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.
ETF.com: Is there one region or country that really jumps out at you, about which you're saying, "We're most bullish on this country or region"?
Schiff: I don't know if there is any one country in particular. I know Asia is where we're probably the most overweight—countries that have a lot of natural resources, as well. I'm still very bullish on commodities long term, so I think some economies are going to benefit from that.
ETF.com: Let's talk about precious metals. You're a gold bull. Do you prefer gold over other precious metals, such as silver or palladium, which have other industrial uses?
Schiff: No, not necessarily. When I talk about gold, generally I have the same advice for silver. Palladium is a little bit more different, and platinum, because they might have more volatile swings, based on their industrial use. Silver, even though it has an industrial use, is still viewed in a way as a monetary metal. Even though platinum and palladium are precious metals, I think they're almost exclusively seen as industrial. Platinum is generally more expensive than gold per ounce, although once in a while it goes the other way.
I am advising people to own gold as a substitute for dollars, euros or yen. I'm looking for it for its monetary properties. I'm looking for the eventual remonetization of gold. If you look around the world at central banks, central banks hold a lot of gold, although not nearly as much as they need, and not nearly as much as they're going to buy.
They don't hold palladium. They don't hold platinum. They don't hold silver. I mean gold historically has been the main monetary metal. So I generally talk about gold when I'm talking about using real money as opposed to fiat.
But I'm bullish on all commodities, which would include gold, silver, platinum. Historically, when you have a bull market in gold, you also have one in silver. If you look at the ratio between gold and silver today, most likely if my gold target is reached—I've been talking about $5,000 gold, which I think is kind of like a minimal, probably going to go higher than that—silver proportionally will be a lot higher.
So if somebody buys silver today, and I'm right on gold, they'll probably make more money in silver. So I'm not discouraging people from buying it. We still recommend it.
ETF.com: : Gold mining stocks have done very well this year. Do you like gold mining shares?
Schiff: I absolutely love them. As an investment, they've done really well. Not compared to how much they lost in the couple of years prior. If you actually look at where they are in relationship to where they've been, they've barely recouped a small fraction of what they lost in the last couple years.
So even though they had done very well, this is just the beginning. I think they've got a long way to go on the upside. In fact, there are plenty of gold stocks today, major gold companies, that are trading at prices below where they were five to 10 years ago.
You're talking about historic low valuations for gold mining companies. There probably isn't a sector more universally hated among professional investors than the mining stocks. If you look at major institutional holders of equities, the typical allocation to mining, gold mining, is zero.
You probably have more institutions that are short gold than long. So they're not on anybody's radar. Nobody owns them. The worst-case scenario is already factored in. I mean these stocks are not priced for $1,300 gold. They might even be priced for sub-$1,000 gold.
So when gold ends up going much higher, these stocks have a lot of catching up to do, because they're priced for the wrong thing. So it's going to be a big surprise. The real value is not in there. You've got sell recommendations, hold recommendations on most of these stocks.
What's going to be happening, ultimately, is they're going to come out. They're going to be beating their earnings estimates. They're going to have upgrades. There's a lot of upside to come on these stocks. There's a lot of shorts that are going to have to cover.
ETF.com: There's a lot of buzz right now with bitcoins in the ETF industry, because there's a bitcoin ETF filing. What are your thoughts on bitcoin?
Schiff: The only thing more ridiculous than bitcoin would be the bitcoin ETF. I like the concept that we need an alternative to fiat currencies, because they're lousy and they don't work, which is true. But I don't know that bitcoin or any one of the hundreds of other digital currencies that now exist because of bitcoin are going to necessarily work any better than dollars or euros or yen. In fact, they may even be worse.
The problem is, there's no real value there. The reason I want gold to be money is gold was a commodity before it became money. Before gold was used as money, we had barter. When the concept of money was developed, people said, "What commodity can we use and just make all of our trades in this one commodity."
The commodity that was most easily used as money, and that satisfied the requirements of money best, was gold. That's why gold became money. But it was a commodity first. It was valued for its properties. Gold was desired. People wanted it because it was beautiful and scarce and had all kinds of properties. There were uses for gold. Those uses exist today.
Bitcoins don't have any value. They're not a commodity. They're just nothing. They have no more intrinsic value than dollars or euros, except they lack a legal tender status. They lack a government accepting it as payment of taxes. They don't have some of the things that give fiat currencies a use, not that they necessarily give them intrinsic value. It doesn't have a history of being accepted.
At least with dollars—not that I'm a fan of the dollar—people will accept them. You spend them. But there's only a small community of people who are going to be willing to accept bitcoins. Why do they accept them? Because they believe that somebody else will accept it.
The price of bitcoins has been falling. They're now about $570 a bitcoin, I think is the price today [7/30/14]. That's down from over $1,100 about a year ago. We're in a bear market already in bitcoin. I think it's a long way down.
Any kind of a bitcoin ETF, in my mind, is really an exit strategy for some people who are stuck with a bunch of bitcoins. They don't think there's a big enough market to sell them. So what they really want to do is shove them in an ETF and sell them on Wall Street. To me, it represents somebody's exit strategy, somebody trying to get rid of a bunch of bitcoins. So I wouldn't want to be a buyer of that ETF.
ETF.com: Thanks for your time.
ETFS Physical Silver (SIVR | A-100)
Schiff is bullish on all commodities, but none so more than gold. Yet he points out that historically, silver follows a gold bull market, and recommends silver, claiming if he's right about gold, silver will rise proportionally higher. SIVR is currently the cheapest option for "pure" silver exposure. Like iShares' Silver Trust (SLV | A-99), SIVR' shares are backed by physical silver in vaults, providing access to near-spot prices. SIVR charges a segment-low 0.30 percent, 20 bps less than SLV for virtually the same exposure. SIVR doesn't come close to matching SLV's $6.6 billion in assets, but its popularity is nothing to scoff at—it boasts $385 million in assets and trades more than $1.6 million a day at 8 bp spreads.
Market Vectors Gold Miners (GDX | B-63)
Schiff sees real value in gold mining stocks. He claims many of them are priced for gold far below the current $1,300 spot price, and if his bullish gold prediction comes to fruition, he sees a lot of upside in mining stocks. GDX is the goliath in the mining space, with close to $8 billion in assets. The cap-weighted fund holds roughly 40 of the largest gold miner stocks listed in the U.S., meaning household names like Goldcorp, Barrick Gold and Newmont Mining are stacked at the top. Roughly two-thirds of the fund is weighted in Canadian miners. GDX charges 52 basis points, but tends to trail its index by only 39 basis points over most 12-month stretches. The fund is a trading powerhouse, with more than $720 million changing hands daily at ultra-tight spreads.
ETF.com Alpha Think Tank ETF Tracker
Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.
We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.
|Ticker||Fund Name||ETF.com Pick Date||TR % (Since Pick Date)||TR %
|Closing Price $ (8/1/14)||Inspired By|
|INDA||iShares MSCI India||2/24/14||23.23||29.57||29.71||Roubini|
|GXC||SPDR S&P China||2/3/14||17.43||18.55||80.60||Rogers|
|EWW||iShares MSCI Mexico Capped||3/3/14||16.14||3.48||68.88||Friedman|
|PXH||PowerShares FTSE RAFI Emerging Markets||2/17/14||14.81||14.16||21.86||Arnott|
|MCHI||iShares MSCI China||4/15/14||13.40||17.00||49.94||Faber|
|AMU||ETRACS Alerian MLP ETN||1/27/14||12.23||15.03||31.57||Luskin|
|GDX||Market Vectors Gold Miners||3/31/14||10.99||1.05||26.20||Merk|
|DBB||PowerShares DB Base Metals||5/8/14||10.62||7.71||17.61||Gartman|
|EWY||iShares MSCI South Korea Capped||2/24/14||10.58||19.68||66.60||Roubini|
|CCXE||WisdomTree Commodity Country Equity||3/14/14||10.45||11.89||31.25||Schiff|
|INDA||iShares MSCI India||4/9/14||9.99||29.57||29.71||Kotok|
|EWW||iShares MSCI Mexico Capped||2/11/14||9.39||3.48||68.88||Fitzsimmons|
|GMF||SPDR S&P Emerging Asia Pacific||4/9/14||9.22||16.70||86.00||Kotok|
|EWP||iShares MSCI Spain Capped||1/27/14||8.75||31.56||40.47||Luskin|
|EWH||iShares MSCI Hong Kong||4/15/14||8.33||16.57||21.98||Faber|
|NKY||Maxis Nikkei 225||2/3/14||8.27||6.53||17.82||Rogers|
|IEMG||iShares Core MSCI Emerging Markets||4/28/14||7.61||13.33||52.63||Luskin|
|EWJ||iShares MSCI Japan||3/3/14||6.46||5.48||11.99||Friedman|
|EWI||iShares MSCI Italy Capped||1/27/14||5.70||24.62||16.24||Luskin|
|GULF||WisdomTree Middle East Dividend||3/10/14||5.64||29.84||22.90||Dorsey|
|BKF||iShares MSCI BRIC||5/22/14||5.55||14.50||39.66||Arnott|
|ELD||WisdomTree Emerging Markets Local Debt||2/17/14||5.45||2.46||46.69||Arnott|
|EWS||iShares MSCI Singapore||5/5/14||4.61||8.08||14.04||Bremmer|
|BAB||PowerShares Build America Bond||4/9/14||4.23||13.03||29.52||Kotok|
|FXA||CurrencyShares Australian Dollar||3/14/14||3.87||6.27||93.11||Schiff|
|DBJP||db X-trackers MSCI Japan Hedged Equity||6/12/14||3.78||8.32||36.98||Roubini|
|CHIQ||Global X China Consumer||3/17/14||3.37||3.77||14.72||Yardeni|
|VTI||Vanguard Total Stock Market||4/28/14||3.32||14.49||99.49||Luskin|
|EWP||iShares MSCI Spain Capped||2/24/14||2.99||31.56||40.47||Roubini|
|RSP||Guggenheim S&P 500 Equal Weight||3/10/14||2.65||15.48||74.76||Dorsey|
|IEMG||iShares Core MSCI Emerging Markets||6/12/14||1.89||13.33||52.63||Roubini|
|KOL||Market Vectors Coal||5/8/14||1.78||7.31||18.85||Gartman|
|FXC||CurrencyShares Canadian Dollar||3/14/14||1.63||-5.09||90.98||Schiff|
|VNM||Market Vectors Vietnam||4/15/14||1.47||15.29||21.04||Faber|
|EWP||iShares MSCI Spain Capped||3/10/14||1.11||31.56||40.47||Dorsey|
|MUB||iShares National AMT-Free Muni Bond||7/16/14||0.76||8.50||109.03||Kotok|
|USDU||WisdomTree Bloomberg US Dollar Bullish||4/15/14||0.50||N/A||24.92||Faber|
|SCPB||SPDR Barclays Short Term Corporate Bond||3/17/14||0.44||1.70||30.74||Yardeni|
|ROBO||Robo-Stox Global Robotics and Automation||3/3/14||0.19||N/A||27.01||Friedman|
|AFK||Market Vectors Africa||5/5/14||0.03||15.80||33.13||Bremmer|
|EIDO||iShares MSCI Indonesia||5/28/14||-0.11||-4.52||27.96||Fitzsimmons|
|XLU||Utilities Select SPDR||4/9/14||-0.30||8.54||41.41||Kotok|
|CHIQ||Global X China Consumer||2/11/14||-0.61||3.77||14.72||Fitzsimmons|
|FXA||CurrencyShares Australian Dollar||7/9/14||-0.99||6.27||93.11||Merk|
|RSX||Market Vectors Russia||2/3/14||-1.39||-6.34||24.07||Rogers|
|VTI||Vanguard Total Stock Market||6/10/14||-1.43||14.49||99.49||Friedman|
|FXB||CurrencyShares British Pound Sterling||7/9/14||-2.03||10.85||165.37||Merk|
|TUR||iShares MSCI Turkey||6/10/14||-2.12||2.86||57.81||Friedman|
|EPOL||iShares MSCI Poland Capped||3/3/14||-2.14||7.31||27.98||Friedman|
|VHT||Vanguard Health Care||7/2/14||-2.22||20.15||111.28||Yardeni|
|INDA||iShares MSCI India||7/23/14||-2.85||29.57||29.71||Bremmer|
|DBC||PowerShares DB Commodity Tracking||3/14/14||-3.50||-3.35||25.12||Schiff|
|DBC||PowerShares DB Commodity Tracking||3/31/14||-3.83||-3.35||25.12||Merk|
|EIDO||iShares MSCI Indonesia||7/23/14||-4.54||-4.52||27.96||Bremmer|
|EWL||iShares MSCI Switzerland||6/24/14||-5.04||11.04||32.63||Dorsey|
|ITA||iShares U.S. Aerospace & Defense||5/5/14||-5.78||16.37||103.33||Bremmer|
|DBGR||db X-trackers MSCI Germany Hedged Equity||2/24/14||-6.01||10.07||24.22||Roubini|
|ERUS||iShares MSCI Russia Capped||5/22/14||-6.05||-8.43||18.46||Arnott|
|IAU||iShares Gold Trust||3/14/14||-6.57||-1.65||12.52||Schiff|
|EZU||iShares MSCI EMU||6/12/14||-7.77||12.43||39.41||Roubini|
Data as of 8/1/14