Contrarian Investing: How to Bet Against the US Dollar (Audio)

Peter Schiff spoke with Palisade Radio last weekend about his strategy for contrarian investing. While the principles are simple, the trick is having the courage of your convictions to bet against the consensus. Peter believes the current consensus is that the US economy is recovering with a strong dollar. He thinks that party is going to end soon and that the US will have a full-blown currency crisis within the next couple years. He recommends investing in the precious metals sector, oil, and fundamentally sound overseas companies.

Highlights from the interview:

“A contrarian is going against the crowd, by definition, when you’re doing something that nobody else is doing. Let’s say you think a stock is cheap that nobody else wants to buy, it’s likely to continue to stay cheap or get cheaper even after you recognize the value. By definition, if everybody wants to sell something and there’s not that many buyers, the price can go down. But you have to have the courage of your convictions that returns don’t have to be front-end loaded, that sometimes you have to sit on a position for years before it works out. Then, when you look at your annualized rate of return, it ends up being quite good. That’s the reward for being patient. A lot of people who are less patient, they want to get that immediate gratification. They want to buy something and have it go up right away. Generally, the only time you can do that is if you buy something that is already going up… A lot of times people who chase short-term performance end up losing money in the long-run…

“Not only are gold stocks a contrarian play, but a lot of the foreign currencies are contrarian plays. The Australian dollar, the Norwegian krona, the Canadian dollar, even the euro. The way you make money is try to find a trade or thesis that everyone is betting on and try to see if it is correct. If it’s not, then you’ve got to bet against that trade. That’s what happened with the mortgage market. Everyone was convinced that real estate prices can only go up, and they were all wrong…

“You have the same situation today. You have everyone convinced the US economy is strong, the Fed is going to raise rates, and as a result of that they’ve already bid up the dollar. So there’s not a lot of risk in shorting the dollar right now, because even if the Fed does raise rates, which I think is unlikely, that’s already been built into the trade. People have already bought in anticipation of that happening…

“But if the Fed doesn’t raise rates or launches QE4, which I think is ultimately going to happen, then you have a crash in the dollar. Everybody is expecting the opposite of that. When they all figure out at the same time how wrong they are, the market will react very violently and very quickly…

“The tools [that the Fed has] don’t actually fix the economy. The Fed’s tools prevent the market from fixing the economy. They broke the economy, and their tools simply allow them to break it worse. The tools used to consist of interest rates and quantitative easing, just expanding their balance sheet. The interest rate tool is pretty much gone, because they’re at zero. There’s no arrows left in that quiver, so now they’re down to just one blunt instrument, which is quantitative easing. They’ve done it three times and I think they’re going to do it a fourth time. I think they’re just going to have to do it bigger. Maybe Paul Krugman is going to be able to convince everyone the only problem with the stimulus in the past was that it was too timid, it wasn’t bold and big enough…

“There was maximum pessimism on Russia. You even had, I think it was the US Secretary of the Treasury came out and said you got to short Russia. He was actually deliberately trying to talk down the Russian market… But I guess when someone from the Obama administration is telling you to sell short Russia, it’s probably a great buy signal. Had anyone bought on the day those announcements came out, they’d be sitting on some nice profits. I think oil prices are headed a lot higher. I think oil did bottom out near $42-43 a barrel. A lot of people are still looking for $20 oil. I don’t think they’re going to get it. I think oil is more likely to recover above $70-80 by the end of the year…

“My guess is this is not going to be the year when it hits the fan. My guess is that when the Fed does start to raise interest rates, the dollar will start to decline. But since it had such a big rally, it’s got a long way to drop before it would get into a situation where it would cause a potential currency crisis, which is where I think the end game is. We could have something like that in 2016 or 2017. But I do think the end is near, as far as when this crisis is going to occur…

“There’s a very unique situation in Puerto Rico. Americans are in a very unique and unfortunate situation relative to people in other countries, in that we’re taxed on our worldwide income. Most people, in fact all other people pretty much on the planet Earth, when they leave their country of citizenship, they leave their tax liabilities behind. They don’t have to file taxes if they’re living abroad. So Americans don’t have that ability. You’re kind of stuck paying taxes, even if you live in a tax haven where there’s no tax. There’s a unique situation in Puerto Rico… By treaty, any American citizens that reside in Puerto Rico, any income they earn from Puerto Rico is exempt from US taxes. It’s really the only place in the world an American can go and earn income and not have to cut the US government in on it. Up until 2012, that exemption didn’t help very much because Puerto Rico imposed its own income tax based upon the US income tax, where the rates were almost as high… Puerto Rico got smart a couple years ago and decided to use its status to its advantage…”

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