Where is our economy really heading?

“We’re heading for a Depression.”

These are not my words, but if you are intrigued I am referring to Peter Schiff.

Peter Schiff is an author, businessman and financial commentator and Republican candidate for the US Senate. Schiff is another renowned bear, along with Richard Russell, author of the Dow Theory Letters.

Rewind back to August 2006 when everything looked rosy and things seemed to be going swell, everyone in America were buying houses (sound familiar?) and the credit markets were booming. Peter Schiff called the end of the age of irrational exuberance and believed the housing and credit markets would soon crash.

He said the economy “was like the Titanic with everyone will go down with the ship”. As outlandish as those comments were back in 2006, he was right.

Four years on and for the US the worst recession since the ‘big one’ Schiff stands alone with another big bold bleak prediction: An imminent inflationary Depression.

The catalyst

Schiff is president and chief global strategist at Euro Pacific Capital and author of the books Crash Proof, and his latest, How an Economy Grows and Why It Crashes. He has said that the government’s policies – massive fiscal stimulus and a zero interest-rate policy – have put the US on a collision course.

Schiff has stated that America is in the early stages of a Depression that will be a horrific experience for the average American and our trading partners.

Schiff believes the Government needs to stop the stimulus immediately as it is the Government that has prevented an efficient allocation of resources. They have prevented the natural market forces from operating the way they need to with too many subsidies and too much regulation, creating a slowing economy.

Bad government

The US Government have created a nation of spenders, speculators and consumers, and destroyed the savers and producers (of locally produced manufactured goods). We’re moving from a market-based economy to essentially a planned economy. That’s a recipe for disaster.

All we’re doing is borrowing money from economies that are growing, like China, and we’re spending their money. But that’s going to stop.

Schiff has also said, “There is no chance of us getting off as easy as Japan either, our situation is considerably worse. We’re going to have runaway inflation and recession simultaneously. I call what we’re going to have an inflationary depression, which is the worst possible Depression you can have.”

Okay Schiff, so where would you park your cash then?

Schiff believes everyone should stay well clear of US Government denominated debt instruments such as Government bonds and head for emerging countries and countries with vast amounts of natural resources such as Canada, Norway and Australia.

He favours either of our big two Rio Tinto (ASX: RIO) or BHP Billiton (ASX: BHP) as an example of companies with exposure to natural resource economies.
He also favours exposure to precious metals – particularly gold.

If not physical gold then an Exchange Traded Funds, with exposure to natural resources such as ETFS Metal Securities Australia Limited (ASX: GOLD) and emerging markets.

Schiff believes the US stock market will fall in numeric terms to the price of one ounce of gold currently at USD$1200 dollars, but he believes the price of gold will appreciate from its current very cheap level and the two will meet; so we are talking a decline in the order of 60-80% or something of that order.

What has that to do for us you ask? Because our market will move in lock-step with the US stock market indicators, regardless of whether they end up taking us down with them or not.

So what do you think? Is Schiff barking up the wrong tree? Is confidence in your world plummeting?

These are certainly not my thoughts and I’m merely presenting a competing view of our financial future.

At the moment there is uncertainty with consumer and business confidence eroding by the day. I’ll give you my take on it next week and thoughts on how you can approach an uncertain future with some confidence in tow.

Nick Christian is a Financial Adviser and planner and authorised representative of Millennium3 Financial Services.

The views and opinions expressed within this letter are those of the author and do not necessarily reflect those of Millennium3 Financial Services Pty Ltd.

The above is general in nature and should not be acted upon without seeking the advice of a professional licensed financial planner.