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March 09, 2007

Three Bears, No Goldilocks - Part II - Crash Proof
by M.A. Nystrom

The first bear that showed up in my mailbox last month was Michael Panzner, with his book Financial Armageddon. (You can read my review of his work here.) Within days of that bear's arrival came another: Peter Schiff and his new book Crash Proof.

Everyone always says don't judge a book by its cover, but it is impossible not to. After finishing Panzner's truly disturbing vision of the future, the cover of Peter Schiff's Crash Proof looks positively glib. It shows a little pink piggy bank safely sheltered from stormy skies by its own personal (pigsonal?) umbrella. How cute. And then there is the cliché'd subtitle: "How to profit from the coming economic collapse." Oh, brother. Honestly, I didn't have high hopes, and as a result I was quite pleasantly surprised. Perhaps this will be the key to surviving the upcoming hard times: Low expectations.

Schiff pulls no punches in unmasking the rosy statistics that the government and its corporate media accomplices foist upon an unsuspecting and gullible public. The US economy is a paper tiger, and Schiff wastes no time getting straight to work with the shredder. "America.com" as he calls us, referencing the hundreds of dot.com companies that burned brilliantly until they burned out completely for lack of substance, has some mistaken ideas about the true nature of wealth and how it is created. Real wealth, Schiff reminds us, comes the old fashioned way - from saving, investment and production. In its salad days, America became a global manufacturing giant through hard work, and by investing the nation's abundant savings back into production. The salad days are gone, as America has gone from a nation of savers, investors and producers to a nation of borrowers, gamblers and consumers.

Copiously peppered with charts that depict the stark reality of America's economic decline, Schiff shows what many reading this site and others like it already know (and he doesn't mince words). America is on a slippery one-way slope, a fact that our government is trying desperately to hide (p.25):

A little dissimulation on the part of our leaders now and then is probably something we should learn to accept, lest the natives get unnecessarily restless. But it's something else - and to my mind, downright inexcusable - to have vital economic information routinely and blatantly misrepresented.

The economic statistics put out by the US government are propaganda, pure and simple. Issued by government agencies, interpreted by spokespersons for the government and the financial community, and reported by the mass media, the information we get has been manipulated to mold a public understanding favorable to the agenda of the powers that be.

Hooray for truth! It is a rare treat to hear someone tell it like it is. Schiff does not fear to tread where the establishment media (including Lou Dobbs) won't dare go. He takes the gloves off and unmasks the Federal Reserve for the fraud that it is in chapter four, Inflation Nation: The Federal Reserve Fallacy. He tears into what he sees as the obscene irresponsibility of the Wall Street / banking cartel and its role in rampant speculation, incessant cheerleading, and efforts to roll the financial bubble through every sector of the US economy, extracting maximum financial gain before finally letting it pop. He explains that through the Fed's policy of negative real interest rates, a nation of savers has -- through rational behavior -- been converted to a nation of borrowers and spenders. Borrowers are rewarded while savers are punished. The dollar retains its strength simply by virtue of the fact that it is the global reserve currency. Asian central banks keep the global ponzi-scheme going with their citizens' hard earned money in order to keep export markets open and their goods priced competitively. Behaving rationally to the irrational policies and schemes of the world's central bankers has created the current global mess - including our current housing bubble. But eventually, Schiff assures us, this mess will have to be cleaned up. But first, things are going to get even messier.

All bubbles share the same fate, and the US real estate bubble - caused by artificially low interest rates and lax lending standards encouraged by the Fed - is no different. Except for the fact that it is bigger than any bubble in history! When this baby pops, it is going to be bad. From page 140:

The collapse of consumer spending, associated with higher mortgage payments and vanishing home equity will plunge the economy into severe recession, further exacerbating the collapse in real estate prices, worsening the recession and continuing the vicious cycle...the country will be a lot poorer as a result of the unprecedented dissipation of wealth and accumulation of consumer and mortgage debt that occurred during the bubble years. Before real estate prices can return to normal levels, they will first have to get dirt cheap.

A recession is clearly coming, but Schiff only hints at systemic and social collapse by giving advice on how to protect your assets from such a possibility (p.249):

Social unrest caused by deprivation on a massive scale can produce violence and anarchy [but it is beyond the scope of this book to examine all such possibilities]. What extreme measures the federal government might take in the name of national economic necessity is also anyone's guess, but capital controls and confiscation of assets, combined with legal authority certainly have precedent in other democracies under comparable pressure. Since the US government seems to have no qualms about violating our individual liberties during times of apparent economic prosperity -- the US Patriot Act being only one example -- imagine how much more draconian will be the measures during the economic collapse that awaits. (emphasis mine)

Ouch. Like I said, he's not afraid to tell it the way it is. Sometimes the truth is painful. But he has, in my opinion, effectively diagnosed the situation. But better, he goes on to outline a number of proactive financial steps investors can take to protect their hard earned money now, not only from the collapse, but from a potentially repressive government of the future (p.250):

It would be a shame to have successfully avoided bankruptcy or have made a considerable profit following the investment advice in this book, only to have the US government confiscate it from you "for the good of the people" under the pretense of a "national emergency."

In other words, get your money out of the country while the getting is still good. Schiff emphasizes investing in foreign stocks since he believes a dollar collapse is coming. In contrast to Prechter and Panzner, he believes deflation to be a "bogus" threat. By holding solid foreign stocks, you benefit not only from dividends and capital appreciation, but also via foreign currency appreciation as the dollar falls. For holding gold, he advocates Perth Mint Gold Certificates, which are guaranteed by the Australian Government and backed by gold on deposit at the Perth Mint. But buyer beware: Many of the products and strategies Schiff suggests are provided by his brokerage firm EuroPacific Capital. Does this mean his opinion is biased? Of course. Does this mean you shouldn't trust him? Like with everything you read, his opinion is one of many. Schiff's position as an independent broker - not beholden to investment banking fee income - gives him a unique perspective you won't get from a large establishment broker that gets most of its income from investment banking.

At the end of the day, the decisions you make are your own. Read as much as you can and try to assess the true state of the economy and the threats we are facing. The future remains to be seen, but we've now heard from two respected authors coming to much the same conclusion. I personally do not believe things are as rosy as they seem, and I'm sure we're in for some hard times. It certainly never hurts to be well informed and prepared for any outcome. Financial Armageddon and Crash Proof are two excellent references toward that end, and I highly recommend them both.

Next Week - Mystery Bear #3 - Sign up to my low volume announcement list to be notified.

Michael Nystrom
Editor
www.depression2.tv
www.bullnotbull.com

M.A. Nystrom is a private investor and consultant currently living near Boston. He earned his MBA from the University of Washington with a specialty in International Marketing. Following his retirement from the US securities industry, he picked up the hobby of web design, a trade he now plies at his big-picture investment oriented website www.depression2.tv.

Copyright © 2005-2009 M.A. Nystom

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