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In January 2009, just as the "Peter
Schiff was Right" YouTube video that catalogued my previously derided
predictions about a coming financial collapse was racking up views and
attracting mainstream attention, a blogger and investment advisor named Mike Shedlock (aka "Mish") saw an opportunity to
make an unethical grab at my current and prospective clients by breaking the
nascent wave.
Shedlock put together
a misleading marketing piece entitled "Peter Schiff was Wrong"
which compared my recent investment performance with that of his little known
firm, Sitka Pacific Investment Advisors. The piece, that
circulated widely in the press and on the Internet, focused on how the
foreign stocks and currencies I favored had fallen sharply in 2008 while the
Sitka Pacific strategy prevented huge losses during the crash. By ignoring
long-term data in favor of highly selective short-term performance, the piece
tempted people to bail on positions that were poised to make sharp upward
moves and lured them into a strategy that has been a long-term disaster for
investors.
While I never publically denied large
declines in 2008, I maintained that the moves did not invalidate my economic forecasts
or long-term investment strategy. In fact, in my book "Crash Proof"
that Shedlock referenced repeatedly in his piece
(often times inaccurately or out of context), I
advocated a three-legged investment stool; dividend paying foreign stock,
cash and foreign bonds, and precious metals.
Shedlock neglected to
point out that the book specifically warned that foreign stocks would likely
fall in sympathy with U.S. stocks once the real estate bubble burst and the
financial crisis began. I had advised readers to use funds from the
"cash" leg of the stool to take advantage of buying opportunities
created by the declining share prices.
As an outsider to Wall Street, the
government, and academia, I represented a threat to the establishment's spin
that no one could have foreseen the crisis. But the popularity of the
"Peter Schiff was Right" video made it hard for the media to ignore
my unorthodox views. After all I had been right when the rest of the talking
heads had been clueless. Shedlock's piece
undermined much of that credibility and led to a negative Wall Street Journal
story that was far more widely read. Thanks to Shedlock,
I was no longer the guy who called the crash, but the fraud who made "minced-meat" out of his client's
accounts.
From Shedlock's
perspective his attack was wildly successful. By undercutting the credibility
of one of the most visible spokesmen for Austrian economics (a school of
thought to which he supposedly subscribes himself); he did manage to make
some bucks for himself.
At the end of 2008, Sitka Pacific had
only 75 clients and $18 million dollars in assets under management (AUM). A
typical junior stockbroker at a mid-tier brokerage firm would have a larger
book. In fact, during seven of the eight years Shedlock's
firm has been in business, they raised an average of less than $5 million per
year. However, in 2009, the year the "Peter Schiff was Wrong"
marketing campaign was launched, Sitka had a banner
year adding 225 new accounts and $40 million in AUM. Today Sitka manages $75
million for 342 accounts. Still extremely small, but had 2009 been a typical
year, today's AUM would likely be just $40 million.
While the 'Peter Schiff was Wrong"
campaign was a great marketing success for Shedlock,
it was a disaster for any investors taken in by the rhetoric. Despite his
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. By following Shedlock's advice to
sell near the lows, investors converted temporary paper losses into permanent
realized losses!
Central to Shedlock's
augment was that I was wrong to have advised investors to get out of the U.S.
dollar and wrong to have advised them to buy foreign stocks. To prove his
point, he reproduced a short-term chart of the Australian dollar and a
spreadsheet representing an account of one of my clients whose account
details he managed to obtain (we had over 15,000 accounts at the time).
Let's start with the Australian dollar.
It had just fallen from about 95 U.S. cents in July of 2008 to about 65 U.S.
cents in October of that year. According to Shedlock,
it was going even lower as the Fed was done with its easing cycle and the
Reserve Bank of Australia had only just begun to ease. However, unknown to Shedlock at the time was that the Austrian dollar had
already made its low, and by April of 2011 it hit a new record high of $1.10
cents, a 70% rise. Today the Australian dollar is worth about $1.05.
So was Shedlock
right to advise investors to sell the Australian dollar near its lows? Or was
I right to have advised people to ride out the decline? In fact, I have been
advocating buying the Australian dollar for over ten years, just as Shedlock had criticized me for doing. When "Crash
Proof" came out the currency was worth 80 cents, and earlier in the
decade you could buy it for closer to 50 cents.
Shedlock's heavy
artillery however, was the specific Euro Pacific client account he
"discovered" that showed unrealized losses of 49%. (Dividends
received that would have mitigated those losses, were omitted). Shedlock implied that the account he showcased was a
typical representation of all my accounts, and demanded that I provide proof
if that was not the case. He specifically challenged me to post a year-by-year
track record of all my client accounts, similar to what his firm did.
The problem is that Shedlock
threw down a gauntlet that he knew I was legally prohibited from picking up.
At that point Euro Pacific Capital was simply a brokerage firm, while Shedlock's firm was a Registered Investment Advisor
(RIA). As Shedlock well knew, the rules governing
the two structures are very different and so there was no realistic way that
I could have accepted his challenge and remained compliant with these rules.
The truth is that all non-discretionary
brokerage accounts are unique. Back then none of our accounts were managed,
and each reflected the unique objectives and decisions made by the individual
account holders. Some were very aggressive, others much less so. Some favored
foreign stocks, others foreign bonds. Some clients just bought physical
precious metals. The account Shedlock featured was
highly concentrated in resource stocks and Australian utilities, two sectors
hit particularly hard by the 2008 financial crisis. I was not allowed to make
any claims about the performance of a "typical" account.
Instead of giving my strategy time to
play out, Shedlock seized the opportunity to
exploit the short-term declines in the Australian dollar and foreign stocks,
to tout the alleged superior performance of his own firm. Since these are the
very benchmarks Shedlock chose to evaluate the
short-term performance of his strategies, let's see how well those strategies
have held up against those very benchmarks over longer time periods.
For the Australian dollar, we will use
the returns on Australian government bonds (after all, investors in
Australian dollars are going to want to earn interest), and for foreign
stocks, we will use a hypothetical portfolio that replicates the precise
composition of the single Euro Pacific account that Shedlock
featured in the "Peter Schiff was Wrong " campaign (hence forth to
be known as "the spreadsheet portfolio.")
Sitka features four unique investment
strategies: Hedged Growth, Absolute Return, Dividend Growth, and Commodity
Focused. Let's compare each strategy to both benchmarks over two relevant
time periods. The first begins Jan 1, 2009 (the month Shedlock
launched the "Peter Schiff was Wrong" campaign) and ends Sept 30,
2012 (the most recent date for which performance numbers have been posted for
Sitka Pacific). This time period would reflect the returns an investor would
have achieved if he had opened accounts with Sitka Pacific after having read
"Peter Schiff was Wrong." The second, and longer, time period
begins with the inception dates of each Sitka investment strategy, and also
ends Sept 30, 2012. And just for good measure, I threw in the returns on 10
year U.S. Treasuries and the S& P 500 as well.
First let's look at the performance starting
in Jan 1, 2009. Since we have no way of knowing which of Sitka's four
strategies an investor would have selected, I simply averaged the returns of
all four.
As you can see Shedlock's
strategies substantially underperformed both Australian government bonds and
the spreadsheet portfolio. If after reading "Peter Schiff was
Wrong," an investor put $100,000 into Sitka Pacific ($25,000 into each
of Shedlock's four strategies), his total gain as
of the end of Sept. 2012 would have been a mere $9,600. That's 89% less than
the $95,400 that the same investor would have earned had he put the funds
into Australian government bonds, and 92% less than the $116,100 he would
have earned had he invested in the spreadsheet portfolio!
Now some may think that Jan 2009 is not a fair starting point, as foreign
stocks and the Australian dollar were way down at that time. While this is
true, Shedlock had the opportunity to buy those
lows, but chose not to, as he incorrectly anticipated further declines.
Others might say that starting in Jan of 2009 is unfair as it omits 2008, Shedlock's only relatively good year.
At first blush this might seem to be a valid point, until you compared the
returns on all four managed account strategies since their inception dates to
the same benchmarks. Even if you include his one good year the relative
performance of his strategies is almost as bad. Take a look at the data below.
The "Hedged Growth Strategy"
has the longest track record of all Sitka's strategies. Had you invested
$100,000 back in July of 2005 your account would have been worth $116,700 by
the end of Sept. 2012. That represents a meager annual return of about 2%. No
wonder Shedlock wants his clients to believe there
is no inflation, as he cannot even outperform the CPI! Contrast that to the
$242,300 his client's accounts could have been worth had they purchased
Australian government bonds, or the $255,500 had
they invested in the spreadsheet portfolio. Those returns annualize to about
18% and 19.5% respectively.
Alternatively, had you invested $100,000 in Shedlock's
Dividend Growth Strategy at its inception in June of 2007 (three months after
my book Crash Proof came out), your account would have been reduced in value
to $92,200 by the end of the third quarter of 2012. However, had you bought
Australian government bonds on that date instead you would have had $215,000.
Even if you put $100,000 into the spreadsheet portfolio, despite its being
down nearly 50% in 2008, your account would have recovered to $140,600 by the
end of Sept. 2012!
So even from their respective inception dates, and despite the huge declines
in the Australian dollar and foreign stocks in 2008, no matter which Shedlock strategy an investor chose, his account
substantially underperformed both Australian government bonds and the
spreadsheet portfolio!
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. By preparing for deflation and a strengthening U.S.
dollar, Shedlock's clients missed out on the far more
substantial returns they otherwise might have earned preparing for the
opposite.
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.
The only reason I decided to revisit
this topic is that Shedlock is at it again. As a
result of his unethical "Peter Schiff was Wrong" advertising campaign, I decided long ago not to dignify him by doing
any joint interviews. Not realizing this, a new member of my staff agreed to
a request from RTV to host an informal inflation/deflation debate between Shedlock and me. As soon as I found out, I politely told
RTV that I preferred not to appear with Shedlock. I
suggested that I would be happy to debate respected "deflationist"
voices such as Harry Dent or Robert Prector. In the
end they decided to book me for a solo interview.
Shedlock then
circulated another blog post that was picked up by numerous web sites, in
which he accused me of backing out of the debate, presumably out of fear.
Even though I informed Shedlock that I never agreed
to debate him, he refused to revise his post.
In addition, Shedlock
also lied about having supported my 2010 Senate run. Though he did write a
self-serving endorsement of my candidacy, it was merely another advertising
campaign in disguise. Despite his talk about wanting to host a fundraiser, Shedlock did not contribute one dime to my campaign
himself. He simply wanted to use his endorsement to attract the attention of
my clients so as to solicit their business.
Had Shedlock
really wanted to patch things up between us he would have apologized for his
conduct in 2009. He would have attempted to set the record straight himself
with respect to the performance of my investment strategy. Instead, he
continues to market his RIA with more insults and false allegations against
me. He absurdly claims to have personally taken the high road to patch things
up, while accusing me of vindictively holding an irrational grudge against
him.
As is always the case with Shedlock, the truth is
something that is easily cast aside when it interferes with his inflated ego
or marketing agenda. Now that I have presented the truth for all to see,
let's see how Shedlock likes stewing in his own
brew. The only upside for Shedlock is that he
doesn't have much of a reputation to lose.
Disclosure
Performance of Sitka Pacific Capital
Management portfolios were calculated as a time weighted return, using annual
figures available on their public website, as of September 2012.
The following assumptions were made for
the spreadsheet portfolio -- All positions weighted according to their
original cost basis as featured in the Shedlock
"Peter Schiff was Wrong" campaign, for both inception and 2009
starting dates. 2% commission charged on all buys. All dividends reinvested
proportionately into each stock in the portfolio. Proceeds of companies
acquired for cash reinvested proportionally into the remaining positions.
Stocks not publicly traded at various Sitka Pacific strategy inception date
were added to the portfolio as soon as they went public, with funds to
finance the purchases raised by proportionately reducing the previously
established positions.
The performance of the stocks in the
hypothetical spreadsheet portfolio and Australian government bonds in no way
implies anything with respect to past performance of Euro Pacific Capital
clients' portfolios, and in no way should this article be seen as being
indicative of future performance for Euro Pacific clients. Past performance
is no guarantee of future results and current results may be lower or higher
than the data quoted. The return analysis is simply offered to demonstrate
the poor performance of Shedlock's strategies
relative the specific benchmarks he chose to use in Jan 2009.
Peter Schiff is the CEO and Chief Global Strategist
of Euro Pacific Capital, best-selling author and host of syndicated Peter
Schiff Show.
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