The Blues Brothers
Posted: December 22nd, 2008 | Author: Wayne Weddington | Filed under: Opinion | Tags: bailout, Opinion, Strategy | 2 Comments »I have been watching with great interest the hissy fit between Peter Schiff and Stephen Leeb. They each offer shrill, and at times histrionic, opinions regarding the current market, the economy and their respective prospects. At times it is rather entertaining: check Leeb versus Schiff or my favourite, the Bailout Mix.
Schiff, to his credit, has been forecasting for some time the economic collapse resulting from the deficit funding of our individual lives and the deficit funding of our government. The former has caused a run-up of consumer debt and the latter has saddled our government with enormous debts to pay to our ‘friends’ around the globe. Americans have continued to borrow until the country is essentially broke.
Leeb also forecast an economic collapse, as he is hyper-focused on energy and its impact upon global economies. It is a noteworthy premise inasmuch as the cost of energy affects the cost of everything we do. Every item we consume is tied directly to the cost of production (in turn proportional to energy costs) whether individually or as industry. Leeb is also an insightful value investor, no doubt, with scores of attractive companies on his list whose fundamentals look great on paper: US companies are definitely cheap at these levels.
They disagree vehemently on whether the bailout makes sense. Schiff argues that the bailout will only worsen our problems down the road. The country is doubling down on a failed strategy of borrowing to finance our standard of living. Instead, a deep recession is necessary to cure consumers of borrowing and to stimulate savings again (not spending). The re-adjustment will be brutal: job losses, asset price devaluations, foreclosures and failed businesses. But the upside would be to rebuild the economic system cleanly from the ground up, without the baggage. Medicine tastes bad but it renders the cure in the end. All very good points.
Leeb, on the other hand, believes that the stimulus is necessary. Without the stimulus, the country would otherwise witness a deeper collapse of the financial system. He postulates as well that the Treasury may even make money on the loans that have been made. The alternative to the bailout is stark, and too high a price to pay in the short run. Moreover, the investment in alternative energy infrastructure will create jobs and yield a significant return to taxpayers’ investment. I couldn’t agree more.
There are elements of truth on either side. But each has a model portfolio that is aligned to their strongly “opposing” beliefs… and each is off sharply YTD 2008.
So there you have it. It has been a difficult year even when you ‘know’ the answers.
[UPDATE]: Stephen Leeb points out that despite his absolute return, the performance of his large cap growth strategy has performed in the top 3% of all managers in his investment category.
- Wayne Weddington
Would you like to further comment on your opinion of the stimulus strategy we will be going with? Since stimulus will be our reality soon.
I will post my opinions on the stimulus under separate cover…. it is unproductive at convenient to criticise without offering any solutions. The answer is that they are both correct. Schiff is correct in that the fastest and cleanest way to ‘fix’ our situation is to let the poorly run institutions fail, but it does not take account for the deep deep pain that would ensue. The answer is not monolithic. It comes down to risk preference curves and pain tolerance. The soft landing scenario that Leeb advances is the most palatable because it delays the deepest sacrifices… and has a glimmer of hope of actually being able to stimulate growth in the interim, however slim. I just hope that when the Obama administration considers the options it balances pain with palliation because the US’ future is in the balance with a consequence that could span a decade or more.