Saturday, August 02, 2014

Schiff vs. Shedlock: The Great Austrian Macro-Tainer Smackdown

(This post originally appeared at Bloomberg View.)

In the world of financial media, it can be hard to separate news and analysis from entertainment. Ever since the crisis, financial entertainment seems to have shifted from hot stock picks to big macro theories. One advantage of spouting macro theories instead of stock picks is that it can take years for you to be proven wrong. Another is that you get to mix politics with economics, which is good for grabbing attention and building up a loyal following.
The undisputed king of macro-tainment is Peter Schiff. Schiff has managed to combine the most effective form of political entertainment -- right-wing talk radio -- with the most popular and addictive flavor of macro-tainment, Austrian economics. Schiff was elevated to dizzying heights of popularity after 2007, when one of his manymanymanymany bubble calls proved to be right. Since then it has seemed like Schiff is everywhere -- I’ve seen his face on three banner ads in three different magazines just this morning.
But it’s tough to be the king, because ambitious dukes and barons are always angling for a shot at your job. For the last several years, Schiff has been dogged by a determined and prolific critic -- finance blogger Michael “Mish” Shedlock.
In a way, Shedlock seems like he should be a natural ally of Schiff, or even a fan. Both avow that they are students of the “Austrian school.” Schiff’s asset-management company is called Euro Pacific Capital, while Shedlock’s is called Sitka Pacific Capital Management. Even their last names go well together -- “Shedlock & Schiff” would be an incredibly catchy title for a show. But in fact, the former has been criticizing the latter since 2007.
The big Shedlock-Schiff dust-up came in 2009, when Shedlock released an epic post titled simply: “Peter Schiff was Wrong.” Here is Shedlock:
I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff's investment thesis was flat out wrong...
(L)et's discuss the main points of Schiff's thesis...
· US Equity Markets Will Crash.
· US Dollar Will Go To Zero (Hyperinflation).
· Decoupling (The rest of the world would be immune to a US slowdown).
· Buy foreign equities and commodities and hold them with no exit strategy...
[Schiff's] investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities...What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.
In other words, Schiff failed where it matters most: Peter Schiff did not protect his client's assets.
Shedlock goes on to back up his criticism with a number of Schiff quotes predicting a dollar crash, hyperinflation and other things that never happened. For each prediction, he includes charts showing just how wrong Schiff turned out to be. If you want to see the dangers of investing based on macro-tainment, Shedlock’s post is Exhibit A.
Now, in the world of macro-tainment-cum-asset-management, them's fightin’ words, to say the least. It took a few years, but in 2012 Schiff fired back with a post entitled “Mish Shedlock Exposed.” Here is Schiff:
Despite [Shedlock's] criticism of my performance, his own performance is undeniably horrible over the long term. Just about the worst investment decision one could have made was to send money to Shedlock's firm in January 2009. Since then, global stock markets and foreign currencies have rebounded sharply and Shedlock's clients have completely missed the gains...
Shedlock has been warning about the specter of deflation for years, and his strategies are apparently designed to guard against this outcome. However, like Linus sitting in that pumpkin patch, it's been eight years, and the Great Pumpkin has yet to appear...
More significantly, if investors really feared deflation and simply bought U.S. Treasuries instead of giving their money to Shedlock, they would also have been much better off. Apparently Shedlock has succeeded in developing an investment strategy that underperforms under both inflation and deflation! So, when it comes to the inflation/deflation debate, no matter which camp wins, Shedlock's clients still lose.
Schiff’s post includes a list of spreadsheets and calculations comparing Schiffian strategies with Shedlockian, and purporting to show the former crushing the latter.
Unfortunately, attempts to get the two in the same room for a debate have not yet been successful.
It might seem strange that these two are fighting, since both profess to be followers of Austrian economics. And indeed, as observers of the debate such as currency trader and blogger Simit Patel have noted, the two do agree on a number of basic ideas:
It's crucial to note that Schiff and Shedlock agree on quite a bit. Such as:
· Gold will rally
· US stocks will decline
· Japanese yen will appreciate
Every one of these predictions has turned out to be the exact opposite of what has happened in the last couple of years. Austrianism makes for great political tub-thumping and fun end-of-the-world scenarios, but if you forget that it’s fundamentally a form of entertainment, your portfolio could be in big trouble.
In fact, my own basic message is something I’ve said before: Macro-tainment contains no actionable information. If you’re one of the few people who can listen to radio shows and read blog rants about poorly defined, wordy macro theories without your investment strategy being influenced by it, then by all means, grab some popcorn, open up Zero Hedge, turn on Peter Schiff's show. But for most of us, it’s crucial to recognize that macroeconomics is something that even the world’s smartest economists still don’t understand very well, and that political ideology and economic reality don’t mix.
Update: In the comments at BV, Peter Schiff was kind enough to direct me to this earlier Shedlock response he posted in 2009, immediately after Shedlock's big attack. The response does not mention Shedlock by name, however.


  1. Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz.

    1. I bet you didn't even hold down the z key. I bet you hit each of those z's independently.

    2. The odd thing is I actually care about Austrian theory. I've actually read a book each by von Mises and Hayek, which I figure is more than 99.9999999999999999999999999% of the people writing about it on the web can say. I guess it's like the Bible, the people who love and hate it most know the least about it.

      I just think Austrian theory is much more reasonable than people give it credit for. As I understood von Mises' rant about inflationism, it was all about printing money to fund continually increasing government spending, which is exactly what causes inflation. He wrote this in German in 1912. You've got to give him some credit for giving a timely shout out about where that was going to lead.

      I also agree with Hayek that the Nazis and Communists were two peas from the same pod. Not so much with the idea of inevitable degeneration of Social Democracy into totalitarianism, not at all with the sympathy for Pinochet. I don't imagine that Austrian or any other theory that old explains modern situations very well, but I also don't see anything in it nearly as silly as, say, the Keynes-Kahn multiplier.

      Schiff is a huckster. Shedlock sounds closer to reasonable, but still a bit weird.

  2. "But for most of us, it’s crucial to recognize that macroeconomics is something that even the world’s smartest economists still don’t understand very well, and that political ideology and economic reality don’t mix."

    Not true. Leftist ideology and economic reality do mix. See Piketty. Throughout the 1990s and 2000s I got my Macro-tainment from the left. The Mexican peso bailout. The East Asian financial crisis and Japan's lost decade. . The Long-Term Capital Management bailout and the Russian default. The "New" Economy with Turned out it wasn't new. Enron. Oliver Stone was right about Wall Street.

    Then the housing bust and epic financial crisis where the entire system was briefly socialized. Some of us were surprised but not *that* surprised as we've been paying attention to the international scene. Macro-tainment became actual dramatic entertainment with movies like Margin Call and Too Big To Fail being made.

    1. But what's most entertaining for me now is the cognitive dissonance raging in the minds of those on the right:

  3. Directional interest rate strategies are the best area for macro analysis, as risk-free rates are tied to central bank policy. Mish Shedlock's views on rates over the past few years seemed to be broadly correct, although I did not bother to create a "track record". And he would have been much better than the consensus and official bodies, who spent the last 4 years screaming about "unsustainably low rates",

  4. "In the comments at BV, Peter Schiff was kind enough to direct me to this earlier Shedlock response he posted in 2009, immediately after Shedlock's big attack."

    I imagine Schiff's email was extremely polite and professional.

    1. Actually, he's been emailing me for a while now, and always politely and professionally.

  5. Weren't you earlier lamenting the lack of actionable information available from "the world's smartest economists"? At least one should be entertained if you're going to have your time wasted. And have something to show for it, like a commemorative gold coin.

  6. I bet the bull market ends when this strain of popular Austrianism finally falls out of favor.

    Sort of how the bear market ended when everyone stopped watching CNBC.

  7. Anonymous11:38 PM

    Generally with Boomer disinflation, you are in general, going to get lower and lower nominal rates. Schiff doesn't seem to get, the demographic part of things. We need less growth and less jobs to create maximum performance. I think rates are to low right now. Take the 10 year. It should be around 3.50-4.50 yield based on current conditions. I think the "fear" trade needs to move on. Eventually inflation will force them to move on as the expansion matures and fracking starts building a current account surplus continuing its boosting of growth. But notice the baseline level of the bond is well down from where it was in 1999.

    Dynamics and Demographics are something any economist needs to understand and respect. Egos and ideological bias can be a killer sometimes.

  8. I wanted to comment here, not in the previous topic! Oops!

    A few thoughts -

    What is diversification? Is it stocks, bonds, RE, gold, commodity? Or, it is a group of companies that may appear to be doing different things - agro, pharma, rocketman, killing fields etc?

    Almost all indexes and ETF baskets reflect an opinion of their creators; S&P 500 routinely add and subtract companies for the reasons that are not necessarily diversification but to reflect the trends and shifts in the economic activities...

    What do Indexes and ETF baskets really do? It dumb downs the volatility of individual equity in the baskets and indexes and keep the investor in a la la land of averages. They also eliminate tax-efficient investing...

    My personal experience is fairly negative in ETF, mutual funds and index investing. I have held these for ten+ years entered into them at varied times and have never been able to match the advertised performances for some mysterious reason like when you entered into the market etc.

    The best bet is to develop a sense of connectivity of activities - economical, political, and social - and invest where there is some return (dividends, distribution, gains and even the losses) that you control; and, assess your sense (pulse) of the connectivity every three months using your investments as a metric, and the only metric as it is where your skin is in the game; rest is noise and blah, blah, blah. Save your skin.

    Example: I never invested in energy until those Texans took over the country. I learned about the energy from finding to burning... I learned about investing in MLPs (did not know anything about that in 2000). I survived better than many through wars and market collapse. At the same time, financials took me to the abyss - though technical signs were many, it is very hard to give up 5% in div, and nearly 20% on initial investment... I learned how not to self delude... Take your profit once your objective is met...

  9. So these pundits can't tell us anything useful? No Schiff, Shedlock!

  10. Anonymous10:59 AM

    "Austrianism makes for great political tub-thumping and fun end-of-the-world scenarios, but if you forget that it’s fundamentally a form of entertainment, your portfolio could be in big trouble."

    Yeah, Mark Spitznagel's portfolio has been nothing but "trouble" in recent years.

    Is this blog a joke?

    1. It's based on a lack of understanding of the subject.

  11. Noah, it seems that you didn't do your homework on Schiff before writing this post and were content to rely on Shedlock's assessment.

    Many people, including myself, have been listening to Schiff for many years and have found his advice to be quite accurate and useful.

    You also said "Macro-tainment contains no actionable information." I suppose that's true if you treat macro-economic analysis as a source of entertainment, but if you take it seriously you can stay ahead of the trend.

  12. Hyperinflation is like an avalanche, forest fire, or earthquake. Conditions for a chain reaction build up and then things happen fast. But the build up time can be very long. When the chain reaction starts is not really predictable. The best you can do is say that conditions for the chain reaction are such that there is a high risk. That a forest fire or avalanche has not happened yet is in no way proof that there is no risk.

    1. After writing the above comment I made a post on this topic, "Lack of avalanche does not prove lack of risk of avalanche".