Peter Schiff: buy Asia, currencies and gold

In the second of our series, Connecticut-based economist Peter Schiff of Euro Pacific Capital tells Jody Clarke what he's investing in now.

In the second of our series, Peter Schiff of Euro Pacific Capital tells Jody Clarke what he's investing in now.

Can government stimulus save the global economy?

The stimulus plans will have a negative impact. Rather than allowing the underlying economic imbalances to be resolved in a stable way that will lead to long-term growth, stimulus delays that process.

The government refuses to let the markets function because they're afraid of the immediate consequences of market forces on employment and asset prices. So they try to mitigate that and end up causing more long-term damage.

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Japan's a great example. Government stimulus protracted a process that would have been completed more rapidly had the government stayed out. But America is the same we stimulated the economy in 2000 and 2001 with low interest rates, rather than letting the recession run its course. The result was the housing bubble and the disaster of 2008.

Should investors avoid equities?

No. We're 100% invested just not in the US. What's happening beneath the surface is a movement away from the US consumer. The conventional wisdom is that by spending borrowed money on imported products, US consumers are somehow the driver of global economic growth.

My point is that we have in fact been a drag on global economic growth. Because we don't produce enough and we borrow too much, the rest of the world has in effect been subsidising our lifestyles. That subsidy exacts a cost on the global economy.

As these imbalances are resolved, the cost of that burden will shrink, and the rest of the world will benefit from the end of those subsidies. I know it's going to happen because the world isn't going to finance us forever, just like the housing bubble couldn't go on forever and Bernie Madoff couldn't run his Ponzi scheme forever.

So have you been buying Asian stocks?

Yes, and currencies. The countries that have borne the highest proportion of the US subsidy have the most to gain when that subsidy ends. The Japanese have said a strong yen is in the national interest. So if I was just going to buy one currency it would be yen.

If the Chinese back away from their dollar peg and let the renmimbi rise, or if China removes the Hong Kong dollar from the US dollar and floats it, the Asian currencies will be strong. The same goes for the Gulf, and currencies such as the Saudi riyal.

What's your strategy for picking stocks?

I focus on value and have a buy-and-hold strategy. I look for dividend yields, lows p/es and good growth rates and I look for companies that are earning their revenues in solid foreign currencies that are appreciating. One of our biggest positions is Skyworth (HK: 751) which makes components for mobile phones in Hong Kong. It hit $3 a share about a month ago. Last year we were buying it at 30 cents a share on a dividend yield of 16%.

We've been buying Vitasoy (HK: 0345), a Chinese beverage brand, too. I've also been buying some Norwegian stocks such as seafood producer Leroy Seafood (OSL: LSG) and fertiliser group Yara International (OSL: YAR).

Have you been buying gold?

I'm still buying gold and silver. It's hard to time the market, so I don't try because I think the moves will be so big. Whether someone buys gold at $900 an ounce or $1,000 doesn't matter if it's going to hit $5,000. I'm just looking at how much money is being printed relative to how much gold is being mined and I think it's going to be even higher than $5,000.

As foreign governments back away from financing our debts, I don't think the response in Washington will be "let's cut the deficit". I think there will be more pressure on the Fed to buy the debt.

I don't think our politicians see any downside they think that money is money. They don't see a difference between the Fed printing it to buy our debt and China buying it with their surplus, so I think you're going to see massive inflation.

I think interest rates in the US are going to stay low for a longer period of time, which means you're going to have very high negative interest rates. If you have a negative rate of -5% or -10%, no one will want to hold dollars. So what do you do? You hold gold.

Who is Peter Schiff?

Peter Schiff did a better job than most of predicting the financial crisis. As far back as 2004, the Connecticut-based economist was warning of the dire consequences of America's debt-fuelled economy and the housing bubble.

Born into a Jewish family in Connecticut, New England, his father was an anti-tax campaigner and "a big influence in that he gave me books to read at a young age that really explained how economies grew and how wealth was created. That gave me an appreciation of capitalism."

It also got him into trouble at school. "I argued with my teachers constantly. The conventional wisdom in the US is that a big government is a good thing that government spending and regulation is what makes the economy grow, and if it wasn't for that the country would have collapsed in the Great Depression (all the Keynesian nonsense), so I talked a lot in class. I didn't argue with my maths teachers or my English teachers. The only time that I argued was if I had an economics or history course with teachers who were completely clueless."

Jody Clarke

Jody studied at the University of Limerick and was a senior writer for MoneyWeek. Jody is experienced in interviewing, for example digging into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.