Exclusive Interview: Peter Schiff on the Real Fiscal Cliff and the U.S.'s Impending Crash

Henry Truc |

While the financial crash of 2008 may have been the worst downturn investors have experienced since the Great Depression, the truth, at least according to famed investor Peter Schiff, is that the bear market is far from over. In fact, the Great Recession may have only been just the beginning. During the years when the housing bubble was in full boom, it was not uncommon for Schiff’s contrarian prognostications of the coming correction to be received by a healthy dose of skepticism But the economic forces that led the market to that point, and the eventual crash that proved Schiff's predictions to be true, have not changed. In actuality, they've repeated the same missteps that create the bubble and resulting crash.

Equities.com had the opportunity to speak with Peter Schiff, CEO and Chief Global Strategist for Euro Pacific Capital and the author of best-sellers such as The Real Crash: America's Coming Bankruptcy—How to Save Yourself and Your Country and Crash Proof 2.0: How to Profit From the Economic Collapse, to get his thoughts on the direction of the U.S. economy, why he believes the Federal Reserve has made the situation even worse, why the collapsing dollar will push gold prices up to $5,000 an ounce, and what investors should do to protect themselves. Schiff will be joining a roster of notable and influential speakers and attendees at the upcoming San Francisco Hard Assets Investment Conference on November 16-17, 2012 at The San Francisco Marriott Marquis.

EQ: Many investors have become more familiar with your outlook on the economy and investment philosophies through your work as an outspoken market commentator. Can you talk about your experience in the industry and your firm, Euro Pacific Capital?

Schiff: I’ve been in this industry pretty much my whole life. I started in 1987 and worked mainly with retail brokerages, but do a lot more than that now at Euro Pacific Capital, which is a full-service investment advisor, broker dealer, and investment banker. We also do money management, brokerage transactions, research, institutional sales, trading, capital markets, private placements, and IPOs. We have six offices in the U.S., three offices in Canada through Euro Pacific Canada. We also have Euro Pacific Bank in the Caribbean. So we’re really involved in all sorts of investments.

I also host The Peter Schiff Show, so people can check out my daily radio show at schiffradio.com. I do it five days a week, Monday through Friday. People can listen live or delayed, and it’s a free broadcast.

EQ: You are the CEO and Chief Global Strategist for Euro Pacific Capital. Can you tell us what your firm’s focus is and how its strategy differentiates itself?

Schiff: I think I have a better grasp of economics and on the true vision of the United States, and a better understanding of the precarious position that we’re in more so than mainstream Wall Street firms. I’m very cognizant of the risks associated with exposure to the U.S. economy, to the dollar, and the bond market. So I’m looking for ways to help my clients protect their wealth from inflation and from a weakening dollar. We've developed a strategy that focuses on that element of risk that most Wall Street firms ignore. There’s too much faith and confidence in the U.S. economy and the dollar by people who don’t really understand how the global economy is functioning and the phony nature of the American recovery.

EQ: What are some of the major reasons for your bearish outlook on the U.S. economy, the dollar and the investment outlooks in the U.S. market?

Schiff: I understand what the distortive effect of the Federal Reserve’s cheap money policy is having in our economy, on the capital markets, on the real estate markets, on savings, investment, consumption, and spending. I saw all of the mistakes that were being made as a result of the Federal Reserve and Congress, and the moral hazards of Fannie Mae and Freddie Mac, and that very strong understanding of it was why I was worried about it for years.

EQ: You've categorized the U.S. economy and the dollar as Titanic in the past. Has anything been done that you've seen to help right the ship that is the economy and market?

Schiff: They’re far from righting the ship. The ship is less seaworthy now than it was before. They've frivolously cut more holes in the bottom of a sinking ship and have done nothing to repair the damage. They’re making it worse. We need to start plugging up the holes. We should put someone at the helm that knows what they’re doing. We have to realize that we’re in trouble because we've borrowed too much, printed too much, and the government was too big. There were too many regulations and not enough free market. There was too much government-created moral hazard, which resulted in too much risk taking. So we have to get government out so that we can get free market forces back in. We need to spend, borrow, and consume less and we need to save, invest and produce more. All these things would happen naturally if the government just got out of the way.

EQ: The upcoming "fiscal cliff" is scheduled to take effect at the start of the near year and has been a major concern for both lawmakers and investors alike. What are your thoughts on the possibility of  this happening?

Schiff: First of all, it’s not even a cliff. It’s more of a pothole when you compare it to what we’re ultimately going to have to face. The reality of it is that we’re actually better off if we do go over this cliff rather than to avoid it by not cutting government spending or by not raising taxes. Unfortunately, the tax increases are not the kinds that are likely to ultimately generate more revenue. We needed to tax consumption, not hard work and investment and production.

But the real fiscal cliff is not the one they’re talking about. It's the one that we go over further down the road if we don’t address the problem. We need to cut government spending dramatically. We need a much bigger fiscal cliff, or otherwise we’re going to have a financial disaster because we’ll be dealing a currency crisis and a sovereign debt crisis. Interest rates are going to skyrocket and we’re not going to be able to pay the interest on the debt, let alone retire the principal.

EQ: You’ve been a major bull for gold, even predicting that the precious metal will soar to $5,000 an ounce. Do you believe that more so now than ever?

Schiff: There’s no ceiling on the price of gold. The Fed is committed to keeping interest rates at practically zero, and they’re already going to buy $40 billion worth of mortgages every month. When Operation Twist ends, they've committed to replacing that with another $45 billion of Treasuries purchases. So they’re going to create $85 billion a month from thin air and spend it into circulation. That’s going to debase the dollar dramatically. It’s not going to grow the economy. The problem is the Fed is basically saying that we’re going to print money until the economy grows and we create jobs. Well, money printing isn’t going to grow the economy or create jobs, but they’re just going to keep doing it indefinitely, and that will result in gold prices going a lot higher.

EQ: Investors have been increasingly moving into cash positions because of the fear of uncertainty toward the economy and the market. Could cash actually be a bad position?

Schiff: I think cash is a bad position, especially if your cash is in the U.S. dollar. That’s the wrong cash to own. For liquidity purposes, you’re better off holding gold or silver, but if you’re going to own cash, look at other currencies like the Singapore dollar and other currencies that are more likely to retain their value.

EQ: Where should investors look to in order to capitalize or even reduce their exposure of a declining U.S. economy?

Schiff: They should look overseas. One of the things that we focus on at Euro Pacific is foreign equities, and we try to find companies that are positioned to do well in a world where the Americas are no longer capable in borrowing. So we look at companies that have exposure to natural resources and other raw materials where prices will rise.

EQ: What foreign markets are you looking at?

Schiff: There are stock markets and companies in particular countries that we think that are better positioned to weather the storm and profit from the transition. That’s part of what we’re trying to accomplish for our clients. For example, we have a lot of funds invested in China and Southeast Asia. We are getting into emerging markets, and have a bunch of mutual funds that are focused on emerging markets, as well as China, Southeast Asia, and Latin America. We also have managed account strategies too.

EQ: You're a frequent speaker at the Hard Assets conferences and will be delivering a keynote at the upcoming San Francisco Hard Assets Investment Conference. Can you talk about your participation at the Hard Assets conference and how investors can benefit by attending?

Schiff: There are a lot of speakers, myself included, that give opinions that investors might not necessarily hear if they just listen to mainstream media outlets. That's important because people have to think outside the box. If you’re just following the conventional wisdom, it’s going to lead you to financial ruin. A lot of people are going to go down with this ship and people are just overly invested in the dollar and in bonds. There are a lot of people in junk bonds and municipal bonds now and they don’t understand the real risk. The risk isn't that you lose your money; it’s that your money loses its value.

I’ll be talking about the real fiscal cliff and how to spot the ledge. The real crash is coming, and 2008 was the warm-up. The main event is still in front of us because the government has done everything wrong. They did everything that I predicted they would do and made all the mistakes I warned that they would make. Now we’re going to reap the consequences of those actions. People need to understand what’s going to happen so they can be prepared for it.

It probably takes a little more time to play out, but we’re running on borrowed time as it is. It’s impossible to pinpoint exactly when, especially since it’s already beyond what should have happened a while ago. We’re overdue for a crisis but it’s hard to factor in all the various things that might happen to buy us more time. You’re always overestimating the intelligence of the world to figure out the game that we’re playing. Eventually, it’s going to happen. You can’t fool the whole world forever.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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