Thoughts on The Little Book of Bull Moves in Bear Markets

I wondered the other day about books aimed at helping investors navigate difficult environments, and bemoaned the fact that all too few basic investing books offer any sort of guidance in this regard. I was also amused (in a sad, head-shaking kind of way) that most of the books about surviving a bear market that emerged from the last bear market were published only after the bear market was over.

So it was with some surprised that I found Peter Schiff's The Little Book of Bull Moves in Bear Markets at the library last week. Timely, yes, but for that very reason, somewhat suspicious to me. The Little Book series has had some decent offerings, my favorite being the one by John Bogle. Offerings from Christopher Browne (Value Investing) and Joel Greenblatt (Beat the Market) offer useful, if perhaps oversimplified, strategies, that I think have merit in their general contrariness to prevailing market wisdom.

In that vein, I was intrigued by Mr. Schiff's little book, which purports to pull back the curtain on the invisible erosion of the value of your money, your investments, the U.S. economy and our financial system in general. Let me say first and foremost that Mr. Schiff has a lot of smart things to say. Yes, the Federal Reserve is culpable and careless about its monetarist policy of inflationary increases to the money supply, especially as it helps put more air into asset bubbles (think the housing market). Yes, Americans borrow too much money for consumption that they don't really need. Yes, fiat currency is beholden to the whim of the market.

Schiff also makes some good and useful points that do not often appear in books about investing. First, he tells you how to actually invest in the things he recommends. Granted, he is often hawking his own wares (his company does many of the things he says investors must have, like stocks bought on foreign exchanges and custodial services for precious metals), but he also presents some things I'd never heard of (like GoldMoney.com) that could have some utility, even if you don't buy his argument whole. Second, he gives some guidance for potential career and business choices that stand to benefit from the disasters he sees befalling the U.S. economy. Though I disagree with him on numerous points, I think his efforts here are an important part of any plan that relates to investing--that is, how you get the money you plan to invest--but are generally ignored in most books on the subject.

However, I have some serious problems with this book. Seven of them. First, it looks like it was rushed to press to capitalize on the recent market turmoil. I don't think they pushed it to market in the wake of the disastrous first few weeks in October, but when everything was going to hell back in July it looked like Schiff's predictions (ever-higher commodity prices and perpetual dollar weakness) were prescient. There are numerous typographical errors, and the title doesn't really seem to fit with Schiff's premise. These aren't bear-market strategies: this what Schiff thinks everyone should have been doing back when things were swell, and he even says that he said this very thing in a previous book. So while this book has a timely title, I don't think it is as useful as it wants to be.

Second, since July, commodities have been largely in freefall and the U.S. dollar has been the strongest performing developed-market currency, undermining most of Schiff's major points. Now he would say--as I do when my own strategies meet an extended bout of resistance--that this is merely a cyclical change and does not run counter to the secular pattern of surging prices of hard assets and the concomitant decline of the greenback. Still, it is hard to find his claims credible when he trumpets the early-July status as proof that his strategies work--including investing in developed foreign stock markets, whose performance has been in many cases worse than that of the U.S. and has been further savaged by weakness relative to the dollar.

Third, he underestimates or misrepresents exchange-traded funds (ETFs). At one point, Schiff lumps in ETFs with actively managed mutual funds as a bad idea because their sole purpose is to beat the market. Not so, and he even says so later on. Why the inconsistency? At another, he describes how he talked a prospective client out of investing in ETFs (admittedly in favor of paying Schiff to build and manage a custom portfolio) because he couldn't find any to invest in that didn't have large allocations to financial-services companies. True, financial serivces are often large chunks of broad-market ETFs for any country, but writing the entire product line off for that alone is short-sighted at best and self-serving at worst.

Fourth, he really skimps on his foreign-market preferences. Yes, he gives a long list that includes Australia, Singapore, Norway and Switzerland, but the information he offers to buttress his preference is apparently gleaned from the CIA Factbook, which anyone can access for free on the Internet. Why do I need him to regurgitate that? If I'm going to pay for his book, he needs to give me something more than information I can acquire at less cost elsewhere.

Fifth, he diminishes his book's long-term utility by devoting the last section to why we should vote for Barack Obama. He compares Obama to Jimmy Carter and insists that a failed Obama presidency will clear the way for a transformational leader, like Reagan succeeding Carter. In this case, he wants Ron Paul, who plans to abolish the Federal Reserve. There are so many things wrong here I don't know where to start, but let me say one thing. The big government that Schiff implies was a function of the Carter administration was in place long before Carter was even governor of Georgia, and was expanded greatly by Richard Nixon. Perhaps an Obama presidency will be weighed down by the same sort of government expansion under a previous Republican administration (Medicare, Homeland Security, Iraq), but it certainly CAN'T get signficantly bigger, whatever the folks at National Review want to believe. Either way, if this book has a viable long-term strategy, it shouldn't be beholden to Obama or Paul.

Sixth, Schiff says the only way back for the U.S. economy is to return to a production-based economy, one where the U.S. produces goods, not services. (At the same time, he says that the entertainment industry in the U.S. is evergreen.) I think he has something there, but it won't be that we'll start again making cotton underwear and tires. We might eventually, but only once the supply of places where workers will supply labor for less money is exhausted, and we've still got big sections of Asia, the Middle East, Eastern Europe and all of Africa to go through before we get there. We're going to have fulfill the single greatest requirement of any business in a free market: make what people want. Obama thinks that's energy technology. Maybe it is, maybe it isn't. The point is that innovation and education are key, not an overpriced industrial base.

Seventh and finally, Schiff's notion of decoupling is debunked by this year's events. His analogy is that the U.S. thinks it is the engine of economic growth in the world, when really it's the caboose. If the rest of the world lets the caboose go, the rest of the train will be able to move faster. True, China and India will have their hands full of production and demand just supplying goods and services for their own populations. But for better or worse, the financial and economic fortunes of the developed and emerging worlds are married, perhaps not happily but married all the same.

In all, I am glad Schiff wrote this book, as it has allowed me to firm up my own ideas about markets and economies. I disagree, but I understand Schiff's strategies as a reaction to real problems. And in his defense, I don't think that investors would necessarily be all that bad off doing what he says. Inflation is a mostly invisible monster, but one that can be tamed. Paul Volcker did it (and Schiff credits him for it, conveniently ignoring that he was appointed by Jimmy Carter), and even feckless Ben Bernanke seems to have some newfound interest in pricking asset bubbles with interest rates and open-market actions. We'll see, but for now I'm sticking with my cheap U.S. stocks and my Treasury inflation-protected securities.