Peter Schiff is CEO and chief investment officer of Euro Pacific Capital, a full-service broker-dealer providing mutual funds and separately managed accounts. He is a firm follower of the Austrian School of economics and a regular critic of the Federal Reserve's policies. He has authored several books, including "Crash Proof" and "Crash Proof 2.0," both New York Times best-sellers, and "The Real Crash." Schiff is a regular on CNBC, hosts The Peter Schiff Show on radio and is often quoted in the financial media.
Schiff recently sat down with ETF.com to voice his concerns about the latest U.S. GDP number and discuss where the Fed's quantitative easing program is headed. He points out his favorite foreign equity markets and explains why silver and gold mining stocks look attractive. Finally, Schiff gives us his take on bitcoins and the proposed bitcoin ETF currently in filing.
ETF.com: Second-quarter GDP came in this morning [7/30/14] at 4 percent, way above the 3 percent consensus. Are you surprised by the resilience of the U.S. economy in the face of Fed tapering?
Peter Schiff: I don't think the economy is resilient at all. I don't think that 4 percent number proves that. You have to look at the context in which the number is offered. First of all, this is the first look at the GDP number. Remember how much the first quarter was revised down. I would be surprised if, by the time they finished the revisions, we even had a three-handle on Q2 GDP.
There's still a good chance that it's going to end up disappointing, because the first number is generally revised down. If you look back over the past several years, you'll find that that is the case.
You have to look at the weather effects that everybody was talking about for Q1, but is being completely ignored for Q2. What actually happens—if you look back over the past 50 or 60 years and you look at really severe weather—there is a tendency for the first quarter to have about a 2 percentage point reduction in GDP that's related to that weather.
The economic activity that does not take place in Q1 because it's held up by the weather, happens in Q2. So generally, you get a 4 percentage point bump between Q1 and Q2 in years where you have a very harsh winter. So you lose 2 points in the first quarter, and then you get them back in the second quarter. When you look at the entire six-month period, all the effects of the bad winter are averaged out over the first half-year.
The government is saying that Q1 declined by 2.1 percent. So 2 percent was because of the weather. So the real number would have been minus 0.1, a horrible number compared to the 3 percent or so they were originally looking for. Q2 would be 2 percent, because half of the 4 percent is the 2 percent we got back that was pushed forward from Q1. So 2 percent is also below the 3 percent that people had been expecting.
By the time they finished downwardly revising this 4 percent number, we could end up with a contraction in the U.S. GDP for the first half of the year. So that doesn't sound like a resilient economy to me.
ETF.com: The Fed will likely announce another tapering by $10 billion, bringing it down to $25 billion a month, which would put QE on a path toward zero by October. Do you see the Fed fully tapering in 2014?
Schiff: First of all, even if they get to zero QE, if you're talking about tapering from the $85 billion, you have to understand that the Fed was doing a lot more than $85 billion. Even if they taper down to $25, they're still doing more like $45-50 billion, because what you have to look at is the fact that the Fed is reinvesting all of the interest and maturing principal that it receives back into the Treasury. So none of that is in the official QE numbers, but it's still QE. It's still the Fed buying Treasurys.
It has no plans to stop that, by the way. It has not telegraphed any intention to halt the reinvestment of interest and dividends and maturing principal. So that's going to continue indefinitely. So they're always going to be in the QE business.
I think that sometime between now and the time that they get to zero officially, I still believe they are going to pause this process, or maybe even reverse it, in the face of mounting and overwhelming evidence that the U.S. economy is much weaker than they think, and despite the fact that inflation numbers continue to come in hotter and hotter, and move further above the Fed's 2 percent official target area.
So I do think we're going to get more QE. I don't know how much time it's going to take before the bad news sinks in.
ETF.com: Last quarter you favored foreign stocks over U.S. stocks. Which foreign stock markets do you favor for the second half of the year?
Schiff: If you want to look at the countries that we focus on for our clients in our managed accounts and our mutual funds, we focus on a lot on the markets that are beneath the radar for a lot of the major investors. So when we invest in Europe, we predominantly invest in Scandinavia—Norway, Sweden; also Switzerland. Not so much in the big economies that people look at in the eurozone.
We also overweight smaller countries like New Zealand and Australia. We invest a lot in Southeast Asia—in developing markets, as well as Singapore and Hong Kong; we overweight there. Selectively in Latin America, we're in Chile, Peru. We're also in Mexico. We have some Canadian investments.
We stay away from some of the larger economies in Europe, in the U.K. or in Japan, and focus on some of these smaller economies that have much better macroeconomic fundamentals, have much better monetary policies, better fiscal balances, better trade balances. I think, over time, sticking with those economies is going to get you better returns.