I recently had the opportunity to hear Pistol Peter Schiff speak on the economy. His speech rehashed his major talking points over the past several years but it was fun seeing him in person. Here were some of his major points:
1. There is already substantial inflation that exists in most major developped economies. He believes that oil prices are the perfect example of this. The demand for oil is at a recent low while the supply has simultaneously reached a high but the price is still at $110 which has been entirely caused by his defintion of inflation ( the increase in the money supply). When pressed about why inflation hasn’t showed up in more tradional measures like the personal consumption expenditure index, he said that much of it has to do with the effect of subsitution. This means that if people were previously eating filet mignon, they might now be substituting towards a cheaper product like hamburger meat and thus PCE will not record inflation. He thinks that by the time measures like CPI, PCE start recording substantial inflation, that real inflation in the economy will already be out of control.
He also thinks that people aren’t more concerned about the inflationary impact of quantitative easing because the government created a good term from a marketting standpoint. He asserted that “Quantitative sounds smart and easing sounds pleasant”. He thinks if they called it what it actually is (debt monetization) people would be more concerned.
2. One conclusion from the inflation we are creating through low interest rates and quantitative easing is that interest rates are bound to rise. At that point he believes both the government and the banks will become insolvent. He says that the banks are borrowing money at practically zero interest rates and reinvesting in slighly higher yielding treasuries and mortgages. Once interest rates rise, the spread will turn negative and they will become insolvent. Concomitantly, the goverment will find it impossible to service the interest on their debt once interest rates rise.
3. He thinks that the dow and gold will converge to a 1:1 price ratio. He says this has already happened twice in history (in the 30’s and in the 80’s) and the economy wasn’t nearly as bad then. He didn’t want to speculate whether the prices will converage at the dow’s current price of 13,000 or gold’s 1,800 or somewhere in between. Other than his bullishness in commodities, he is much more bullish on emerging market stocks that pay a solid dividend. He thinks that the only thing that is worse than holding US dollars are US bonds (a promise to be paid US dollars in the future). He seems to be in agreement with Warren Buffet who recently wrote an op-ed on the toxic nature of US bonds.