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Blogger Wars: Mike Shedlock vs. Peter Schiff

The Austrian economics blogosphere was rocked to its very core yesterday, when Mike Shedlock, one of the most popular economics bloggers on the web, dropped a serious smackdown on Peter Schiff in a post entitled, "Peter Schiff Was Wrong." In this post we'll analyze the beef between two of the most prolific economists of our time.

Meet the Contestants: Peter Schiff vs. Mike Shedlock

Peter Schiff: Adheres to the Austrian school of economics. President of his own brokerage firm, Euro Pacific Capital. Here's his web site.

Mike Shedlock: Austrian economist. Investment advisor. Prolific blogger -- check it.

Like any great rivalry -- Ali vs. Frazier, Google vs. Microsoft, Batman vs. Joker, etc. -- Schiff vs. Shedlock is not without history; see their previous debate.

Now that we've met the contestants and know the history of this longstanding rivalry, let's take a look at what it's really about.

Schiff vs. Shedlock = Dead Dollar vs. Rangebound Dollar

It's crucial to note that Schiff and Shedlock agree on quite a bit. Such as:
  • Gold will rally
  • US stocks will decline
  • Japanese yen will appreciate
Their primary point of contention is their debate on what will happen to the US dollar. Schiff thinks the dollar is doomed and will lose more than half its value over time; how long is unclear, though Schiff has been anti-dollar for some time (since at least 2002), and is sticking to that as the long-term trend. Shedlock, on the other hand, thinks the dollar will be rangebound and is not expecting to see the dramatic decline Schiff is expecting.

Schiff is referred as an inflationist, while Shedlock is a deflationist. It is crucial to note the terms inflation and deflation refer to money supply, not prices. Thus, a key difference in the analysis of Schiff and Shedlock is that most inflationists will use MZM as a money supply indicator, while Shedlock and other deflationists are more inclined to use something else. As a result, the issue of how best to calculate money supply also plays into the heated rivalry between Schiff and Shedlock.

Secondary Conflicts Over Treasuries and Commodities

Their conflicting views on the US dollar lead to conflicting views on other asset classes -- namely government bonds (i.e. Treasury bonds) and commodities. Commodities are traditionally anti-dollar investments; if you think the US dollar will fall, buying commodities is a way to hedge against this. This was proven to commodities investors who enjoyed the rally from 2002 to mid-2008, which coincided with ongoing dollar devaluation. Likewise, bonds are typically favored when investors "go cold" and look for safety -- but are dreaded by those who view currency devaluation as a great concern.

Sizing Up Schiff

Peter Schiff is an icon of sorts amongst bears, as he has been the most successful in breaking the "bear barrier" and expressing bear ideology to millions via regular appearances on national television. Personally, I agree with Schiff's long-term fundamental analysis, which is bullish for commodities, metals, and Asia, while bearish on the US economy. I think dollar devaluation is baked in, that there is a bubble in Treasuries, and that once this bubble pops, a run on the dollar will ensue (the Argentina and Iceland scenario).

With that said, as Schiff himself admits, it is unclear when the bubble will pop. Bubbles can go on for a few years, and during that time, clinging to your investment thesis can hurt -- and Schiff's overall thesis did not fare well in 2008, as his archnemesis Shedlock is fond of reminding us. For that reason, I think it would be advantageous to couple Schiff's fundamental analysis with momentum following technical analysis. This is essentially my trading strategy, and 2008 was a healthy and profitable year for me -- as it was for anyone who coupled Schiff's views with technical analysis.

Sizing Up Shedlock

There is no denying Shedlock is an excellent economist, and he deserves much credit for being one of the few people who called for a strong rally in the dollar, US Treasury bonds, and a decline in commodities. While most perma-bears and Austrian economists saw the collapse of XLF (financials) and XHB (homebuilders) coming, a more common view was that the bubble would go to commodities, where it would stay and grow. Thus the calls of oil going to $200 (which is something I must confess to having said, but not traded). And we did proceed on this path -- oil got above $140 -- but then came sharply back down, and the bubble was passed to Treasuries.

Ultimately, Shedlock thinks the Treasury market is safe, and is not one of those concerned about a potential collapse in Treasury prices. Shedlock maintains this concern when wealth contraction occurs around the world, thus leaving less investment dollars available for foreigners to buy US Treasury bonds, and also while gold and silver become increasingly popular alternatively stores of wealth, something which Shedlock correctly forecasted. And he maintains the stability of the Treasury bond market when supply is set to increase significantly given Obama's aggressive stimulus mandates and philosophy of "deficit's don't matter."

The Key Factor: To What Extent Is Monetary Policy Fiat?

So who's the winner? Schiff or Shedlock?

Well, as noted previously, I consider both to be outstanding economists, and thus they have already won in the eyes of this judge. In terms of whose investment thesis will prove to be more victorious, however, much of it will boil down to one key question: is monetary policy fiat? Meaning can the Federal Reserve inflate if it wants, and deflate if it wants?

Deflationists will argue that because the Federal Reserve cannot force banks to lend, it cannot affect the portion of the money supply that is created by commercial banks when they lend money into existence, and that credit destruction (declining availability of credit and falling asset prices) will result in a declining money supply. Inflationists will argue deficit spending, interest rate cuts, induction of sell offs by foreign central banks, and coordinated activity with other central banks can always result in inflation, provided there is no restriction on money supply, like a commodity standard that guarantees the value of each note of circulation with respect to a commodity.

In my opinion, the Federal Reserve can inflate if it wants, and that monetary policy in an economy with a central bank and a fiat currency is a fiat matter -- if inflation is decided, than that is what shall happen. As Bernanke and friends still view inflation as the solution and view deflation as intolerable, I'm inclined to think inflation/currency devaluation is the greater concern, and that Schiff's long-term thesis is still correct.

Alternatives to Schiff and Shedlock

There are those who may find Schiff and Shedlock to both be unsatisfying in ways, and thus may find the rivalry to be less than compelling. For those folks, I'd recommend Eric Janszen and Stefan Karlsson.

Simit Patel


My Wealth.com said...

Well these two got one out of three right.

Gold will rally. The yen will tank. Stocks will rise..but probably not as fast as the yen tanks or gold rises.

My Wealth.com said...

Personally, I love the Austrian school of thought. Good stuff.

Simit Patel said...

I wonder about the yen. I've been trading long yen since October, in a short USDJPY trade now. I been reading more and more about how the yen is overvalued. while this may be true i think the dollar and most other currencies are more overvalued than the yen. will look for technical signs of bearishness in longer term charts.

Anonymous said...

Austrian school of economics is spot on...you simply can not inflate your way out of this.

Look at what New Zealand did after the IMF told them for years to run budget deficits, trade deficits, and inflate their currency...NZ kicked out the IMF, deflated their currency, cut taxes, and cut spending...viola! Their economy recovered and tax revenue SOARED.

What a concept.

My Wealth.com said...

Yeah, unfortunately our "Fed" tends to take an opposite view. It hurts us in the long run, here in the U.S.

I agree with you. Good to hear from you Market Speculator!

Anonymous said...

Just disappointing.

My Wealth.com said...

Yep, all our central bank knows how to do is "print money" and cause future bubbles on down the road while the try to make things better in the short term...that never last for the long term.

I agree totally. You're right.

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