Bull Moves in Bear Markets Outline

2015-11-22: It seems like this book is pretty irrelevant given seven years of history to show whether it is right or wrong. But leaving this up since I wrote it up.

I also reviewed this book.

Title: The Little Book of Bull Moves in Bear Markets: How to Keep Your Portfolio Up When the Market Is Down

Author: Peter D. Schiff

Length: 304 pages

Published: 2008

ISBN-10: 047038378X

ISBN-13: 978-0470383780

Foreword

Foreword is by Marc Faber, author of the Gloom Boom and Doom Report

  • Essentially tells that Peter will make it clear why we are in the mess that we are currently in, and you will lost respect for the government and wall street investors
  • Also talks about how inflationary pressures are quite high

Author’s Note

  • defines bear, bull, and sideways markets
  • important to keep the indexes consistent when you are discussing or considering how a market is doing
  • discusses corrections and rallies
  • important to note that just because a stock goes up does not mean it is more valuable: you must adjust for inflation
  • successful long-term investors need to see fluctuations for what they are
  • Wall Street attempts to portray every market condition as bullish or at the end of a bear market
  • author bases strategies in the book on the conviction that the dollar will lose purchasing power
  • continually stresses looking at history with regards to inflation and percentage changes
    • AJP: this guy is pretty smart
  • overpaying for stocks in bull markets has a severe negative effect due to the fact that when the market goes down you are out that money
  • “The goal is to help you preserve and enhance wealth that can be reinvested in America after fundamental economic reform takes place.”

Introduction

  • Talks about Crash Proof and how it accurately predicted the events of the last year or so
  • “…consumer spending in and of itself does not constitute an economy. Rather than being part of the solution, consumer spending is a major contributor to our current malaise.”
  • While others were talking about the assets of America, Schiff was concerned about the liabilities, especially those that would persist even after various bubbles burst
  • “Lenders will rediscover the prudence of prior generations, as it becomes painfully clear that banking is not really about lending money at all, but getting paid back.
  • AJP: I’m pretty much sold after the introduction, just based on how things are going in the world

Chapter 1 - Let’s Do The Time Warp Again: What happened to our purchasing power?

  • contrasts the healthy 1950s with early 2007
  • huge problem now is that we are borrowing to obtain not capital goods, but consumer goods which have no lasting value
  • talks about Euros being more commonplace in cities like New York
  • refers to predictions made in Crash Proof several times to establish credibility for later instructions
  • talks about how the US is like a playboy, but a subtle difference is that the US can create money, which will destroy the economy with inflation
  • AJP: it’s funny how every little page that I stumbled upon about economics is somehow reflected in the book here
    • the main problem seems to be a feedback loop based on value. Essentially, people keep overvaluing each other and borrowing, and then everyone realizes that everyone else has nothing
  • Americans will face a lower standard of living than they are used to
  • discusses how economic stimulus plan actually just increased inflation
  • about bank bailouts: "In the end, Americans will be on the hook for the losses, either directly through higher taxes or indirectly through higher inflation.”
  • “In my view, there is a real possibility that a new administration in Washington will confront its economic challenges with New Deal-type programs that will only exacerbate the damage and turn the current recession into a repeat of the Great Depression, only with consumer prices rising instead of falling.”

Chapter 2 - Saving Your Assets: Stay out of cash and bonds

  • hyperinflation has been experienced in every society that has used fiat money
    • almost every other currency in the world is based on fiat money
  • although typically you want cash and its equivalents when the stock market is crashing, the fact that the currency is crashing means that you don’t actually want these
  • many securities are based on the consumer price index, which is artificially manipulated. (you will lose money)
  • “I’d reinvest any cash you don’t need for walking around money in a nondollar money market fund…”
  • stocks could still benefit, especially if the companies are able to weather the storm
  • the fed has continually pumped money into the system to increase liquidity, which has caused inflation that has not been measured in the CPI or PPI
  • the government wants to create inflation
    • inflation is used for political reasons (stimulate economy, prevent normal, but unpopular, downturns)
    • government debt becomes more manageable when using inflationary dollars
    • force people into higher tax brackets
    • finance entitlement programs that would normally cause tax hikes
  • “By focusing attention on a red herring, the government is deliberately diverting attention away from the real rate of inflation and its role in creating it.”
  • “If foreign holders use their dollars to buy American companies, as is being done increasingly through sovereign wealth funds, earnings streams vital to the American economy are diverted to foreign owners, as is the political influence they represent. If they are spent in the American marketplace, foreign dollars compete with domestic dollars and send prices soaring.”
  • talks about various excuses and poor policies that the government uses to hide their stealing
  • Bretton Woods Agreements of 1944
    • pegging European currencies to the dollar, which would be redeemable in gold
    • Nixon was under pressure from earlier administrations’ expansions, and inflated the economy
    • other nations made a run on gold, and Nixon saw no choice other than to close the gold window
    • the gold standard limited the Fed’s ability to create money
  • The rest of the world will decouple from us to prevent losses, and will move even quicker as a result

Chapter 3 - Beware of False Prophets: How prophets cost profits

  • US government has some interests that it looks out for with:
    • misrepresenting inflation
    • Dow lost a huge amount in the eight years after 2000 due to inflation
    • the GDP
    • when buildings are destroyed by natural events and rebuilt, it increases the GDP, even though it’s clear that the economy would be better off without having to use resources to rebuild them
    • money borrowed and spent on consumer goods adds to GDP, even though it has a primarily negative effect
    • “Uncle Sam is using GDP growth as evidence that a weak, dangerously overextended economy is strong, healthy, and growing, and that Americans should therefore keep spending.”
    • productivity measures
    • unemployment figures
  • Wall Street
    • investment banks
    • basic conflict of interest between firms that do underwriting and brokerage
    • encourage people to invest even when Wall Street knows better
    • their major concern is to sell stocks and keep their corporate clients happy. Remember that, and discount their public predictions accordingly
    • mutual funds
    • their agenda is to maximize quarterly profits
    • this is directly in contrast to your agenda to maximize long-term profits
    • hedge funds
    • managers take 20% of profits but have no liability for losses
    • some are managed well, and some are very unstable
    • have a track record of almost destabilizing economies
  • industry groups
    • obviously have their own bias
  • AJP: What is Schiff’s bias? He leads a company that specializes in foreign investments. Hence, if other people invest abroad, they could increase his stock values…

Chapter 4 - Of Babies and Bathwater: What to do with my current US investments?

  • recommends getting out of US stocks for at least the next three to five years and investing in undervalued foreign stocks
  • not all stocks are going to tank, and some may rise. look to history to see what to invest in
  • not clear whether stocks are a good inflationary hedge
  • current situation similar to Great Depression and 1970s recession, and nothing like 80s and 90s investment strategies
  • GD was different, in that the problem was deflation instead of inflation
    • food, tobacco, and gold seemed to be safe
    • market did not fully recover until the 50s
    • the government is going to ensure that we don’t deflate by pumping money into the system
    • arguably a good thing for the GD was that everything deflated, which caused less problems for the people of the time
  • 1970s stagflation was countered by increasing interest rates
    • this is not an option today because it would cause huge consumer debt defaults
    • key stocks were basic/raw materials companies
    • in extreme inflation, stocks do not provide a good hedge for inflation
    • people want ‘stuff’ in high inflationary periods

Chapter 5 - Hot Stuff: Investing in the commodities bull market

  • commodities are bearish when stocks are bullish
  • Asia and India are just about to maturity, and will have an extremely high desire for raw materials, causing their demand to go up (prices of these will go up)
  • commodities are listed on the Commodity Research Bureau’s website
  • “Trading futures is potentially the most profitable way to participate in a commodities bull market.”
  • methods of trading futures:
    • advanced investors
    • nondiscretionary individual account
    • managed (discretionary) account
    • commodity pools
    • average investors
    • index funds
    • stocks of producing corporations or companies providing related services in resource-rich countries
    • dividend-paying stocks of other corporations in resource-rich countries
    • AJP: seems like there is considerable risk in me doing something like the advanced investors, as you constantly have to keep up with it, and I’m not sure that I have the time for that (author equates it to day trading)
  • investing in foreign companies that produce raw materials
    • “The secret is buying a combination of value and high dividends in developed foreign economies enjoying strong growth

Chapter 6 - The Ring In The Bull’s Nose: Making money with gold and silver

  • gold is limited in supply, and people will flock to it when the dollar collapses
    • this makes it valuable
    • although it’s at about $700 now, author sees it going to $5000 by end of bull market (although this dollar figure is strange to me based on the inflation that he’s talking about)
  • silver is used as a commodity in industry and is lessening in production
    • sees as a good bet, although more volatile than gold
  • ways to play gold and silver
    • physical ownership
    • coins or bullion
    • "people buy physical gold as a way of preserving wealth, avoiding risk, and maintaining liquidity rather than making their wealth grow”
    • coins having the same weight may have different purity
    • talks about problems of having this and securing it (what if bank goes insolvent, government confiscates, etc?)
    • Perth Mint
    • author advocates; his company does business with these guys
    • exchange-traded funds and notes
    • author seems kind of worried about the backing of these
    • GoldMoney
    • online banking backed by gold
    • commodity futures
    • mining stocks

Chapter 7 - Weathering the Storm: Following the money to foreign soil

  • to maintain purchasing power, you must invest where the purchasing power is going so that you keep it
  • in the past people were worried about investing overseas, although now the risk is more in the US than anywhere else
  • methods of investing
    • American depositary receipts
    • mutual funds
    • exchange-traded funds
    • other vehicles
    • exchange-traded notes
    • unit investment trusts
    • closed-end funds

Chapter 8 - Favorite Nations: Money cat knows where the money tree grows

  • Invest in foreign countries from the top down: region then country then sector
  • next, look to get positive return from at least two of: dividend income, currency exchange, and capital appreciation
  • so pretty much you want solid non-dollar stocks that pay dividends that you can use as income or further investment capital
  • this is so that you can stay on your feet so that you have money to reinvest when new US opportunities emerge
  • try to focus on companies that make money with partners outside of the US
  • discusses a bunch of countries and their resources

Chapter 9 - If You Want To Roll The Dice: The lure of emerging markets

  • risk is high and takes a variety of forms
  • says that only professionals should try this

Chapter 10 - To Infinity and Beyond: Secure employment for the future

  • says that anything service-based will be very problematic
    • even includes health services - even though people predict that boomers will need more health care, America just can’t afford it
  • jobs relating to engineering, construction, agriculture, merchant marine, commercial fishing, energy, computers and high technology (AJP: yay), entertainment, automotive and appliance repair, and tailoring and textiles will benefit or stay flat based on market conditions

Chapter 11 - A Decade of Frugality: Making it with less money

  • standard of living is going to go way down
  • start saving now
    • sell goods if you don’t need them
  • get rid of variable rate debt and credit card debt
  • stockpile goods, even things you may not need that you can barter with
  • get good at fixing things

Chapter 12 - Pack Your Bags: Emigrating can save wealth and taxes

  • the most rapid growth is in Brazil, Russia, India, and China (author’s preference is China)
    • learning Mandarin might be a smart idea
  • the best way to build a business in the BRICs is to start your own business
  • if you stay in the US, try to avoid poor urban areas because of violence

Chapter 13 - The Light At the End of the Tunnel: How to make it shine on you

  • talks about upcoming presidential elections
  • the light at the end of the tunnel is that sooner or later the US economy will be profitable again
    • says it’s probably not safe to invest in the US until at least 2012