Crash Proof 2.0: How to Profit From the Economic Collapse
By Peter D. Schiff with John Downes
John Wiley & Sons 2009
356 pages. $27.95
In 2006, Peter Schiff wrote a book called Crash Proof, in which he predicted an imminent financial crisis. The book came out in February of 2007, just as the initial tremors of the financial earthquake were being detected. In other words, Peter Schiff anticipated what was coming. Which means he knows whereof he speaks.
Two years later, Crash Proof 2.0 was published. In his Author’s Note to 2.0, Schiff says bluntly “While most believe that the economic collapse is over, the reality is that it has only just begun. What we have witnessed thus far are merely the events that have set the collapse in motion. It will take some time for all the dominoes to fall.”
Crash Proof 2.0 goes on to spell out why and how the situation is going to get worse before it gets better. This explanation comprises the first two-thirds of the book. The final third of the book provides Schiff’s three-step plan for surviving not only today’s predicament, but also the turmoil that is about to come.
Schiff starts off by describing how we got into this mess. He cites two primary causes: for one, the reserve currency status, which has allowed America’s deficit to attain dangerous levels. For two, America’s shift from a manufacturing economy to a service economy increased trade deficits to the point of morbid obesity. In other words, we don’t make much of anything anymore. We simply consume. Which means we are overleveraged. And as Schiff points out, what is happening right now – layoffs, home foreclosures, etc. – “are free-market forces trying to correct economic imbalances and restore economic viability.”
The government’s response to the crisis is to try “to reflate a consumer-driven bubble economy.” According to Schiff, it won’t work, because that’s what caused the problem in the first place. It’s like trying to put out a fire by throwing gasoline on it.
Schiff then moves on to relate how King Dollar, which, at the present time appears to be rallying, will ultimately topple. The government will be forced to borrow more and more money to prop up the dollar, while at the same moment “our economy is becoming less efficient and less productive.” This vicious cycle will only increase in intensity. Schiff believes this will lead to a massive economic failure in the future.
The next topic Schiff writes about is inflation. He does an excellent job of defining and illustrating exactly what inflation is and is not. Schiff states, “Governments love inflation. It’s a way for them to take money from the people without the people realizing they took it.” He tells why governments like to create inflation, along with five reasons governments try to hide inflation. According to Schiff, such inflationary shenanigans are the way you “can have your cake and eat it.” But it involves fibbing.
Schiff believes this inflationary house of cards will come tumbling down when “demand for our government securities dries up and buyers change their focus from default risk to inflation risk.”
After discussing inflation, Schiff moves on, examining what he calls “stock market chaos” and the collapse of real estate. In Schiff’s opinion, it’s best to stay out of stocks, because most of them are overvalued and low-yielding. His suggestion to those who insist on investing in stocks is “buy and hold,” long term investing. Regarding the real estate crisis, Schiff fixes the blame on government policies, which resulted in “collusion between originators and appraisers resulting in faulty documentation, phony appraisals, and lax credit screening practices.” In other words, government policies engendered a conflict of interest between the real estate market and the mortgage market. This conflict of interest corrupted the real estate industry.
Schiff forecasts a vast commercial real estate collapse looms just ahead. He likens commercial real estate to “an 800-pound gorilla” waiting in the closet. Sooner or later – probably sooner – it’s going to jump out and make its presence known. And when it does, it won’t be pretty.
Up to this juncture, Crash Proof 2.0 is nothing but gloom and doom. Schiff sounds like Chicken Little. “The sky is falling! The sky is falling!” And any investor who is reading the book starts to wonder if he should just throw in the towel. In actuality, though, what Schiff has been doing is explaining how we got where we are. Because where we are affects where we’re going.
Once he’s established our present location, Schiff hands the reader a map and a compass, pointing in a new direction. The map consists of three steps: rethinking your stock portfolio; gold rush; stay liquid. According to Schiff, if the reader follows the map not only will he find his way out of the present crisis, he will also prosper.
Step one is investing in foreign markets. As Schiff says, “The U.S. stock market is just one market in one country in one very big world.” Schiff walks the reader through the process, explaining every aspect of foreign investing. Foreign investments are a win-win situation no matter what happens, is Schiff’s conclusion.
Step two involves investing in precious metals, specifically gold and silver. In fact, Schiff is convinced silver might “be an even more profitable investment” than gold. When buying gold, he recommends bullion and mining stocks. He is leery of GETFs and commodity futures. He believes there is no limit to gold’s upside.
Step three, according to Schiff, is stay liquid. By liquidity, Schiff means personal liquidity. Which means not only walking around money for living expenses, but also a stash of cash to take advantage of any opportunities that arise. To this end, he provides guidelines for maintaining liquidity, including investments that provide liquidity, homeowner options, and savings.
In his final analysis, Schiff believes America is still the greatest country on earth. It’s creative, productive, innovative and hard working. Schiff has no doubt – that in the end – things will turn around. Economic prosperity will return. Until then, he believes investors have to be smart.
Crash Proof 2.0 is more than a good read. It’s a quintessential read. Even if the reader disagrees with the author, the book provides important information every investor needs to think about.
On the Read-O-Meter, which ranges from 1 star (skip it) to 5 stars (get it now), Crash Proof 2.0 piles up 5 stars.