I find that it is fear drives me to the hyperinflation / pro-PM camp but usually decisions made in fear are not the most wise.  Best to keep a level head....

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Re: Peter Schiff and Robert Prechter

 

It seems to me that the inflation/deflation debate (longer term) will be answered be answered by figuring out what happens when an economy/money supply that is large and sized for growth hits a shrinking energy supply that no longer supports having that amount of 'economy'.

To me, that sounds like big-time deflation as the endgame.

While we wait for the peak oil(etc)reality to hit, I think it is possible for government to perform unnatural acts that could spark inflation.

 

John

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Re: Peter Schiff and Robert Prechter

Wedgehead

the interview with Eric Townsend was one of the most interesting i've heard.  Eric believes, if I remember correctly, that we'll have 20-40% inflation but not hyperinflation. To me it seems to be a fine line between 20-40% and hyperinflation and can the Fed really split hairs that well.  And I don't believe that the US has quite the military hegemony he claims.  Sure we can cause a lot of trouble with our military might, but using it to guarantee the flow of oil from here forward is another story.  

Brian 

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Re: Peter Schiff and Robert Prechter

I for one really miss Eric & Davos not posting anymore. They added a lot of character to this site!

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Re: Peter Schiff and Robert Prechter

Ditto re Eric & Davos.  Hope they reappear soon.

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Re: Peter Schiff and Robert Prechter
idoctor wrote:

I for one really miss Eric & Davos not posting anymore. They added a lot of character to this site!

Agreed.  At least DIAP is back!

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Re: Peter Schiff and Robert Prechter

What a pity that Peter Schiff whose written commentary in the past has been impressive should let his ego outrun his ability to argue. Despite the sheer rudeness of the man in constantly talking over Robert Prechter and interrupting his argument at every opportunity, he was comprehensively outgunned by the steady logic of Prechter.

I have been following Prechter's argument for 10 years. It is not something that can be easily explained when you have someone lobbing "spoiling" grenades constantly rather than asking intelligent questions. Prechter was not allowed to explain his principle socionomic theory which lies behind his thought process. To be honest, it is not something that can be explained in a few minutes under a barrage of interruptions. However, Prechter's point about the bond market is absolutely correct. If inflation was taking off why has the the bond market not fallen in a deep hole? Schiff kept banging on about gold. Sure it has made a new high - the last commodity to do so - but what kind of high? As is so often pointed out as an argument for gold to go higher, it would need to reach $2400 to equal the high of the early 80s in inflation adjusted terms. It is high in terms of the Dow - 9 ounces buying the Dow rather than 40 but that is more suggestive of deflation rather than the opposite. Prechter described Schiffs arguments as linear projections. What he meant by that is that Schiff is arguing like the average economist in just projecting into the future what is happening now. These projections always become more "certain" and intense just prior to market turns. Prechter described Schiffs analysis of what the Fed is doing as akin to an experiment in physics. That is: a+b must equal c. Economics is not some electro mechanical machine. The economy is driven by humans and there are many unintended consequences of both central bank and political decisions. In particular, human beings do not always respond in "rational" ways or at least ways that bankers and politicians would deem rational. More than anything, this is because humans are driven by waves of optimism/risk tolerance followed by waves of pessimism/risk aversion. That is the case now. Bankers and politicians are humans (despite opinion to the contrary) and they are driven by the same basic emotions as the public at large. Right now, bankers do not want to lend and the public does not want to borrow. As a result, the line showing a rising money supply for 80 years has tipped over as Prechter pointed out. This is quite unprecedented. Schiff thinks that the Fed/government can change this. Prechter's argument is that you can lead a horse to water but you cant make him drink. The argument so far is on Prechter'e side. Nearly $2 trillion has not been able to turn the tide. I can't see another $900 billion succeeding. Maybe $30 trillion or $50 trillion could but I don't think even Helicopter Ben has the balls for that.

Towards the end of the "debate" Schiff got onto the notion of 1 ounce of gold buying the Dow which, ironically, was actually Prechter's forecast 10 years ago. Schiff then betrayed his one track thinking by asking where gold and the Dow would come together but, interestingly, suggested that it would be at 10,000 whereas Prechter suggested it would happen at multiple points. Of course Prechter would be thinking that the Dow and gold will track each other down to his forecast of a sub 1000 Dow. Prechter's analysis of gold is much deeper than Schiff's - Prechter has shown that gold tends to go up when equities go up. Think about it - gold has tracked equities for 80 years when it was allowed to. For most of those years the price was fixed until 1971 after which was the big catch up for gold. It appears to follow inflation because that is what we have had since 1913 but the same could be said of equities - that they are an inflation hedge. In fact they are not and neither is gold because, as Prechter pointed out, inflation is a monetary supply phenomenon. Rising prices are an effect not a cause. As he also pointed out, if there is inflation then it is universal because prices should rise more or less across the board. I expect equities to fall over the next few years simply because spending is going to have to fall with the high level of unemployment and the obvious belt tightening that is taking place.At the very least, I would expect the March 09 level to be tested. Perhaps gold will go to 6500 while the Dow falls to that level but that would be an  unprecedented divergence of the index and the gold price. It would be the most inconvenient store of value - a single coin worth 4-5 weeks wages. I find it much easier to imagine the price of everything coming down - wages, energy, food, housing etc - which means the relative value of the dollar or any other currency rising against goods and services. Whatever is the means of exchange ( I expect it to be paper - for sheer convenience) cash will be king. What is left in banks or is invested in many equities, corporate bonds, munis, or any type of commercial paper will just disappear like a puff of smoke. Destruction of wealth will continue unabated at a faster rate than any central bank or government can monetise. I'm sticking with the Prechter argument.

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Re: Peter Schiff and Robert Prechter

Timeandtide

That was an excellent analysis.  You should post more often.

Travlin 

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Re: Peter Schiff and Robert Prechter

Timeandtide

I appreciate your excellent explanation of Robert Prechter's views.  From a purely academic standpoint I am fascinated by the inflation/deflation debate, which  I  believe it is extraordinarily complicated.  Of course I still regard myself as a simpleton when it comes to economics.  I do have a couple of questions for you:

Have you heard of Gonzalo Lira?  Mr. Lira has his own website and has provided a summary of the hyperinflation experience in Chile in the early 1970s.  According to Lira, the price of equities dropped dramatically as inflation/hyperinflation was occurring.  At the same time the basic necessities, such as food and energy skyrocketed.  So Im not convinced that inflation will lead to subsequent rise in prices of all asset categories. 

Do you believe that a central bank can create inflation through government spending?    I believe the Prechter comment about mood shifts is true (ie lenders aren't in the mood to lend and borrowers aren't in the mood to borrow).  But what about government programs?  Funding through government programs occurs through grants, which do not have to be paid back... and in fact there usually is every incentive to spend every dollar granted.  this seems to be an alternative mechanism to get money flowing into the economy.    if the Fed and Treasury decided to push money through govt programs, would it be a much easier avenue to create inflation and counter the credit destruction?  If I remember correctly, Peter Schiff made this point.

thanks for your input

brian 

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Re: Peter Schiff and Robert Prechter

Thank you Brian for your kind comment.  I have heard of Gonzalo Lira having read his hyperinflation scenario a few
months ago.
In the first part of his analysis he notes that, at best, the Fed has only managed to alleviate deflation - that all the so
called "money printing" or "liquidity injections" have been overwhelmed by the credit contraction. That is to say the
money supply  is deflating faster than it is being created. Between September 2008 and June 2010, the total US credit
market outstanding declined by$296 billion despite a $2.46 trillion increase in the Fed's balance sheet. Added to this
are the huge losses made on the markets and in real estate worldwide by individuals. The same losses in real estate
have not been brought to to account by the biggest financial institutions due to the government sanctioned fiddling
with the accounting rules. I believe, though, that these losses are real and will be realised at some point. The effect is deflationary.

That is essentially Prechter's argument. However, I don't think he would agree that the actions of the Fed have
anything to do with the re-inflation of equity markets or commodities. He, in fact, called the March 09 bottom about a
week early having collected 800 S&P 500 points. He would simply argue that the mood has changed - people are
becoming more wary, tightening their belts, reviewing budgets, foregoing spending, paying off debt etc. This is
across the board - people do not want to spend as freely and bankers do not wanr to lend. Even China is throwing the
anchors out to slow things down. You can rationalise all these phenomena in a thoroughly economic way but it is
very hard to explain in economic terms why all the economic energy just comes to a halt. Bernanke and others talk
about restoring confidence - I would like them to explain why confidence came to a halt at the top of a soaring market
in October 07 or why confidence mustered itself despite universal cries of despair and pessimism at market bottoms in Sept 01, Oct 02 or March 09 for example. If there were a feedback loop whereby confidence engenders more confidence, which appears to be the Bernanke rationale, then a rising market would go up for ever and vice versa. The simple explanation for me is the best - that we humans are subject to tides of emotion. There are times when no matter how bad things are, people just get on with it and plough on through and keep on doing that until, like the road-runner, we are over the cliff. At other times they can only look a gift horse in the mouth. Just a few do, like what they see and so begin another fortune (I am thinking of Warren Buffett here in the mid 70s).

Getting back to the Gonzalo Lira scenario - I would not argue with him that we may well be in for a hyperinflationary period at some time in the future but I simply do not see how we can have both events at once. He does lay his finger on the great conundrum - why have the bond vigilantes remained so calm in the face of what would appear to be a time of heightened risk? Why do they sit back and let the US treasury issue more and more debt and take it on with, seemingly, scant concern that the low level of interest in any way gives them a return that is commensurate with the risk? This, surely, is the last and greatest bubble of all?

Before making an attempt to address those questions, I will return to Lira's contention that hyperinflation is a loss of faith in the currency. I am not sure that is quite right. Inflation is usually perceived as rising prices but the cause is the money supply inflating faster than production of goods and services.  In previous major hyperinflationary events (the US revolutionary war, the US Civil war, Germany after WWI,and more recently Yugoslavia and Zimbabwe the hyperinflation was firstly a monetary phenomenon where printing and distributionof paper notes was done on a massive scale before it became a confidence problem. In all of these events the money supply simply overwhelmed the supply of goods and services. That is simply not happening yet. Maybe it will happen but with the huge population of the US, tremendous physical resources of land and energy and a large capacity overhang, it is hard to see that happening. I think it would have to be in the aftermath of a world war or utterley destructive event like a major earthquake in California before the US would be placed in that situation.

So far it appears that the bond holders have no real fear of inflation either - whether that is because it is a bubble and disbelief has been suspended (as happens in all bubbles) or they are simply trapped in the sense that if they are large bond/Treasury holders like China or Japan, then they fear setting off an avalanche of sales.
I am sure there will be a run on the treasury/bond market at some stage and when there is I doubt that the Fed will stand in front of it for long. They are a bank after all and presumably intend to operate profitably. Their member banks are also obliged to pick up any losses that the Fed makes so the Too Big To Fail banks are really in the same cooking pot and their interests are not mutually exclusive.

However, the idea of the world changing in the space of a few hours because of a run on the Treasury/Bond market feeding in to a run on the commodities just does not ring true to me for very practical reasons. Sure, the hedge funds, and the Goldmans can buy up every commodity in site but to whom are they going to sell if they wish to realise a profit?  In addition, any huge rise in commodity prices would kill off any economic upturn. Any sustained rise in the price of equities will be because people are feeling perkier again and more willing to spend, borrow and employ people again. We have had 20 months of realively perky beviour which has driven equities up a Fibonacci 62%. Most newspapers, magazines and commentary reports that the GFC is over so optimism is peaking. I think we head into stormy turbulent waters again. Another reason for my scepticism about an upward commodity run is that most people are just not in a position to jump on the commodity market or in a position to hoard such essential goods like petrol or flour in any meaningful way. China is the only country that has demanded commodities and it has paid for them with surplus dollars but their run is coming to an end - there has been a great deal of poor investment and many investment decisions have been made for political reasons like keeping the masses employed and avoiding trouble between the city haves and the rural have nots.

If the Treasury/Bond market lurches and there is a big sell off that means the value of all bonds (corporate, municipal, junk etc) will fall in price so the total stock of money in existence will have fallen too. That is deflation. The point is that the value of the Trreasury/Bond market will fall faster than the holders can get out without losing value more than they may be prepared to accept. I am sure there are some wonderful game theory algorhythms to calculate the pros and cons of this and I am sure it has been done. No doubt there is a first mover advantage but probably only to the smaller holders. That, of course, is always where the action in markets really takes place - right on the edge amongst the small holders who have a greater incentive to try to offload because they probably can. On the other hand, the TBTF crowd have every incentive to keep the leaking galleon afloat. Size has its advantages but in the end like the dinosaurs the financial giants will most likely be unable to survive the darkness of a "nuclear winter" or depression which, I believe , we are heading into. The dinosaurs apparently were unable to survive the post meteorite darkness that wiped out much of the sustaining vegetation and the chain of life that it supports. In the same way, the institutiions and governments will not survive on a public that is increasingly unemployed and unable to spend even if it wanted to.
Perhaps there will be a hyperinflation in the future but not before the deflationary broom has swept the cupboard bare.

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Re: Peter Schiff and Robert Prechter

Thank you for your generous comment. I would if I could find the time but like many small business people I am caught up in the whirl of time and tide and find too much of one and not enough of the other!

I have posted again , though, in answer to Brian's question about what I thought of Gonzalo Lira's theories on hyperinflation.

By the way, most of my ideas are not really my own - I am very influenced by Bob Prechter and have been reading his monthly theorist for a decade or more. I was lucky enough to attend a lecture he gave at the London School of Economics about 5 years ago. He is just about the coolest, most rational and intelligent dude I have ever come across. He has a few wrinkles which I wont go into but his arguments are the most consistent and logical of anyone that I have read in the financial arena. I haver ead quite a bit of the Austrian economists and condensed versions of the 19th century economists - essentially I am self taught. I think there is more to learn from the 19th C thinkers than the present mob because thet saw things in human terms. Most of todays economists seem to know lots of algorhythms but nothing about human behaviour! Or else they have a political/idealistic like Paul Krugman. Most small business people have more economic nouse than any of todays high falutin economists.

All the best.

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Re: Peter Schiff and Robert Prechter

Great insight T&T. I would say one day the $500 trillion OTC derivatives market losses will also have to be counted for, leading the way to deflation as well. This amount is more money then even God can print! lol

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Re: Peter Schiff and Robert Prechter

Brian - I did not answer your second question as to whether the government programs/spending could create inflation. I think there is no doubt that they are creating inflation - the cost of education and health, in paticular, are soaring with no end in sight. I won't get into defence spending other than to say that US defence spending must benefit the employees and shareholders of defence contractors but the results of it are surely destructive in terms of the global economy. Some would argue that wrecking Iraq is good for the economy because Halliburton et al do well out of it. But that is like saying that natural disasters or walking down a street and breaking all the windows is good for the economy because someone has to fix things. This muddle headed thinking was pointed out by a french economist, whose name I can't thinkof right now, in the 19th C. The point, of course, is that economic resources are diverted to fixing something up when they could be better and more productively spent creating new capital.

Getting back to government programs to create inflation - governments/politicians are essentially reactive and pretty slow to react at the best of times. By the time they have the balls to do anything meaningful, the deflation will be over. This does present a risk of a huge inflation down the track but my guess is that the people will have revolted long before that and thrown the morons out (no doubt to be replaced by another bunch with similar ability to create unintended consequences). The US is not Zimbabwe or as shattered as Germany was after WWI. The idea of throwing money out of helicopters is to me less likely than the idea of someone throwing Ben Bernanke out of a helicopter.

ElliottWave show a graph of the money supply over the last 80 years or so. For the first time ever it has turned down. That is highly significant of the change in outlook. If money was handed out to people it would most likely be spent by the unemployed but the majority, the other 80-90% would either use it to pay off debt or hoard it. The government has, in a sense, been trying to hand out money by way of mortgage relief but very few people have been able to avail themselves of the programs because they are so hedged with conditions that hardly anyone can qualify. This speaks volumes about the real intentions of government ( generally do do nothing because of fear that they will be upsetting half the population but to appear to be doing a lot) and things will only get worse as political parties around the world become more polarised (another Prechter prediction).

What is needed is a sober realisation that the deflation horse has bolted because growth could never be maintained at the rate it has been over the last 3 decades. All growth is exponential. Divide any growth percent rate into 70 to give you the doubling time (eg 10%  into 70 gives a 10 year doubling rate). Equities were averaging 14% + for 20 years which is way ahead of a natural and sustainable rate. No one seems to ask how financial wealth could be increasing at such a rate when GDP was only increasing at perhaps 3-4%. It happened because money was being created out of thin air to finance expansion at a rate far in excess of savings. It was though to be a virtuous circle - the new economic paradigm. A central banker will believe anything that makes him look good.
Capital is created from your "seedcorn", which is your savings. The world has deluded itself that it can be created out of thin air and so by the early 90s most of the banking safeguards that were put in place during the 30s had been dismantled. We must now pay for that delusion. Unfortunately, the delusion still holds sway and we would rather believe that we can be saved by borrowing more than knuckling down and taking our medicine. Actually, I think most people are already doing that - which is why credit is contracting and people are saving again. Not the politicians, though. As usual, they are the last to understand and they would rather believe that they can have their cake and eat it. So there will be more bread and circuses until it just runs out or there is revolution.

So instead, we get more empty promises and a financial elite who are cynical and greedy enough to exploit the credulity of politicians on the one hand and the passivity of the people on the other. It cannot last and will most likely end in violence and tears.

Where are the savings to come from? The majority of the wealth is in very few hands. It probably ought to be taxed but there is no chance of that now that the republicans control the house. Anyway, taxing that wealth only places it in the hands of politicians/civil servants who have not proven themselves to be able handlers of money. The Norwegians have done well with their wealth fund but they are the exception. The problem is that so much of the world's wealth is just not being invested in real things but in schemes and there is no shortage of schemers in the financial capitals of the world. All of these schemes ultimately depend on the implicit guarantees that governments have given over many years that they (i.e. the taxpayers which really means the working Joes and Joans) will support the major financial institutions.  It works until it doesn't. I believe we are within half a decade of the doesn't stage.

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Re: Peter Schiff and Robert Prechter

I have to admit I am very new to the inflation/deflation debate. I've followed the 'linear' argument that what is happening now must (Of course! Duh!) be able to be projected indefinitely into the future. At the very least, I now understand the inherent failure of that line of thinking.

 

That being said, a question. I've understood the idea of getting into 'tangible' investments to escape would could be a 'collapsing' dollar. However, a deflating dollar sounds like a different ball game. If any of you could do me the favor, what's a basic investment plan for overall deflation actually look like?

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Re: Peter Schiff and Robert Prechter

[deleted for sake of a new forumer's double-post]

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Bob Prechter and deflation

time and tide

thanks again for your responses.  I find your arguments compelling and I think you're (Prechter) right about the human/societal emotion and mood and its impact on the economic cycle.   Maybe you should summarize or combine your posts and make it a forum topic for the community to read.  

btw - what do you think the impact of peak oil will be on deflation/inflation?  I assume you are familiar with Nicole Foss.  are you in agreement with her assessment?  Also what are your thoughts on precious metals?  finally, if we expect more deflation, I believe we can expect more bank failures.  does this mean that the small banks will be allowed to fail and the TBTF banks will be bailed out again.  If cash is king (at leas for the time being), where is the safest place to hold it.  in a small bank? or a TBTF bank? in treasuries? or cash under the mattress?

thanks again

Brian

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