The Little Book of Bull Moves in Bear Markets by Peter D. Schiff

GLENN: From Radio City in Midtown Manhattan, third most listened to show in all of America. Hello, you sick twisted freak. Welcome to the program. We have Peter Schiff on the phone from Euro Pacific Capital, and I wanted to get Peter to explain first of all what happened last night. We had all of the futures markets freeze up and you couldn't, you couldn't buy your way out last night. The market's pretty much closed. Is that an accurate?

SCHIFF: You couldn't sell your way out if you were trying to sell any futures because they were lock limit. But seems like the event that precipitated the decline was the near 10% decline in the Nikkei and what happened is a lot of the major exporters, right, that export to the United States came out with some bad earnings numbers and that clobbered Japanese stocks and also sent the Japanese Yen, you know, soaring.

GLENN: Okay. Peter, remember this isn't CNBC. This is -- you know, this is not a financial show at all. So if you can break down everything as much as you can. Why were we expecting the market to open and people were full-fledged panic this morning?

SCHIFF: Well what happened is, you know, with all the selling that was happening in Asia, people who trade stocks started anticipating more weakness in U.S. stocks when they opened the following morning and so people started selling U.S. stock index futures and that drove them to limit down and that's what got everybody frightened because we hadn't seen a limit down move in the stock market. I can't even remember when that's happened.

GLENN: Okay. So why didn't it shut down and trip? What happened? Why is it now at only, you know, 350 points?

SCHIFF: Well, you know, buyers came into the market. So it wasn't, the opening wasn't nearly as bad as people had feared. But remember the day is still early. You know, we can still go a lot lower. I don't think -- you know, people keep bringing up, oh, people who bought in October 1987, they made a lot of money. So people should just come in and buy, and the same thing is going to happen. But the big difference is in 1987 we were still in a bull market. The bull market began in 1980 and it went until 2000. So that was a correction in a bull market. Now we're in a bear market. We've been in a bear market since 2000. So buying a big dip in a bear market, maybe it would work for a trader, but for a long-term investor, stocks are going to continue to lose value over time.

GLENN: I have to tell you, Peter, it's driving me nuts. You know, people will watch these traders and these people on television. They're salesmen. I mean, it benefits them when they say, "Hey, you know, getting in..." I mean, I had people say on my show -- I think you were on the same show with me on the day where the Dow came close to hitting 14,000 and people were saying there's lots of room left in this thing and I'm like, you're out of your mind.

SCHIFF: Of course, look, you are not going to walk into a used car lot and the dealer's not going to tell you not to buy any of these cars. I mean, that's the same thing that goes on in Wall Street. They want to sell stocks. No matter what the price is, it's always time to buy. And it's either a bull market or it's the end of a bear market. I mean, it's always time to buy if you listen to Wall Street.

GLENN: All right. So Peter, if you had a 401(k) or, you know, if you had anything right now, what should you -- if you had a financial advisor and you got him on the phone, what would be the tip-off that your financial advisor got it? What are the questions that you should ask? Or what would be the telltale signs?

SCHIFF: Look, they would have to understand that the U.S. economy is a complete disaster, that in the future it's going to look nothing like it did in the past, therefore corporations, many of them are not going to earn the type of money that they used to earn. Many companies that have been here for years are going to go out of business. Our earnings are going to collapse and stocks are going to be worth a lot less in real terms than they are now and that riding this bear market out is not a good idea. So he would have to basically give you some whole new ideas to try to reallocate your portfolio for the way the world is going to look, not the way the world used to look.

GLENN: Okay. How much of a role are the hedge funds playing on dumping their assets? For instance, gold has been --

SCHIFF: I think they are playing a major role because right now everything is going down. Regardless of the fundamentals, regardless of the value, people are saying whatever they've bought with borrowed money. And since we have thousands of hedge funds -- and also it's not just hedge funds. You also have mutual funds and other investors that are all simultaneously trying to get out the door at the same time and everybody is selling. And, of course, you've got fire sale prices. But the U.S., the Dow is not on a fire sale. I still have I many U.S. stocks are expensive even after the decline considering what is likely to happen to their earnings. But I think people who still hold U.S. stocks, one thing they can do is when they're selling their U.S. stocks, they can go and buy some of the stocks in other countries where the valuations are a lot better. And you have to remember what's actually going on right now in the global economy is the countries that loaned us a lot of money are having financial problems because we can't pay that money back. So there's trillions of dollars of loss --

GLENN: Wait, wait. Wait, wait. Explain that. Where have we defaulted on paying money back?

SCHIFF: Well, we borrowed, you know, trillions of dollars from the rest of the world to buy houses, to remodel houses, to import cars, to buy consumer electronics, to buy clothing and furniture, to do all sorts of things. Every American has a dozen credit cards in his wallet, he's got car loans, student loans, mortgages. Where is all that money coming from? The money is coming from the rest of the world because that's where all the savings are. And, of course, Wall Street came up with all these products to put together Asian savers with American borrowers and arranged all these cross-border loans. But the world is starting to realize that Americans are not going to be able to pay the money back. We haven't defaulted on all of it yet, but people are starting to connect the dots and realize that it's impossible for Americans to pay this money back. They don't have the income, they don't have the assets. And so this whole dynamic is imploding. So in the short run the people who loaned us the money are suffering but ultimately the change is going to be much worse for us because in the near future, our economy's going to have to function without credit. People are not going to be able to use credit cards and borrow money to buy cars or to buy big screen TVs or to, you know, buy furniture. Our whole economy is going to change. And when Americans can only spend the money they actually have, this whole phony service sector economy that grew up around access to foreign savings and credit is going to crumble. But meanwhile the rest of the world still has a viable economy. They still have all their infrastructure, all their factories, all their savings. All they are doing is losing money on what they loaned us. But going forward, their economies are viable. Ours is not, and we've got a major, major transformation ahead of us and unfortunately we know the Obama administration is coming in and everything they are going to do is going to try to interfere with what the market is trying to do to correct the economy, and we know how that worked in the 1930s. It's not going to work any better now, especially when you've got the printing press nature of our money now that we didn't have back then and we have the potential for an inflationary depression that would be much worse than a depression that we had in the Thirties.

GLENN: All right. You know, I just said on the air that I'm not convinced that -- I'm not an economist. I don't know, you know, I don't know what labels mean and everything else. So I can just tell you that what I said on the air is I've been concerned about a depression, but I'm more concerned of a Weimar Republic at this point. I don't know what the event is. I just know -- or what anybody's going to call it. I just know we are headed for a major event and within 24 months this country doesn't -- I mean, I'm not saying that the country is wiped out or anything else and we all survive and we're not out eating leaves, but it is dramatically different than it is today.

SCHIFF: Oh, exactly. And the real bigger crisis that is going forward is the one that we are in the process of creating right now with all the bailouts and all the money we're printing and all the stimulus packages because ultimately when the dollar stops rising, which it's doing now as a result of all these hedge funds and all this unwinding. When the real move in the dollar is down, when the price of gold is not going down but going up $100 or $200 or $300 a day and the dollar is dropping 10 or 20% every time we go to bed, that's the real crisis. The real crisis isn't when you go to the bank and you can't get your money out. The real crisis is when you go to the bank and you do get your money out but you can't buy anything with it. And that's what's coming.

GLENN: So Peter, explain the price of gold. Price of gold is down $713 now. To most people that doesn't make any sense. My research shows that it is from these giant firms that are dumping bars of gold to be able to have some sort of liquid asset.

SCHIFF: Yeah. I mean, everybody is selling everything, but if you look at on a relative basis, gold has held up relatively better than most assets. If you look at how much the Dow is down on the year, it's down more than gold. So in terms of gold, the Dow has lost value. So people who are holding gold rather than stocks are preserving more of their wealth. But ultimately I think this is purely a function of the market.

GLENN: Right.

SCHIFF: If you actually look at the physical demand for gold, the demand for coins, for actual gold bullion by real people who are trying to save money is going through the roof.

GLENN: Right.

SCHIFF: And what's happening is you are seeing the big players, the leverage players who were selling their gold.

GLENN: At a fire sale because they got it --

SCHIFF: People are buying gold.

GLENN: Right. Because the reason why it's going down is because there are people who are in panic mode that have to liquidate huge sums of gold, right?

SCHIFF: Yeah. And a lot of times it's not a panic. If you borrowed a lot of money to go out and buy gold -- and a lot of people like myself who forecast these events correctly as far as from an economic macro call and they tried to think of, okay, what can I do to profit from this or to benefit from it, they went out and bought gold. Now, the thing was in the hedge fund community, you just don't buy stuff. You borrow money. You use leverage because you get a big incentive.

GLENN: Right.

SCHIFF: So all of a sudden the people who anticipated this major collapse, who bought a bunch of gold, maybe they even bought a bunch of gold to hedge some of their long stock positions. Now they are losing on everything, and the bankers who owned them the money are giving them a call and saying, "Hey, you've got to pay this money back because your assets are falling." And now they have to sell stuff. So it's not a panic. It's a situation where they are required to sell and they have no choice.

GLENN: Right.

SCHIFF: At whatever the price is.

GLENN: I didn't mean to say it was necessarily panic as much as it is they have no choice. They have got to sell it. No matter what the cost is, they have got to sell it because they have to raise the money. And that would cause --

SCHIFF: They don't really want to sell their gold. They would rather sell some other stock but there's no market for it. There's no bids. At least there's buyers for gold. So if you need to raise money in a hurry, you can always raise it by selling gold because there are always people who want to buy it.

GLENN: One last question here on the gold thing. If we look back to the 1980s when inflation really truly kicks in, is there any way, Peter, that massive inflation doesn't start coming our way within the next eight to twelve months?

SCHIFF: No, I mean, it's coming. I mean, we already have pretty high inflation. The government lies about it. Asset prices are coming down but goods prices are going to come up. They are going to come up. In terms of gold, sure, we're going to have big deflation in terms of -- if you want to figure out what things cost new terms of ounces of gold, things are going to get cheaper. But in terms of little pieces of paper, the Federal Reserve notes we're cranking off the presses, in fact if you read all the things the central banks are doing, they are talking about supplying unlimited quantities of dollars, unlimited. They are going to run them off, you know, until they run out of trees, run out of ink, run out of paper. And if they are going to do that, how can it have any of its value? And how can people around the world continue to accept the money we're printing in exchange for all the products they are producing? They are not going to do it.

GLENN: But if we go back to the 1980s when Voelker came in and he tried to bring the money supply in and, you know, bought into a strong dollar, Barack Obama says he believes in, that's why he has Voelker as one of his guys, A, you can't bring that money in because you'll stop all of the money supply. You'll choke the economy to death. I mean, the deal is do I choke it to death or do I just bleed it to death.

SCHIFF: But the thing is believing in the strong dollar is one thing but actually pursuing the policies that are going to give us a strong dollar, it's like you could say I believe in getting A's. You know, I can go to school and say I believe in getting all A's. Well, that's great but if I don't actually study and I cut, doesn't matter how much I believe in getting A's, I'm going to get out. So in order to have a strong dollar, we have to have a sound economy which means we have to manufacture, we have to export, we have to save, we have to cut regulations, we have to cut taxes. We have to do all the things that are consistent with a strong dollar. But Barack Obama doesn't want to do any of those things. So, you know, he wants to cut class but he still wants to get an A. It ain't gonna happen.

GLENN: How much better do you think John McCain would be, or do you?

SCHIFF: I don't know how much better he would be. I think he would be less bad but one of the things I wrote about him, you know, the little book that just came out, The Little Book of Bull Moves in Bear Markets, my idea there was that Obama would actually be the lesser of the evils because I thought that if we put McCain in charge, with all his, you know, get the government off your back, with all that nonsense that he says but he doesn't actually believe, if we had four years of McCain and then the situation got really bad, I could just imagine what would replace him, whereas if we put Obama in right now and let him try to fix the problem with big government, and when it's so much worse in four or five years, then maybe we can react the other direction and say, okay, we tried big government; now let's try less government; let's bring in a real reformer. So in a way, you know, maybe that can be a positive. But then again I could just be grasping for straws here.

GLENN: No, I have played those scenarios in my head over an over again and that's one of the main things that stops me from committing and filling out my vote today is I haven't really decided that yet. I mean, I just wonder. My question is do we survive an administration that doesn't -- is going the complete opposite direction. I mean, does the dollar survive four years.

SCHIFF: And that's the problem. We can survive the economic problems. They are severe. We've dug ourselves into a big ditch. But you know what? We can survive it. We don't need to buy more cars. We don't need to -- we have so much stuff, we're fine. It's okay if we stop spending money for a while and start saving. It will cause, you know, some pain and maybe a lot of people who are retired are going to have to go back to work. I mean, that's unfortunate but, you know, they can do it. But what we can't survive is all the government cures. All the things that government is going to do in the name of making the situation better that is going to make it much worse. That's the danger.

GLENN: And that doesn't even --

SCHIFF: We end up killing ourselves.

GLENN: Right. And that doesn't include anything in the scenario that I've been calling the perfect storm, that doesn't include what would happen to our economy with civil unrest. That doesn't include what would happen to our economy if we were hit again.

SCHIFF: You can imagine, you know, with what's happening in the market, Barack Obama could win in a landslide. This could be the biggest lopsided victory since Reagan. He can sweep in all kinds of Democrats. And what is the big mandate? The mandate is to undo the perception of free markets, that government is the answer, that we're in trouble because of all this unbridled greed in capitalism and we need the government to do everything.

GLENN: Yeah.

SCHIFF: And that's the problem.

GLENN: Peter Schiff, thank you, sir. I appreciate it.

SCHIFF: Thank you.

GLENN: Book of bull moves and bear markets is his book. He is from Euro Pacific Capital, Peter Schiff.