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Schiff's Overall Thesis
* US Equity Markets Will Crash.
* US Dollar Will Go To Zero (Hyperinflation).
* Decoupling (The rest of the world would be immune to a US slowdown.
* Buy foreign equities and commodities and hold them with no exit strategy.
Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.
Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.
What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.
In other words, Schiff failed where it matters most: Peter Schiff did not protect his client's assets. Let's take a look how, and more importantly why, starting with charts of various foreign indices.
2008 was a global equities bloodbath. Clearly there was no decoupling. The Shanghai index (China), Nikkei (Japan), TSX (Canada), AORD (Australia), and virtually every world equity index collapsed along with the S&P 500, the DOW, and Nasdaq in the US.
Many, if indeed not most, foreign equity markets did worse than the US indices. The Shanghai index fell from 6124 to 1665, a whopping 72.8% decline top to bottom.
Millions of Chinese Struggle to Find Jobs
In the wake of a global slowdown, Chinese export shrink, civil unrest is a worry, and unemployment is rising as noted in Xinhua says there will be more unemployment and social revolts in 2009.
The odds of China finding work for 33 million workers without printing vast amounts of money are slim.
Those hot money inflows were all part of the global credit boom that is now unwinding. Much of China's boom centered on exports. Now that the US consumer has thrown in the towel, a key question arises:
Can China expand enough to make up for the contraction in US and European demand given that the two economies are more than six times the size of China?
The answer to that last question is an emphatic no. One tail cannot wag six dogs.
Here is another way to look at it. The US is the world's largest economy. Housing had already weakened but commercial real estate had not. US retail stores and malls were being built at an unsustainable blowoff pace and those stores were crammed with goods coming from China and Japan.
The decoupling theory was that loss of the US consumer would not matter to the commodity producers like Canada and Australia or the manufacturers like China and Japan. How could any economist have thought that? Many did. Schiff was one of them.
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.
In addition to mischaracterizing many of my beliefs, he also is confusing short-term market fluctuations with long-term economic trends.
Originally posted by Mercenary2007
There is NO way China can survive if the U.S. economy or even the European economies collapse.
Just those 2 economies combined are more than 6 times larger than China's economy!