Wednesday, June 10, 2009

Peter Schiff on The Daily Show, Context From Mish

Peter Schiff has been very correct in his predictions of economic and housing collapse over the last few years. Here is his appearance on The Daily Show with Jon Stewart:

The Daily Show With Jon Stewart Mon - Thurs 11p / 10c
Peter Schiff
Daily Show
Full Episodes
Political Humor Newt Gingrich Unedited Interview

Where Schiff may be wrong is in his expectation of hyperinflation. It’s true that the Government is flooding the market with dollars, but debt (also money) is being destroyed even more quickly (deflation, not inflation). This may change at some point down the road…perhaps when the bankruptcies end…but not in the next year or two.

This is an important argument to consider when looking at real estate as a hedge against inflation. If there were inflation, especially hyperinflation, then owning anything tangible, like real estate, is a good thing. Prices, in dollars, my rise, though no real wealth would be created because dollars would be worth less.

Consider Mish’s piece Peter Schiff Was Wrong

Hyperinflation or Hyperventilation?

Schiff asks "But what if it keeps falling? What if it's down 5% next week? And 5% the week after that? And then what if it drops 10%? ...."

That was quite some rant, enough to scare many who listened. Schiff is indeed very charismatic.

He never bothers to ask, "What if it doesn't?" The answer was not so pretty for his clients. The simple fact of the matter is Schiff was wrong where it mattered.

Schiff has been ranting about hyperinflation for years. The dollar is substantially higher now than it was at the start of 2005. His explanation for the recent rally is there is no "real demand" for dollars, it's just deleveraging.

I agree that deleveraging is indeed happening.

But why is deleveraging happening? The answer is everyone herded into anti-dollar plays based on decoupling and hyperinflation theories that did not pan out. Those trades are now being forcibly unwound. The bulk of the carnage is likely over but the losses have been immense.

Note that there has never been hyperinflation in history where real property declined in value. Therefore, if Schiff really believes in hyperinflation, he ought to be suggesting that his clients buy houses.

However, Schiff thinks housing prices will continue to crash. So do I. And if they do, you can kiss hyperinflation theories goodbye.

Peter Schiff was wrong about deflation.

There is no debate (at least there should not be a debate) that the US is in deflation. The conditions in the US are exactly what one would expect to see in deflation. The score is a perfect 15 out of 15. Please see Humpty Dumpty On Inflation for details.

I believe I know Schiff's rebuttal. He will talk about soaring money supply. Yes, money supply is indeed soaring, but destruction of bank balance sheets is happening faster.