Continuing with the transcription of Peter Schiff’s speech from 2006, here is part six, seven and eight.

You can view the sixth, seventh and eight parts of his speech on YouTube on the following links:
http://www.youtube.com/watch?v=IrpPsOvHUU8
http://www.youtube.com/watch?v=jkyX0_1LaEA
http://www.youtube.com/watch?v=xgRgGKxXbCw

Read more for the transcript.

[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 [start of part 7] 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%, [start of part 8] 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.