Peter Schiff, President and Chief Global Strategist | Green Shoots Turning Brown?

For all the talk about “green shoots” in the financial media these days, one might mistake CNBC for HGTV. However, what many see as the first promising sprouts of economic recovery are, in reality, the artificially generated, short-term gains from the most massive dose of fertilizer (government stimulus) that the country has ever seen. Few talking heads on Wall Street or in Washington understand the damage that such a flood of chemicals will inflict on the long-term health of our economic soil. The “green shoot” discussion centers on the less-than-horrific data that began to emerge a few months after the economic free fall of Q4:08. The statistics regarding unemployment, business spending, consumer confidence, and credit availability have all recovered somewhat. Many of these numbers are labeled “positive” merely because they're not declining as rapidly as they had before. In response to these perceived stirrings of health, the U.S .stock market has put in a strong rally. But now, as the statistical trends are appearing to falter, many are questioning the significance of these “green shoots.” Since one of the greenest of shoots happens to be rising stock prices, a minor reversal in the current rally in itself could cause the rest of the garden to wilt in concert. The observation that no one seems to be making is that the modest statistical improvement comes as a result of trillions of dollars of government stimulus spending. It would be impossible for such a program to not have such an effect. But artificial government stimuli are no more capable of creating lasting economic growth than green paint is capable of making a healthy lawn. The question Euro Pacific investors should now be asking is whether our foreign stocks, many of which have rallied strongly off their 2008 lows, will decline when the rally in U.S. stocks reverses. Many of you may be tempted to lighten up on your positions now and look to reposition later at lower prices. As always, my preference is to stay the course. First, the “green shoots” may take awhile to wither, i.e. recent stock market strength may continue for many more months. Even if another meaningful decline is already under way, my gut feeling is that foreign stocks will not fall as much as domestic stocks. In 2008, the decline in foreign stocks was far steeper than domestic stocks. Most investors now assume that this dynamic will repeat, should the downturn resume. I do not concur. I believe that the panic has already occurred, and the fever it sparked has passed. Going forward, fundamentals will be a bigger driver of stock price; and overseas, the fundamentals are still better. More importantly, I do not expect another big rally in the dollar to accompany a selloff in stocks. That was last year's head fake, and I do not think investors will fall for it a second time. More likely, I think the dollar will fall in conjunction with stocks, particularly if accompanied by confirmation that the U.S recession is worsening. In fact, this time it might be dollar weakness that actually precipitates a decline in stocks, which will mitigate any share price declines for U.S. holders of non-dollar stocks. Also, given how quickly stocks can turn around, as evidenced by the strength of the March to May rally, short-term market timing is a difficult game to win. My feeling is that the long-term risks of mistiming the markets outweigh the short-term risks of holding through a correction. In other words: we should concentrate on winning the war, not every battle. For that reason, I will be much more interested in buying into any weakness in foreign stocks and selling into any dollar strength, rather than looking to guard against those potential outcomes. Far and away, investors' biggest concern should be the likelihood of further deterioration in the U.S. economy, and the probability of a sharp decline in the value of the dollar. Also, I believe foreign economies will not be affected in the way many now believe. As I have said many times before, a sharp decline in the value of the dollar and a significant reduction of foreign purchases of U.S. treasuries will spur, not inhibit, global growth. So while the waters may remain choppy for some time, the current is definitely still drifting in our direction.

Peter Schiff is President and Chief Global Strategist of Euro Pacific Capital, a full service NASD-registered broker dealer which specializes in foreign securities. He is a recognized expert in the foreign securities markets as well as the currency and gold markets. Mr. Schiff delivers lectures at major economic and investment conferences, and is quoted often in the print media, including the Wall Street Journal, New York Times, L.A. Times, Barron's, Business Week, Time and Fortune. His broadcast credits include regular guest appearances on CNBC, Fox Business, CNN, MSNBC, and Fox News Channel, as well as hosting a weekly radio show. He is also the author of two bestselling books: "Crash Proof: How to Profit from the Coming Economic Collapse" and "The Little Book of Bull Moves in Bear Markets".