Book Review: "Crash Proof" by Peter Schiff

Peter Schiff, the principal author, is a broker-dealer and president of Euro Pacific Capital. John Downes is editor of the investment newsletter "Beating the Dow".

"Crash Proof" is something of a job application, since if you accept Mr Schiff's recommendations you will be looking for the kind of services he advertises. In my opinion, he does well at the interview: the book is good enough to re-read. It is clear, concise and authoritative.

In the last three chapters, he explains how to protect your wealth - but you don't have to be very wealthy to use his ideas. I'll give the main tips at the end of this article.

He starts with where we are now, and how we got here. The US has a huge capital account surplus, which sounds good until you know that it's another way of saying Americans owe a fortune to foreigners. The government has encouraged money and credit in the economy to increase, so we think we're well-off; but the country has shifted from producing goods and services to consuming them, and paying for it all by borrowing. One day, it's got to be paid back - with interest.

There's no panic right now, because the government, Wall Street and the news media are failing us. They downplay the trade and budget deficits; fudge figures on inflation, productivity and GDP; and quote the consumer's confidence back at him, instead of telling him the truth: you can't spend your way out of debt.

Mr Schiff is a monetarist. For him, an increase in cash and credit is inflation; price rises are merely the effects. These price changes give misleading signals to producers, so they make too much of the wrong stuff and go broke. So inflation causes cycles of boom-and-bust. The US dollar was once backed by gold, but now there is no such restraint on the Federal Reserve, which Schiff terms "an engine of perpetual inflation". Money is simply created at will - the dollar is a "fiat currency".

The greenback hasn't yet had its bluff called; one reason is that it is still used as the world's international trading currency. But it could be replaced, for example by the Euro. In that event, trillions of dollars would come home and the real extent of inflation would be revealed. Import prices would rise, and although the weaker dollar would make exports more competitive, US industry has shrunk and couldn't take full advantage of increased foreign demand, so domestic costs would rise as well. Belts would tighten and non-essential services would be hit. You could get hyperinflation and an economic slump at the same time.

"In the perspective of previous bear markets, notably those of the 1930s and the 1970s, the prospects look even worse. Economic conditions now are as bad as or worse than what existed then." (p. 114)
The implication for US investors? Schiff estimates (p. 95) the Dow ought to drop 30% from its end-2006 valuation (David Tice at Prudent Bear recently predicted a 50% fall - see next posting above), and a weaker dollar will magnify the loss.

Where does he suggest we invest? Here's some pointers:

Negatives

1. Avoid debt, unless you plan to use the money to make a profit in some way.
2. Get out of the dollar, and out of US stocks.
3. Be wary of Treasury Inflation Protected Securities (TIPS) - the government defines inflation, but it's also the borrower. Schiff says it's like "trusting the fox to guard the henhouse".
4. Think twice about investing in bonds: "[it is] my belief that all governments that issue fiat currency will inflate".
5. Avoid mutual funds, because they add a layer of costs.

Positives

10 - 30% of portfolio: gold, and maybe also silver.

Of this, maybe 20 - 50% should be in bullion, some in your direct possession, some held elsewhere. E.g. Krugerrands and pre-1968 US silver coin; Perth Mint Certificates; GoldMoney.com (banking in gold).

Other investments in gold could include gold Exchange Traded Funds (potential risk: false auditing); gold futures (risk: the firm may buy on margin; also, counterparty risk); gold mining stocks (risk: potential future speculative bubble).

Rest of portfolio: non-US stocks - purchased through a broker (e.g. Mr Schiff!)

This is where the broker would make specific recommendations to the client. In general terms, the author recommends a portfolio of non-US shares, maybe 10 -20 in all, in an assortment of companies, sectors, markets and currencies. He likes conservative, high-dividend stocks (a key principle of the Dogs of the Dow - see John Downes) in developed markets - e.g. Canada, Australia, New Zealand. In the shorter term, he thinks the UK and Europe should do better than the US; in the long run, Asia.

As to favoured sectors: power, commercial real estate, commodities and natural resources (much of this seems to chime with what we have learned about Marc Faber - see second posting above).

This book is not only an investor's survival guide, but a layman's economic primer. It is well worth reading.

Crash Proof, by Peter D. Schiff with John Downes; pub. John Wiley & Sons, Inc; Hoboken, New Jersey, USA 2007

If you wish to purchase this book, the author gives this link.