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A Tough Year Ahead for the U.S. Economy?

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As the dollar has depreciated, commodity prices have risen, causing commodity-focused companies such as Freeport-McMoRan (NYSE: FCX  ) , Rio Tinto (NYSE: RTP  ) , and Southern Copper (NYSE: PCU  ) to soar. Most notably, gold has rocketed a glittering 30% this year, boosting gold stocks like Newmont Mining (NYSE: NEM  ) , Barrick Gold (NYSE: ABX  ) , and Kinross Gold (NYSE: KGC  ) .

So are commodity stocks still the place to be in 2010? Will the economy improve next year, validating the market's torrid run in 2009?

Peter Schiff, president and chief global strategist of Euro Pacific Capital and author of the newly updated book Crash Proof 2.0, weighed in on these issues during a recent interview. Schiff, who called the financial meltdown in 2006 and who is running for the U.S. Senate in Connecticut, thinks next year will be another tough year with rising unemployment. He says stocks will rise in nominal terms and fall in gold terms. As a result, he's not investing in the U.S.; rather, he favors China and resource-rich countries and sectors.

Here's an edited transcript of our conversation:

Jennifer Schonberger: In terms of your near-term outlook for the economy, what are you expecting here next year?

Peter Schiff: Assuming that we don't have a currency collapse next year, then the economy will continue to deteriorate beneath the surface. The unemployment picture won't improve. We will continue to lose manufacturing and production jobs. The trade deficit will continue to expand. The savings rate will continue to fall. The budget deficits will get worse. Prices will be creeping higher for commodities -- particularly food and things of that nature. The dollar will be losing value, gold will be rising -- it's not going to be a pretty picture.

Schonberger: In terms of your outlook for the stock market in 2010, given your outlook for the economy, the government's actions, and the torrid run we've seen this year, are we coming to an inflection point here where the discounting machine maybe has overcompensated based on the fiscal stimulus?

Schiff: That I don't know. My guess is that the stock market in nominal terms -- in dollar terms -- will continue to rise, and that is going to confound the bears.

I think that the monetary policy and the fiscal policy we have is more likely to cause stock prices in dollars to rise because the policy the government has undertaken is to try to prop up asset prices by depreciating the value of the dollar. Since the majority of Americans, including the federal government, are massively in debt, they want this relief through inflation.

But people need to understand that just because stock prices are going up, it doesn't mean they're richer because they own those stocks. Stock prices are rising more slowly than the dollar is falling. They may have more dollars when they sell their stocks, but they'll be able to buy less stuff.

If you really want to see what's happening with stock prices, and take the inflation out of it to find the real value, then you look at stock prices in terms of gold. Right now the Dow is worth about nine ounces of gold. In 2000, the Dow was worth 43 ounces. So even though the Dow is only down slightly in dollar terms for the last decade, it's down 70% in gold terms. I think next year the Dow could fall precipitously in terms of gold. I wouldn't be surprised to see the Dow down to five ounces of gold, which is a significant fall.

Schonberger: Besides gold, where are you investing for 2010? It sounds like the U.S. isn't the place to be in your view.

Schiff: Unfortunately, no. Unfortunately, the policies that are being pursued by Congress and the Federal Reserve are destructive to the value of our money and are undermining the competitiveness and the productivity of our economy, while destroying profitability.

Any investor who wants to preserve or enhance their wealth has to look outside the U.S. The nations and areas of the world I think are the most vibrant now are in Asia -- Hong Kong as well as mainland China. I'm also buying the resource countries like Norway, Australia, and Canada. I own a lot of mining stocks -- principally Canadian companies. I'm also investing in parts of Europe and Latin America.

I think gold stocks relative to the price of gold have underperformed the price of gold for years. If you look at gold, right now it's still better than 10% above its 2008 high. Yet gold stocks are better than 10% below their 2008 high. Silver is still below its 2008 high by more than 10%. So I don't see a lot of speculation, despite what you hear about a bubble in precious metals. I don't see any signs of that all. Yes, the price is going up, but for good reason. I don't see a lot of speculation on the part of the general public.

Schonberger: Are you at all concerned about a bubble brewing in China, given your investment there?

Schiff: Yes, I am concerned about that. They are creating too much money in China, and that is problematic. It will create bubbles in assets there. [However,] I think that the bubbles could inflate for a long time, given the real productivity and competitiveness of the Chinese economy and the savings that they have. This bubble could expand for five or 10 more years.

At some point, if we get real crazy valuations in Chinese assets, then I'll have to move out of that market. Right now, if you look at most Chinese companies based on dividend yields, P/E ratios, you don't have those kinds of crazy valuations yet.

Schonberger: You're running for the U.S. Senate in 2010. With the unofficial unemployment rate at 17%, what do you think is the best way for us to create jobs in America?

Schiff: Jobs come from the private sector. The reason people are able to get jobs is because a businessman, an entrepreneur wants to make a profit; and he sees a profit opportunity and he has the capital to attract labor. So you need to have profit opportunities for business and access to capital, which comes from savings.

The Obama administration is attacking capital formation and attacking profitability of small businesses by increasing the cost of running a business. By increasing taxes and regulations on small business, they are diminishing the ability of businesses to offer employment opportunities. ... The only way we're going to get real job growth is if we dismantle much of the government impediments already in place that are making it less likely that businesses will expand and be creative. Unfortunately, all the things that Obama is doing right now are so destructive to small business, and so the jobs are going to disappear.

Schonberger: So you think the unemployment rate is going to go higher than where we are right now?

Schiff: Yes. The government reports unemployment at 10%, but if you look beneath the headline number at another number that the government also reports -- the unofficial unemployment rate -- that's at 17%. The unofficial rate includes people who have given up looking for work because they're discouraged as well as people who accepted a part-time job to make ends meet while they're still looking for a full-time job.

If you go back to the 1970s -- or the Great Depression in the 1930s, when unemployment was over 20% -- they used the unofficial number. So when the politicians say, "It's not as bad as the Depression. It was 20% then and it's only 10% now" ... if we use the same number, it's 17% now. It's actually almost as bad.

Schonberger: Do you think the unofficial unemployment rate will get as bad as 25%?

Schiff: ... There is a good chance we could hit 25% using the unofficial rate before Obama leaves office. The actual headline number the government uses, that might get to 13% or 15%.

For Related Foolishness:

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 15, 2009, at 2:37 PM, cmfhousel wrote:

    "If you really want to see what’s happening with stock prices, and take the inflation out of it to find the real value, then you look at stock prices in terms of gold"

    I don't understand that. He's assuming the price of gold is 100% correlated to price inflation, which is utterly false. That gold has increased fourfold in the past decade does not mean overall prices have as well.

  • Report this Comment On December 15, 2009, at 3:06 PM, hldboo wrote:

    If only I could vote in Connecticut instead of New York.

  • Report this Comment On December 16, 2009, at 1:22 AM, topsecret09 wrote:

    This Is a smoke and mirrors recovery,with all the so called PROS,and government media pundits crowing that we are out of the recession. These are the same people that didn't even know that we were In a recession In the first place! Too much complacency has the alarm bells ringing for me..... The stock market Is WAY overbought and It has made this historic run on a bunch of funny money printed and given to the banks by the FED. American citizens are In deep trouble as a whole,and without consumer spending this economic house of cards Is going to collapse.... TS

  • Report this Comment On December 16, 2009, at 12:01 PM, qpsoftware wrote:

    A follow-up note on truthisntstupid's comment, what he is saying is really a distortion of the truth. He is comparing gold to it's all time high of $800 per ounce in 1980. However it really all depends on when one would have purchased the gold. For instance if someone would have bought in 2000 when it was under $300 the inflation viewpoint would change.

    Also another quick note in relation to gas prices; we have been sending the OPEC countries our paper IOU's for that gas. In many cases those nations have yet to cash in and are still holding those dollars. When they do cash in it will increase the money supply and result in inflation.

  • Report this Comment On December 16, 2009, at 12:23 PM, Jimmy1986 wrote:

    A gallon of gas cost $1.20 in 1980, or 0.14 per cent of an ounce of gold. In 2000, a gallon of gas cost $1.50, or 0.5 per cent of an ounce of gold. This despite the fact that measured in 2005 prices, gas was cheaper in 2000 than 1980. So I too don't really get the idea of gold as an effective measure of inflation.

    That said, I agree with Peter Schiff on many things and I'm sure he'd make a great senator.

  • Report this Comment On December 16, 2009, at 6:47 PM, FoolishPhilbert wrote:

    It's not about gold prices being perfectly correlated with all consumer goods prices. There are many factors that cause different consumer goods prices to rise and fall. Gold is a special type of commodity, its money. Pricing assets or consumer goods in gold compared with fiat currencies demonstrates how much purchasing power your currency has lost.

  • Report this Comment On December 17, 2009, at 2:29 PM, freetobe79 wrote:

    Jimmy1986's example of gasoline prices is going to be inaccurate, because the oil and gas industry has been subsidized by the US government for over twenty years. A gallon of gas has been $3-$4 in many European nations and in Asia (though they use the metric system) since the late 80s. It has not been a part of the "free market" since it has been such a powerful tool in our government's political and economic control over the middle east.

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