Peter Schiff’s speech to the mortgage bankers 2006 is now available in one part. I have previously transcribed the speech in the in its “cut-up” form. So in this post, I have put together all the previous posts.  The transcription includes the Q&A section at the end.  There are probably plenty of errors in the transcription so please leave a comment if you find one.

You can find the complete speech on Youtube here:
http://www.youtube.com/watch?v=jj8rMwdQf6k

Click on the “read more” button for the transcript of the entire speech.

I am on the same side of the political spectrum as Barry. I believe in pretty much in the same things, limited government, freedom, capitalism, sound money, the rule of law, private property. All the concepts believed by the Founding Fathers when they first created this republic. Unfortunately, few, if any, of those principles are applicable to the modern American economy. Now, I’m going to talk mainly today about the real-estate market and the mortgage market because I know that’s the most relevant to the people in the room.

But let me first talk about the broader economic picture and where we are as a nation. Sure, when we were first formed as a republic a couple hundred years ago, the reason why we prospered, and the reason why we became the world’s wealthiest creditor nation (back in 1980 anyway) was because we had a comparative advantage in economic freedom. Taxes were much lower, the government was much less intrusive, here in America, then were the kings and the despots all over Europe. So the American colonies and our new country prospered. And we certainly borrowed a lot of money from the Europeans in the 19th century, but what we did with that money – we invested that money in factories, in infrastructures – we made capital investments. And, by taking that money and building factories. We became the world’s leading manufacturer and exporter of high quality, low cost consumer goods. Even if we eventually paid the highest wages in the whole world, American products were still the cheapest in price and quality. And because we made productive use of the money that we borrowed from the Europeans, we were able to repay the debt. You see, when you borrow money and build a factory the factory produces consumer goods, the consumer goods are sold. We sold those consumer goods – automobiles, sawing machines, dishwashers, we sold all these goods to the Europeans and we paid off our debts. And we went from a debtor nation to a creditor nation. But we had more foreign assets, that were owned by Americans, than all the other creditor nations in the world combined. We were the world’s biggest lender around the world. Americans were wealthy lenders, we had a high savings rate.

All that is different in modern America. Today the United States is not the world’s larges creditor nation – we are not even a creditor nation. We are the world’s largest debtor nation. In fact, we owe more than all the debtor nations of the world combined. We no longer flood the world with high quality, low cost manufacturing goods. We flood the world with our paper currency. Our “IOU’s”, because we no longer possess the industrial might or capability of producing those goods ourselves. Instead of being the world’s biggest lender, we are the world’s biggest borrowers. The United States routinely borrows from the poorest nations in the world. Now, according to modern economic thinking, this new state of affairs is somehow sustainable and a viable symbiotic relationship between America and the rest of the world. The relationship is: America consumes – and everybody else produces. America borrows and everybody else saves. And on the surface, potentially that argument may make sense. Without American consumption, what would all these Chinese do for jobs? As it was pointed out by Barry, it’s not about jobs, it’s about consumption. It’s about standards of living. You don’t want jobs just so you can work, you want jobs so that you can consume, so that you can have a higher standard of living. The fact that the Chinese get jobs in exchange for the products they give us doesn’t do any good for the Chinese. The Chinese are perfectly capable of consuming their output themselves. They don’t need their government to artificially suppress the exchange rate of the Yuan so that they can artificially elevate the value of the Dollar so that the Americans get to consume all the goods that the Chinese could have consumed had it not been for that monetary policy. But this current dynamic, where we don’t save and we don’t produce, is not viable. It is no more viable than the economic models that existed in the 1990’s with respect to internet stocks or technology companies, where Wall Street had people believe that stock prices could rise regardless of the fact that the companies had no earnings, paid no dividends. Without any regard to any fundamental measure-evaluation we were told that it was a new era, and we saw what happened there. And the same Wall Street economist that told us the internet era was a new era are now telling us that this current era of American consumption and global production is viable. And it is not.

I will give you a quick little analogy and then move on to another subject. I mentioned this on my website and I use it on various speaking engagements. But to describe this dynamic – assume that a group of castaways are stranded on an island. Let’s say five of them are Asian and one of them are American. And when they are stranded on this island, they need to divide up the workload. So one of the Asians is given the job of hunting, looking for meat. Another one is going to be fishing, trying to get fish. Another one is in charge of scourging the island for vegetation. Still another one gets the job of looking for wood to build a fire and cook the meal. And then it comes down to the American and they say “what job should we assign the American”? Well the American gets assigned the job of eating. And so at the end of the day, all these Asians gather around this big table after a hard day of forging and hunting and fishing and they prepare to feed this American who did nothing all day but sun himself on the beach – he had a service economy. At any event, a modern economist who is looking at this little island’s economist would say that the American is the key to the whole thing. Without the American, and his ravenous appetite, these poor Asians would have nothing to do all day. They would all be unemployed.

Well, the reality is that the Asians are perfectly capable of consuming the food themselves. Now, perhaps if they didn’t have to spend all day feeding this fat American, they wouldn’t have to work this hard. Maybe they could pursue other interests that they had. The best they could do to improve their own standards of living is to kick the American off the island. Off course when that happens, the American is in trouble because now he doesn’t have five Asians doing all his work. You know, it reminds me a lot about that book, Tom Sawyer. You know where Tom is able to convince all his friends to whitewash this fence for him. And to not only do that, but to pay him for the privilege. Because Tom Sawyer got his friends so convinced that there was so much joy in this toil that it was worth paying him. So he got the world to do his chores. And little did Samuel Clemens realize that that little passage from that book would one day form the basics of the global economy. Where America convinced a billion Chinese to paint our fence and pay us for the privilege. That is going to end. In fact, the Chinese have been talking this week about diversifying, you know out of their one trillion Dollars in reserve, of course they can’t diversify out of them, they are stuck with them. But the minute they stop buying Dollars it is over.

Let me go back a little bit to where we are right now and how we got here most recently. Back in the 1990’s we had a bubble in the stock market. The bubble, like most bubbles was created by Alan Greenspan, the Federal Reserve and a monetary policy that was that was too loose and too inflationary, even in the 1990’s. The inflation that was created manifested itself in rising asset prices. And during that time period there were a lot of “malinvestments”, as Mises calls them, made. A lot of that easy money funded a lot of cockamanie investments in telecommunications in internet companies that never should have seen the light of day. Ultimately, Greenspan started to raise interest rates and take away that monetary stimuli that he had supplied during the nineties. And eventually the bubble burst. The NASDAQ lost 80% of it’s nominal value and many of the dot.com companies lost 100% of their value. Now, I had predicted this in advance. In fact, when I used to speak to clients and potential clients in 1997, ’98, ’99 and tell them that the NASDAQ was going to loose 80 or 90% of it’s nominal value, people used to think that there was no way that could possibly happen. I mean people used to tell me that the government won’t let it happen. Well it happened. I lot of people in the real-estate market have the same idea when I tell them that property prices are going to drop 50, 60, 70, 80%. They don’t think it can happen. They don’t think the government will let it happen. Well, it happened in the stock market and it is going to happen in the real-estate market. There is very little difference.

Anyway, we had the bursting of the technology bubble. Also that coincided with the election of George Bush. Comes into office 2001 and the bubble that happened under Clinton burst, as soon as he is on the job. Now, we are quickly to explain business-cycles and how they work- Contrary to what people think, the boom is the real problem. The bust is the solution. A boom is like an artificial high, you know when you take heroin – you know you shoot yourself up with heroin and it feels really great, at least that is what they tell me. But anyway, that’s artificial, you want to get healthy, then you have to go to rehab or detox and you go cold-turkey, and you go through withdrawal. The withdrawal symptom is very unpleasant. Very painful – again that is what I hear. Again it is necessary if we want to remove these toxins from your system and get healthy. The same thing happens in a business-cycle. When you have a central bank, and the central bank made the same mistakes as it did in the 1920’s. When you have a monetary policy that is too inflationary, you create a credit bubble, you create malinvestments, the malinvestments need to be purged, the economy needs to be balanced.

It’s like in the internet bubble – let’s say I ran a small restaurant and a circus comes to town. And all of the sudden there is a lot more demand in my restaurant and I misinterpret this. There is a false signal – I don’t understand where this demand is coming from. So I expand. I hire more workers. I build on the restaurant. I think there is a real increase of demand. And the all of the sudden they pull up the stakes, and the circus leaves town. Now it exposes the malinvestments. Now what do I have to do? I have to fire some people, I have to sublease a space, we go through a recession. That is what is necessary. That is the cure. The problem were the false signals that were sent that were misinterpreted during the boom.

Same thing happened during the 1990’s. We had lot of investments that were made based on false economic signals. A lot of tech companies and start up internet companies with lots of cash from IPO’s were spending a lot of money. That was not real demand, there were no profits there. You know companies like Intel and Lucin[?], Nortel vendor financing all these companies. And I mean, it was all a hoax, it was all a fraud. And when all these companies started to go bankrupt, when all these malinvestments were exposed, we were going to go through an economic downturn. That downturn should have been very severe. We should have had a very deep recession in 2002. We should have had a recession in proportion to the boom that preceded it during the 1990’s.

But George Bush didn’t want that recession happening on his watch. He wanted to get reelected. And Alan Greenspan, far from his Ayn-Randian roots from the 1970’s is now a very political person and wants to help his buddy get reelected. So what do they do? They combined with the worst ever combination of irresponsible tax and spending and monetary policy in our nations history. You know, Barry talked about the problems of the 1970’s. Well the reason we had the 1970’s is because of the 1960’s. The 1960’s was the Lyndon Johnson guns-and-butter administration that had us fighting a war in Vietnam, sending a man to the moon, fighting a war on poverty while at the same time running a big deficits to finance it all. Ultimately having to leave the gold standard in the early 1970’s and as a result of all the inflationary monetary policy and the big government deficits that were monetized in the 1960’s and 70’s we had oil prices going up ten times, the Dollar loosing two thirds of it’s value, gold going from 35 Dollars an ounce to 850 Dollars an ounce. All the problems of the 1970’s had their roots in the 1960’s. Well, what we seen with George Bush and Alan Greenspan is far worse than what we saw with Lyndon Johnson and William McKinley Martin during the 1960’s. And of course, during the 1970’s America was on a lot firmer economic footing as the world’s wealthiest creditor nation, as a manufacturing power. The fact that now we are in such a lousy position economically, what we are about to experience in the decade ahead is far worse than anything we experienced in the 1970’s.

Anyway, so the recession we didn’t have in 1982. Technically we had two quarters of negative growth. But during that supposed recession, we had record car sales and record home sales. Now, that doesn’t sound like any recession that I’ve experienced. Normally in a recession, these things go down. Also a curious thing happened, at the end of the recession, consumers had more debt than when it began. Now that also doesn’t make sense for any recession. Because in a recession, debt is paid down – people take on too much debt during the boom, they pay it off during the bust. During this bust, we went deeper into debt.

Now, what happened? What this irresponsible monetary and fiscal policy did was to create the biggest consumption binge in world history, where American consumption – now greater than 70% of GDP – kept us from really having a recession. But all it did was to push of the recession to some later day. After the re-election of George Bush, which is what they really cared about. We don’t care if we create a bigger disaster, we just want to have a bigger disaster later. Because then somebody else might be in office.

So this is what they did, and even though we had our down-turn in the capital goods sector, the consumer went into debt and basically pushed off this recession until – maybe starting in 2007. But it is going to be far worse as a result of the unproductive debt that has been accumulated during the past seven years.

We are now running trade deficits of 65 billion dollars a month. Over 850 billion dollars a year in debt. And what are we borrowing all this money for? We are not borrowing it for the same things we borrowed it for as a nation 100 years ago or 200 years ago. We are borrowing money to buy imported consumer goods. We are borrowing money for non-productive, depreciative consumer goods. Or we are borrowing money to just buy food or gasoline, we are borrowing money to take vacations, to remodel our kitchens, to put granite countertops in there.

All this stuff is going to have to be paid. American consumers are now loaded up with debt, and the very nature of that debt – you know, a lot of people in this room understand that because you are in the mortgage industry. You know how many people own a-just-low-rate [?] mortgages. And how many people have been able to extract equity from their houses as they have been appreciated. See the dynamic behind this whole perverse situation was that as Americans spent money, we sent Dollars abroad, to pay for all the goods that we could no longer produce ourselves, foreigners were accumulating their IOU’s. Because we didn’t have any goods that we produced that the Chinese or the Japanese wanted, they were stuck with all this paper. And so their central banks kept buying it. And what did they do with the Dollars? They bought US treasuries, they bought mortgage back securities – they kept interest rates artificially low. Because in America, we should not have low interest rates. We’ve had negative saving rates for years. We have hardly any savings. Interest rates is the supply and demand of money, so we have minimum savings – everybody is trying to borrow. Interest rates should be high. Why aren’t they high? Because the rest of the world is loaning us their savings. And that’s what has kept interest rates low. But as money kept coming back to the United States and buying our mortgage-backs and buying our treasuries, that kept real-estate prices rising. The higher real-estate prices rose, the more money Americans could borrow against their houses, the more imported goods we could afford to buy, the more Dollars we sent abroad – and it was a process that kept perpetuating itself. And of course, now the Chinese have over one trillion Dollars in foreign reserves.

And that’s just the Chinese. The Japanese have a trillion as well, and of course every other country in the world is collecting reserves. These represent goods that Americans have imported, but that we have not yet paid for. And the way you pay for goods is by exporting. Right, nobody exports for the sake of exporting. You don’t export because you want to create jobs. The role of an economy is to eliminate jobs – people don’t want to have to work. But the reason you export is to import. It’s a comparative advantage. But the problem is, we are not offering the world anything except our IOU’s. And the promise that at one point in the future we will make good these IOU’s with a manufactured product. But in the meanwhile, our ability to manufacture is diminishing with each passing day. And the world is going to wake up and understand this.

But anyway, so getting back to where we are. So the consumer went into debt and spent a lot of money to keep this recession at bay. But all that consumption has a price of dramatic reduction of future consumption. You see, the only way a society can really increase it’s future consumption is to save. And by definition saving is under-consumption, it is a lack of consumption, it represents self sacrifice. But when you save and reduce your consumption today, and you have money that you can invest and you have compound interest and returns, ultimately you can enjoy enhanced future consumption. In America, we have indulged ourselves in the present at the expense of the future.

And a nation is no different than an individual. Just like if there is one individual who works hard and doesn’t take as many vacations, doesn’t buy new cars, doesn’t eat out a lot, saves for his retirement- you know he is building something for the future. You take another similar situation, a guy with the same income but saves nothing, takes out a second mortgage on his house, doesn’t have a retirement account, doesn’t save for his kids education, and just spends everything he earns – initially, that persons economy looks pretty good if you simply measure it based on consumption. Which is what we do when we measure our GDP. But you are not looking beneath the surface – at what expense is this consumption being funded? That is the big difference.

And also, I just want to digress briefly on government statistics. You know, it was mentioned by Barry that our inflation rate is so low compared to what it was in the past. The reasons for that, and probably the primary reason for that, is the way the government has changed how it keeps score of the statistics. Back in the 1970’s they took housing out of the CPI. Back in the 1970’s when we had that high inflation, housing prices were in there. They are not in there now. And in the mid 1990’s they introduced the concepts of hedonic adjustments and substitutions which basically rendered the CPI worthless. Because the government can do whatever they want with it. If the price of something went up, they don’t have to count it. It’s not a fixed basket anymore. And there is a lot of subjectivity in there. Where the government can take a look at something and say, “well the price went up 20% but we think it’s 30% better so the price went down 10%”. There is a lot of subjectivity that is in there now that wasn’t in there back then. So when you just look at these numbers and say “there is no inflation”, it’s like a government weather man telling you there’s sunshine, but you look out the window and you can see that it’s raining. Now, I’m not going to believe the government, I’m going to believe my own eyes.

And the same thing with the productivity numbers. The productivity statistics were the product of hedonics. If we were becoming so much more productive, where are all the goods that we are producing? And why can’t I see that in the balance of trade? If we are so productive, where are the exports? Why do we have to import so many products from the rest of the world if we are more productive then they are? So you can’t hide the facts. The government can lie all it wants with statistics but the facts speak for themselves. You don’t go from being the world’s wealthiest creditor nation to being the world’s poorest debtor nation and somehow claim that you are more productive than everybody else – it just doesn’t make any sense. And the difference of course – you know when the world was accumulating assets we were accumulating liabilities. We have to make payments on those liabilities.

And this is what is going to happen, and anyway, coming back to where we are as an economy. We had a real-estate bubble that blew up. Americans took on a lot of debt, we spent a lot of money. Where are we now?

Over the next year or two, you have about two trillion dollars of the just low rate mortgages that are going to reset. Now, where are the home owners going to get the money to make these mortgage payments? It’s not like they are sitting on a pile of cash. In fact, most people who own homes, when they qualified for their mortgages they bought the biggest monthly payment that someone would approve them for. Even at that low rate. So if they got a teaser rate at six percent or five percent then they maxed themselves out. They are spending 40% of their income on their mortgage, now at the low rate. How are they going to afford their payments when the rates are 8% or 9%? Well the first thing they are going to do is to cut back spending on anything else. No more eating out, no more shopping at Wall-Mart, no more cable TV, no more cellphone – “I got to make this mortgage payment”.

Well that doesn’t happen in a vacuum. The minute Americans stops pending, because all their surplus money is now going to make interest payments to the Chinese or Japanese or to pay higher costs for gasoline and food. That doesn’t happen in a vacuum. A lot of people in America earn their living on discretionary spending. In fact, most of us earn their [sic] money on discretionary spending. A lot of people are going to loose their jobs because a lot of Americans are struggling to make mortgage payments instead of spending money on what they are spending it on now. Of course a lot of Americans got their spending money from home equity extractions. As the real estate was going up, they kept borrowing against it. Well you can’t borrow against if all the equity has been borrowed out or real estate prices start to fall.

Interest rates on the long term are not any higher than what they were four or five years ago. But what is higher are the short term rates. And that is where these adjustable rate mortgages are all set at the short term.

Also, of course, a lot of people don’t realize this too, but one of the things the Clinton administration and the Bush administration is that we put the entire country on an adjustable rate mortgage. The US government used to finance its borrowing with 30 year paper. Now, the average maturity of national debt is under three years. That’s almost 9 trillion dollars in debt as an adjustment rate mortgage. So as interest rates rise that is going to affect the federal budget and there’s probably going to be quite a bit of tax increases in the pipeline because of the larger deficits that are in our future. Of course, that means that home owners are not only going to face higher mortgage payments but they are going to have higher taxes as well in addition to higher costs for food and groceries and things like that.

So, we are going to have a very severe depression as a result of that contraction in consumer spending. Also, Americans are going to have to rebuild their savings, replenish their savings. For the last five or six years, a lot of Americans felt, why save? I own a house, I don’t need to save. In fact a lot of Americans said I don’t even need a job, I have a house. You go to California about two years ago, the average person buying a home in California believed, that that house was going to appreciate by 20% a year for ten years. Now the average price at the time was 500 000 dollars. Which meant that that person, buying that house believed that he was going to earn 100 000 dollars a year for the next ten years. No, actually more than that, appreciation – 3 million dollars over ten years. Because that is what 20%, compounded for ten years would take a 500 000 dollar house and turn it into a three million dollar house. So the average person in California who might maybe make 50 or 60 thousand a year believed that by buying a house he was going to have an extra 250 thousand dollars a year in income. Just because he owned a house. Why even have a job?

You know people used to buy a house because they could afford it. Now they buy a house because they need the money. And if you need more money, you buy a vacation house. People forget that real estate depreciates. Houses have to be maintained. That they cost money. But they forgot that when they were speculating. In fact the people who bought real estates made the exact same mistakes as the people who were buying stocks. You know, when people were buying stock in the 1990’s, the reason they lost money is not because stocks are bad investments. If you buy a stock at the right price, then it’s a good investment. The reason they lost money is because they forgot. They overpaid for stocks. It’s over paying for stocks that makes them a bad investment.

How do you know that you’re overpaying? Well, you look at the dividend yield. If you don’t get a good dividend then you are overpaying for the stock. Well, how do you know that you are overpaying for real estate? You look at the rents. And the rents are not just supposed to cover your expenses – you don’t want to invest just to break even, you can get 5% at a government bond, right? If you can’t get 7 or 8 or 9% on a piece of property, then you are overpaying. Well, what’s been happening in California and other parts of the country – investors, you know the really speculators, were buying property and not only was there no investment return, but there was negative cash flow. People would buy a piece of property and pay a million dollars for it where the rents that they could collect were less than the mortgage payments on the property or the taxes. Less!

Now why were they doing that? Because they figured they would make it up on the appreciation. But they didn’t bother to ask themselves, why should an asset that’s so overpriced that it produces a negative return, why should that asset appreciate? It should collapse. But the people who were buying real-estate and are still buying real-estate were making the exact same mistakes that people were making in the stock-market. They were not basing their investment decision basing it [sic] on the fundamental value of the asset. They were basing it on the belief that prices would rise. On the belief that there would always be a greater fool willing to accept more losses – real-estate would always go up. It was a sure thing. Just buy it – it doesn’t matter what you pay for it, it doesn’t matter what the rent is ’cause it is always going to appreciate.

Well, people are now starting to find out that that’s not going to happen. And also you know, (one of the reasons [sic] ) people are saying – prices are just going to level off. That’s impossible. Prices can’t level off. It’s like, I can’t hold a balloon up in the air like this and take my hand away and expect the balloon to stay there.

Why did real-estate prices get so high in the first place? How did they get there? Well, they got there because of the artificially low interest rates that existed. Well, those artificially low interest rates are not there anymore. The rates are still not high, but they are not nearly as low as they were. And without those very low rates these prices are impossible because people can’t get payments that low.

They also were there because of the complete abolition of lending standards. Well, that process is starting to reverse itself – I’m going to talk about that in a minute. But standards are starting to tighten and they are going to be a lot tighter.

And number three, was the speculative mentality of the buyer. Now, one of the reasons people who were poor were buying real-estate, let’s say someone in California who believed that this house was going to appreciate by 20% a year. Let’s assume my income is 5000 dollars a month but I’m going to buy a house where the mortgage payment is 4000 dollars a month. Well, no sane person would commit 80% of his income to mortgage payment. But wait a minute, if I’m expecting that house to appreciate by 20% a year, my real income isn’t the 50 000 I earn as a police-man, it’s the 100 000 dollars a year, the 200 000 dollars I earn as a home owner. So they take a look at that money and they figure – that’s my real income. So they get one of these no doc loans, one of these liar loans that you guys came up with and say – my income is 150 000 a year. I qualify for that loan. And of course they pay a little bit higher interest penalty because they didn’t want to document their loan. And of course anyone who could document their loan would do it. Why would anybody who actually had the income not document it? I mean, they file a tax return. They are lying. But they don’t care.

And I wrote, I mentioned this as a paradox that even though real-estate prices were high, rising real-estate prices makes real-estate affordable. Because, if somebody believes that they are going to get paid 100 000 dollars a year for owning a house, right, that offsets the actual costs, of the mortgage, of the taxes, of the maintenance. But the minute a more realistic outlook for the future price is in the mind of the buyer, the minute he can’t anticipate that windfall, all of the sudden, the true cost of home-ownership becomes apparent to the buyer. And he’s not going to pay these prices. But more importantly then the buyers are the lenders who are not going to lend.

And a big part of this problem has been from the lenders perspective. Traditionally, the way people bought a house is that they went to the bank and the bank wrote them a mortgage. And the bank held that mortgage for 30 years. And so the bank had a big vested interest in the loan getting re-paid. So, how did the bank insure that that loan was re-paid? Well, it was very careful with who it lent money to and under what terms money was lent. Buyers needed a 20% down-payment. Why did they need a down-payment? Well, so that they wouldn’t cut and run at the first sign of trouble, number one. Number two, because the ability save a down-payment said something about an individual’s character and their ability to save and pay for the on-going expenses for home ownership. And number three, if the home went into foreclosure, the bank had a cushion. Right? There was something there.

Also, when the appraiser was hired it was hired by the bank and the bank wanted that appraiser to be accurate because that was what it needed if it had a default. It had to know – what is this asset worth, cause I’m going to carry this asset in my books for 30 years. If this guys doesn’t pay, what can I sell this property for.

So there was a lot of scrutiny and a lot of soundness in the lending practices. And of course the lenders would say – well, I’m not going to lend to any more than 30%. I’m not going to let anyone commit to a loan where payments are more than 30% of their income. Because they know what can be reasonably handled.

And of course they wanted the borrower to fully document that loan. Yes, we want proof. I’m not just going to your word for what you make. Prove it!

Now, how does the lending industry work today? Well, you’ve got this huge moral hazard built in and a lot of it was created by government and guaranteed mortgages of Fannie Mae and Freddy Mac. But what happens is that you got a whole bunch of people in this room that are lending money. But when you lend the money, does anybody in this room keep that loan? No it gets sold. It gets re-packaged, and these other companies buy them and then they re-package them again. And they get sold to Goldman Sachs and Morgan Stanley who creates these collateralized mortgage obligations or they sell them to Fannie Mae and Freddy Mac that just buy them if they are conforming loans.

So what happens is that lenders just want to make loans, they don’t care if they are ever re-paid because they are not going to own the loan. Now, all of the sudden, when they hire an appraiser, do they want an appraiser who is going to give an accurate appraisal? No, they want an appraiser who is going to appraise the property high enough to fund this loan. The appraisers know that. The appraisers want to get jobs, they want to get hired – who hires them? The mortgage lenders. If a guy keeps coming in with low appraisals – he’s not going to get any work. So the appraisers have an incentive to inflate the value of the home. Of course, the buyers, they don’t care they just think it’s all going to go up, so they just want to close on this thing.

In fact, back in California, when I was living there, the house would go on the market and there would be a hundred offers. People would write in with sob-stories you know: Please sell me your house, I go to church every week. You know, it was like a gravy train, all you had to do was to own this house and you were home free. Done, you were rich. You didn’t have to work anymore. So all they wanted to do was to buy this home.

Now, when people used to buy home with a 30 year mortgage, the reason it made sense to buy a home, the reason it was an investment was because you paid off the house. After thirty years, you lived rent-free. Now you can retire, burn your mortgage, because you longer had any debt. And the return on home ownership was that rent you paid to yourself and that you are now out of debt. Well, today people aren’t buying homes, they are renting them from the banks. They have interest only loans, or worse yet negative amortization loans when they go deeper into debt every year. All they are doing is that they are hoping that the appreciation value bales them out. That they build equity not by paying off the loan but by the house just magically appreciating in value. That doesn’t happen. I mean it can happen for a short period of time but it doesn’t happen for the long-run.

Let me tell you about the subprime market which I am actively involved in shorting right now. But to show you what is going to happen. The way the subprime market works – and I didn’t even realize this until I did the research to start shorting stuff. 65% of the subprime mortgage market, were where a guy [sic] stated income, no doc, negative am, risky loans, 65% of those things are re-packaged by Wall Street and rated AAA. AAA, the equivalent of sovereign debt of the best credit quality governments of the world. How can it possibly be that 65% of the subprime mortgages that are issued get a rating at AAA? How can that be? Well, the reason is that Wall Street creates these tranches of CMO‘s, a billion dollar’s worth of mortgages. The way they structure it is they insulate the top 65% from losses by saying all the losses from interest in principal are going to go to these riskier tranches. The riskiest tranche represents one percent of the market, ten million face [?]. That risky tranche gets all the losses first. So, that tranche has to be wiped out before any other tranche looses one dime of interest, let alone principal . Now, that particular piece of paper is rated triple B minus and yields about seven and three quarters percent right now. That piece of paper should be rated F and it will go to zero as will several tranches above it. Right now, one of the big trades that is starting on Wall Street and which I’m participating in is shorting that tranche. A lot of the brokerage firms are creating derivative instruments where you can do these credit default swaps and you can bet on those things defaulting.

Now, what’s going to happen as more and more people put this trade on, the price of those bonds are going to start to fall. As the price of those bonds, those risky tranche bonds falls, the yields are going to shoot up. When that happens, it’s going to make it impossible for Wall Street to collateralize this debt. Because it’s going to be too expensive, rates are going to rise and the bottom is going to drop out of the subprime market. And of course, the subprime market is at the margin, determining home prices. It’s these who were lying about their income or were overstretching themselves who were coming in here, and it’s been made possible through this credit market where the buyers of these instruments are somehow believing they are insulated from losses and people were willing to buy these risky tranches. Once they don’t want to buy those tranches anymore you are going to start to see a big big drop or a big rise in interest rates and that whole market is going to shut down. Because all of the sudden, when the mortgage people who are buying these bonds from you guys, when they can’t re-sell them because Goldman Sachs and Morgan Stanley won’t buy them anymore because they can’t sell them, then it’s over. There is no more market. There is no more secondary market for these products.

And credit really starts to contract. It’s almost like a perpetuating spiral. Because the minute you take away the credit and you make it harder for people to borrow to buy property, well you have fewer buyers. Of course, a lot of property is going to be coming on the market the next year or two because, as I said, when these adjustment rate mortgages reset a lot of people are going to be in the situation where they can’t make these payments. Even if they cut back everywhere they can’t make these payments. And, of course, a lot of them are going to be unemployed if they happened to work in the service sector and they lost their job because other people have cut back. So a lot of properties are going to come on the market. If you think there is a high inventory now, wait a while. Who’s going to buy these properties if there is no credit flowing? And besides, everyone already owns houses, I mean we have home ownership right now is at an all time record high. You know, there’s never been more people that own homes.

I mean, look at all the homes that are being bought by single women in their twenties. You know, it used to be – back I don’t know, ten, fifteen years ago – if two people got married they were both renters. They got married and they bought a house. Now when two people are going to get married, they are both home owners. They got to sell one of them. You know the whole dynamic.

And one of the reasons this downturn is going to be particularly severe – you know, when people are stressed to the limit on their mortgages and they have no savings [sic]. You know back in the 1950’s or 1960’s a guy lost his job, it wasn’t a big crisis. He had a stay at home wife, she could get a part time job, he could get a part time job, they had plenty of savings, they had a fixed rate mortgage (and it wasn’t adjustable), they could get by. No big deal, it wasn’t a crisis.

Today, most people who have a home you got two bread winners. And even if one of them looses a job – they are done. They can’t make their payments. The only reason they were able to do it before was because OK, they borrowed some more money. They went to that ATM and extracted some equity. But all of the sudden, when you can’t do that – you know [sic] a lot of the people who own homes, I used to laugh all these people would be buying with adjustable rate mortgages. And they’d be asked in a survey “why did you buy with an adjustable rate mortgage, why didn’t you get a 30 year fixed?” “Well I’m only going to live in the house for two or three years.” Well, I was thinking, then why are they buying it? If you are going to live in a house for two or three years, just rent. But they were buying it because they were speculating. They said – I’m going to buy this house, it is going to go up and I’ll sell it in three years.

Well, what happens when it doesn’t go up? And what happens now that the mortgage rate re-sets and you can’t afford it? Well, you just walk away.

In fact, what a lot of people don’t realize – and I used to read a lot of articles about all the risks of nothing down mortgages and zero down mortgages. And I would say, yes you are right there are a lot of risks but the papers had it wrong. The risks weren’t being born by the borrower, they were being born by the lender. That’s the whole idea. When you put nothing down, you got nothing to loose. It’s the lender that takes all the risk. And of course, when you give somebody that situation, when you tell somebody – “Hey you can buy this house for 500 000 dollars, you can lie about your income, you can put nothing down, and if it goes up it’s all yours. That two million buck, yours. You can borrow it out tax free. It’s all your money. And if it goes bad, just move out. You have nothing to loose”. Especially if they took a negative am, teaser rate, adjustable rate mortgage where for the first two or three years the mortgage payment was really low, it might even have been lower then what they were paying in rent. And so they figured, what the hell!

And in fact for a while in California, it was much easier to buy a house then rent. Because, for renters the landlords, you know, wanted to prove your income. The lenders didn’t need to prove your income. You can’t do a stated income rent, you always do a credit check, they always check on your stuff. Landlords wanted first month, they wanted last month, they wanted a security deposit. Hell, you didn’t need any of that to buy a house. So a lot of people were just making this gamble. Because as we put that in their minds.

Of course, this is all going to unravel. This is all going to unravel. And as real-estate prices start to fall, right, and you say wait a minute – when they rose… look what happened to real estate prices, I mean what have they done [sic]? When people talk about that we’ve created all this wealth, I mean Barry mentioned all the wealth we’ve created, we really haven’t created wealth. What’s happened is that the value of our assets are now appraising at a higher price. But prices can change over time. The NASDAQ was 5000 then it was 1000. The stocks were still the same stocks the perception of the value is all that changed. So the reason that real-estate prices were so elevated was supply and demand – right? Everybody wanted to buy, but nobody wanted to sell. Why would you sell a house? It just kept going up. If you needed money – just borrow against it. And everybody wanted to buy because it was your ticket to easy-street. If you were renting, you were an idiot, you were throwing away your money – you got to buy. So everybody wanted to buy, nobody wanted to sell so prices went up.

Well, what’s going to happen? All of the sudden, nobody wants to buy anymore. Who wants to buy houses when they are falling in value? Who wants to lend money to buy houses? When real-estate prices were rising, the lenders didn’t care. Default? Who cares about default? The guy defaults we sell the house and make a profit. But when prices are falling and lenders are worried about defaults, they are going to contract their lending – “I’m not going to lend money out. Nothing down, are you kidding me? You know, I need 20% down.” Of course, when you require a down payment, it makes it much more difficult for someone to buy a house, especially when the prices are so high. You know, if the average house is 500 000 dollars and you need a 100 000 dollars down, the average guy doesn’t have that kind of money. It was the fact that they abolished the down-payment that made so many people able to pay these prices. In fact, there was a whole lending industry constantly lowering their standards. And lowering their standards which enabled prices to rise. Historically, the lenders provided a check on home lending. If you look at a chart, if you go back a hundred years, you look at the price of houses in the United States, until 2000 it maxed the CPI. Basically all that happened is that housing prices stayed even with the CPI but only because the owners of those houses spent a bunch of money every year maintaining them. If you didn’t maintain it, you didn’t fix the roof, you didn’t fix the pipe, if you didn’t do all that stuff your house lost value. It was only because you kept it current, that you maintained it, that it kept pace with inflation. It wasn’t until 2000 that it went off the charts because something weird happened. And this is all going to be corrected.

But also, you know, when pendulums swing, they don’t swing way to one side and then come and stop in the middle. They go all the way to the other way first. It takes a while before you find a balance. So as expensive as real-estate got, that’s how cheap it’s going to get. People are going to be completely amazed at the prices houses are going to be selling for in the next couple of years. Amazed. Just as amazed as the people were when they saw their shares of stocks go from 200 to nothing, or practically nothing. It’s the same thing. It’s the same dynamic because you are going to have lots of sellers, you’re going to have very little buyers, you are going to have a lot of foreclosures, you are going to have a lot of developers going bankrupt, you are going to have a lot of speculators.

You know, I know lots of people that own five, six, seven, eight houses. Maybe they’ve had negative cash flow on these houses. Their negative cash flow is going to get bigger because a lot of them are re-financed with adjustment rate mortgages. You know, I know people who own many many houses and when they even qualified [sic] for their loans they wrote “Owner occupied”. I mean there are people that have seven, eight or nine owner occupied homes in different states. I mean, everybody is looking the other way at these speculators buying houses. But you know they are all going to come out of the market. Look where we are here in Las Vegas. I mean, there are so many condominiums that have been built in this town, that nobody lives in. Their lights are never on. I mean they weren’t even bought with the intention of living in them. Some of them are so small, it’s like nobody would even wanna live… [sic] I mean why would you even want to buy a condo in this town. Look at all the hotel rooms, and they are pretty reasonably priced. Why would you wanna own a condo? The only reason people wanted condos was because they thought they could flip them to somebody else.

But it’s this huge supply of houses coming back on the market from speculators who got caught. And a lot of people who were speculators are home owners. Just because you own your home and live in it doesn’t mean you are not a speculator. If you bought a house using an adjustable rate mortgage knowing that you can’t afford to make the payments when they re-set – you’re a speculator. If you bought a house planing on selling it in two, three or four years – you are a speculator. That’s all you are.

So we had rampant speculation in this housing market, much more so then we had in the stock market. But the bigger problem is how intertwined the economy and the stock market are. Because if you look at that housing prices as the source of this consumption and the collateral for all of our borrowing abroad, this is the problem. Now, of course, when interest rates start to fall, I mean when prices start to fall people think – well the Fed will just cut interest rates and save the day with some rate cuts. It’s not going to happen. Once the bubble bursts, cutting interest rates doesn’t stop it. Greenspan brought interest rates all the way down to 1%. It didn’t stop the NASDAQ decline. It happened anyway. Once money starts moving out of an asset, it moves out of that asset. Low interest rates are not going to do anything.

And the bigger problem though is the dollar. Right now, as I said, I think the dollar is posed for a substantial decline. Once the dollar really start to fall, interest rates are going to have to rise and rise sharply to shore up because we have no savings, we got to pay the Europeans and the Asians to hold their savings in our currency. And when our currency starts to fall, the only thing we can do to entice them to hold it, is to pay them higher and higher rates of interest.

And in 1980, when Ronald Reagan came in and we tried to stop the decline of the dollar which lost 2/3rd of it’s value in the 1970’s. We did it. But we did it by putting short term interest rates up to 20%.

Now, imagine what would happen to the US economy if interest rates were even half of 20%. What would the interest on the national debt be? Oh, a trillion dollars a year. Where the hell is the government going to get that money. Imagine if people’s home mortgages were now based on an over night Feds funds rate of ten percent. I mean, what would this economy be? What would happen to Fannie Mae and Freddy Mac? Would they still be around?

You know those tranches that were shorting. According to the statistics, all it takes is about 5%, a 5% loss rate on these collateralized mortgage obligations, just five cents on the dollar is lost and it wipes out that tranche completely. Completely, to zero. I think a similar amount of losses would wipe out Fannie Mae and Freddy Mac and of course the government has an implied guarantee of all that debt.

And of course, you know, Barry talked about inflation and how inflations have destroyed countries. It’s not inflations that destroy countries, it’s governments. Because governments create inflation. Governments create inflation by creating money. And that’s the situation we’re staring at, because as the housing bubble implodes, as the economy implodes as these entities go bankrupt like the pension guarantee corp, like Fannie Mae and Freddy Mac, the incentive to monetize that and for the politicians to print enough money to try to make good these promises is tremendous. It’s the same type of incentives that the Argentinians faced, that the Germans faced in the Wiemar republic, that’s what led to the inflation. And that’s something that we’re potentially staring at.

I hope it doesn’t get to that worse case scenario, but unfortunately, that type of inflation is the only thing that’s going to stop nominal real estate prices from collapsing. If we don’t have that, if the government does the right thing, we will see real estate prices decline dramatically. Not only will all the gains of the last six or seven years be completely erased, but prices will be lower than they were in 2000. Lower, by a considerable margin.

And as I said, you know, if that doesn’t happen, if we have inflation, it really doesn’t matter if you live in a 1 million dollar condo if you have 10 000 dollars worth of groceries in your refrigerator. Relative prices don’t matter, right. And that’s what might happen if we just have enough inflation so that nominal housing prices don’t collapse but real housing prices have to go down. That’s real housing prices relative to the price of everything else.

Am I out [of time]? Anyway, thanks.

[At this point a Q & A session starts. I will only transcribe the question – where they are audible – and the reply of Peter Schiff and Barry Asmus]

[Question – not audible]

[Schiff] Well first of all, I think the demographic argument is a ruse. It’s very similar to the arguments perpetuated by the analyst in the 1990’s to explain the valuation model. The eye-balls and click-troughs, they were always trying to, they didn’t want to admit that it was a bubble, so they were trying to rationalize it. The demographic argument is flawed. I mean, the demographics are no different than they were in the 1980’s and the 1990’s. I mean there isn’t a bigger influx of population.

But I remember having an argument with someone in California who was talking to me about the demographic argument and I had to show him that California was actually loosing population. That he was actually wrong in what was happening with the demographics.

This has been a credit bubble, pure and simple. It has nothing to do with the fundamentals. If the fundamentals were in charge, prices never would have risen to these levels, you know. So I am focusing on the fundamentals. That’s what I’m doing. That’s what I did in the 1990’s with the stock market. I wasn’t distracted by all the propaganda by the Wall Street community why to justify this mania. Just like I’m not being distracted now by David L[?], the propaganda coming out of the real estate industry about why this is justified. It is not justified, it is a pure and simple mania. If you want to look at manias, you know look at manias throughout history. Again, we had one with the internet, you know you go back to tulip bulbs or the Mississippi bubble or all kinds of things, railroads in the 19 hundreds – it’s a mania and it’s always the same kind of stuff.

As far as where are the opportunities? You know, there are a lot of opportunities now. In the real estate market the opportunities are probably to stay away from it and maybe buy some things when they get very cheep. Don’t buy too early because they are going to get a lot cheaper than you think. In the meanwhile you want to keep your wealth outside of the US dollar. As I said the dollar is going to loose a lot of value. If it lost 2/3rd of it’s values in the 1970’s it can probably loose three quarters or ninety percent of it’s value in the next ten years. Which means that foreign assets will go up five to ten times. So if you have your assets, if you have your wealth in Euros in Yuan, in Australian dollars, if you own other assets then you’ll have a lot more purchasing power to buy very depressed US real estate in several years.

[Asmus] The Berkins institute did a big home study just recently and here is what they said. “A study funded by the Berkins institution metropolitan policy program indicates that by the year 2030 about half the buildings in which Americans live, work and shop will have been built after the year 2000. The nation had about 300 billion square feet of built space in 2000 but by 2030 we’ll need 430 billion square feet of space to accommodate growth. While 82 billion of that will be in form of replacement of existing space, 131 billion will be new space.”

Once again, to review that, half of the buildings that we will be occupying in the year 2030 have not been built yet. It must occur to someone that there is great opportunity in building some more. Recently, Harvard, I don’t quote them very often, but their big housing report: “The most immediate risk to the housing market now comes from the rise of interest rates, the erosion of affordability after years of strong house appreciation and the growing inventory of both new and existing homes for sale. But unless the broader economy stumbles, and job losses mount” (and of course that’s what Peter’s worried about too) “home sales and construction activity will likely dip only modestly. Over the longer term, the outlook for the housing market is favorable with household growth accelerating and second home demand climbing, the number of conventional homes completed and manufactured homes placed in the coming decade should easily exceed the 18 million added between 1995 and 2004. As a result, housing production should average between 2 million units annually over the the next ten years.

And just one more quote, and this is from someone in your industry. His name is Douglas Duncan, chief economist at the Mortgage Bankers Association. He observes that “34% of American home owners have no mortgage debt and 48% have fixed rate mortgages. That leaves 18% with adjustable rate mortgages of which 6 percentage points are probably subprime. He doesn’t see how these numbers add up to a major calamity for the economy.”

Thirty more seconds? No.

[Question] Yes, Peter, as a lender myself and a property owner, and also a writer about real estate and what’s going on, should I just slit my wrist?

[Schiff] No, I mean there is no reason to slit your wrist. I mean, this is what’s going to happen. I want to get to, you know, the fundamentals here. The idea that there is all this demand on second homes. Second homes are in demand because people that are buying them are buying them because they think they are going to get rich on them. The reality is that the demand for second homes are going to collapse. All these vacation homes are going to come out on the market when people realize that it’s cheaper to stay in a hotel when you go on vacation then to buy a piece of property. Also, all the home constructions that are going on is being done by public builders who are building homes to maintain their stock-prices so that the insiders can keep selling shares even though there is no demand. You can look, I live in New England now, there are “Fore Sales” and “For Rent” signs all over the place. I mean, there are so many unoccupied homes that if there really were a shortage – I mean no one’s ever lived in them, no one’s ever going to live in them. They are empty houses. You can rent, where I am now in New England, I don’t know about California, houses that appraisers will tell you are worth four and five million dollars. You can rent them for 6-7000 dollars a month. It is absolutely ridiculous. And the people who wrote that, whatever you were reading [aimed at Barry] are not looking at those fundamentals. You know, this is a huge, huge glut- Prices are going to collapse.

All you can do, instead of slitting your wrist, you can say – look this is what’s going to happen, so what can I do? How can I change my business in advance of what’s going to happen? Rather then just being surprised by it. Obviously there are going to be some opportunities.

But look, this industry is going to change. A lot of people were stock brokers in 1990, 2000. A good friend of my mothers was a shoe salesman all her life and she got a job at Merrill Lynch in 1998, she was selling tech stocks. One day I called her up and I asked her – “Carol, here is the name of some good oil stocks, why don’t you recommend these oil stocks to your clients”. And she said – “Well look, I’m a technology broker, I don’t buy oil stocks.” And I said – “But what do you know about technology? You are a shoes salesman. You know what the P/E‘s are on those tech stocks?” And she says – “Well, P/E‘s don’t matter.”

Of course, she’s baking cookies now, she doesn’t work at Merrill Lynch anymore. So a lot of people came into the mortgage industry in the last four or five years. They are not going to be in this industry in another four or five years. But obviously, some people will be there. I’m still a stock broker. There are still stock brokers around. But you have to understand, how you can re-organize your business and what you can do differently in light of what’s going to happen.

[Asmus] Uhm, Peter. I think what the audience has to understand that what Peter is doing a bit, in the vernacular of your… is he is selling to the book. His company, Euro – whatever, is big into commodities, gold and currencies. So it is in Peter’s great self interest that people look at commodities, gold and currencies, maybe a few other things but that’s the biggest ones. But understand that that’s the prism through which he views the world.

Now, you can prove anything that you want with statistics, one way or the other or the other, so there’s no doubt about that. But you have to understand where he’s coming from. And by the way, my gut feel about that is that that is very risky. A portfolio of commodities, currencies and gold is a very very risky portfolio. We’ve just come through a four or five year boom market in commodities. And he’s trying to tell us that it’s probably going to go on and on and I would suggest it’s not.

Look here, Peter is very upset about 70 dollar a barrel of oil. The point is, 70 dollars a barrel of oil is not the problem. 70 dollar a barrel for oil is the solution. Why? Because markets respond. 70 dollars a barrel of oil brings in all kinds of alternatives. And what he’s saying is that oil prices have now come down a bit and now back up [sic]. I don’t think so. As a matter of fact I believe they are going to continue to move down. Why? Because that’s how markets work.

Now, have some mistakes been made with these low market rates? Of course they’ve been made. Is there bubbles in some markets? Perhaps Phoenix, Southern California, Florida? No question about it. Did my aunt pay a big price by putting all here money in one technology stock in the late nineties and call me and say “I’m a millionaire, I’m a millionaire” and then all of the sudden she is not a millionaire, she is in poverty? Of course. That happens. There is going to be some people that get burned on this thing. The ones that Peter described. There are going to be some people who are hurt. But as far as the longer term, to imply that America isn’t a producing nation, in my opinion, just is not factual.

[Schiff] I take exception to that comment about I’m talking my book or that somehow what I’m saying is influenced by my investment approach. My investment approach is dictated by what I believe. I own a company. Euro Pacific Capital recommends whatever I want. And so, if I was bullish on the US and I was bullish on technology stocks my clients would be loaded up with Cisco and Microsoft. In fact, I would have made a lot more money during the 1990’s when all my friends were getting rich telling their clients to buy dot com’s, I was taking the hard road. I was telling people – “No, this is wrong. You don’t buy these stocks. This is a bubble.” I talked people out of that. So my firm reflects myself. The fact that I’ve been recommending people to buy foreign stocks for the last 8 years and the fact that they made 30 or 40% a year doing it, is because of my foresight. And believe me, the minute I get bullish on the US market in the US dollar, will be the minute I stand up here and tell people to buy US stocks. It’s not like I can only tell people to buy oil and gold. The fact that I told people to buy oil when it was at 17 a barrel or gold when its 250 dollars an ounce is to my credit.

[Question by moderator] I’m a mortgage broker, I’m from Phoenix, I own four homes. Do I slit my wrist before I leave here today or Barry, do I expand my business because I’m going to need more loan officers and I’m going to need to train more people.

[Asmus] I surely can not see that you want to expand at this time. There is no question that there is going to be some softening in the economy in the year 2007. And a big reason why that economy is going to soften some, is because of the very thing that Peter is talking about. We will pay a price. I will argue that it’s going to come nowhere near the severity of what Peter shared with you. So I think you would all do well to invite us back next year, and the year after that and the year after that, because we will watch this thing play out.

The problem, Peter, that I have is when you say things like you do about Greenspan and about other people, and people in the market, you are saying that they don’t adjust. And that’s exactly what markets are about. We will now go through an adjustment. We are going through [sic]. There is no question or softening, there is no question that 2007 will be a little bit of a weak economy, but understand something, we have just come through 12-14 quarters of 4% growth. Now me put that in perspective.

During the Ronald Reagan years it was 3.4%, under the Bill Clinton years it was 3.6%. I mean, this economy is humming. The fact of the matter is that people want to come here. The fact of the matter is that automobile plants throughout the world that want to locate in America, right now out of Jackson, Mississippi, Infinity – one of the biggest automobile plants in the world. Just out of San Antonio, Toyota is building one of the biggest automobile plants in the world. Why? We are producing one third of the world’s wealth, that is why.

And the point about outsourcing. Look, comparative advantage says that if China can do some of the manufacturing, let them be. Don’t tell me that China can do that without our banking and our technological skills when it comes to investments. They rely totally on us.

[Question by moderator] Peter, what should I be doing with my mortgage company right now?

[Schiff] You should put it on the market, and if you can find dumb enough to buy it and someone dumb enough to finance it, you should sell.

The fact of the matter is, the economy hasn’t been humming. All we have been doing is going on a consumption binge, just like a heroin addict. These numbers are false. All they are measuring is how much wealth is dissipating not how much we are producing. We are borrowing money from the Japanese and the Chinese to buy the products that they produced on credit. We are going to go through a painful crash. And anybody that thinks that we are going from such an out of whack imbalance and we are just going to turn a little switch and it’s going to be a, you know, not a big deal, is fooling themselves. Just like when people told me – I said that the NASDAQ is going to drop 80 or 90 percent, of course I was right – oh no no no it’s not going to go down 10% or 15%, no way.

We are way out of balance. We are not going to have a little mild recession. This is a major contraction that is coming and the real estate market is right in the forefront.

[Question] You talked before about how there were forecasts made last year. I’d like to hear a little more about what Peter’s forecasts were and how they come about during the past year and then have each of you think the DOW will be one year from now and the ten year treasury be one year from now.

[Schiff] Well, when I was here last year, I don’t think I made any forecasts on the DOW. I made forecasts on the real estates and I predicted that the market will go down and it has gone down. I predicted that the bubble was in the process of bursting and it has. The question now is, how much air was in it and how much is going to come out. And I think it has a long way to go.

And you know, when you mention those statistics [aimed at Barry] about adjustment rate mortgages, the problem is they are all concentrated in the high price markets. I think something like 54% of the value of mortgages in the United States is adjustable rates because they are all concentrated in the high priced market. It’s a huge problem.

What’s going to happen to the DOW? The market’s been rising in nominal terms. There’s been a tremendous amount of inflation. So I don’t even care if the dollar goes up or down in nominal terms. The DOW is loosing value as we speak, it has been loosing value for seven years. If you adjust the DOW for the CPI it would have to be at 14 000 right now, even if you take the government numbers as accurate. If you figure that the government CPI is understating inflation by 2-3 percent per year, which I think is conservative, the DOW would need to be at 16 000 right now to have the same purchasing power it had in 2000. The DOW right now is about a third below what it was in 2000 in terms of the Euro, it’s about 25% below what it was in terms of the British pound or the Australian or Canadian dollar. The DOW is less then half of what it was in 2000 priced in gold. And if you want to price it in zinc or led or copper or oil, its even worse. So the DOW is loosing value against just about anything that you can own and I think that’s going to continue to be the case.

Long term interest rates eventually going to go sky high. I don’t know where they are going to be next year but eventually rates are going to Pluto, they are not just going to the moon, they are going to Pluto.

[Asmus] I think Peter’s scenario would come true if an atomic bomb landed on either Los Angeles, Chicago or New York. Now, if I think, that happened and that’s not beyond the realm of possibility for sure, if that happened, this scenario would unfold. It would take that kind of event.

But when you are a 12 trillion dollar economy. Very very productive. And the labor force doubling it’s productivity in the last years. Of course, there’s going to be some corrections, of course there’s going to be some softness [?] and of course, some people are going to get burned. But to the degree that Peter said, I don’t buy a bit of it and so once again, we all going to have to get together next year.

And by the way as much as I disagree with Peter he’s really a neat guy. Take it from me.

[Transcription © csaba.se]