He writes for the New York Time, the Financial Post and makes numerous appearances on all the US television networks. Currently he is predicting serious inflationary consequences as a result of the massive amount of bailout money being pumped into the economy by governments.
His passionate arguments have proven to be highly prescient and are worth taking a look at.
In understanding the current state of the financial and real estate crisis, it is important to look at how it all got started. So I am going to break up his views and start with the Internet Bubble. From that we will move to the Real Estate Bubble, the crash of the stock market, the bailouts and, finally, to his views on what will happen next.
What follows is condensed from a speech he gave on March 13, 2009 to the Austrian Scholars Conference.
The Internet Bubble
When you are living in a bubble, sometimes it is hard to see reality for what it is.
In 1997, 1998 and 1999 we had the NASDAQ bubble and nobody seemed to be able to figure out that these companies that everyone was touting were not worth what people claimed.
They said we were living in a new era and that the internet had captured everyone’s attention. People were saying that everyone was going to buy everything on the internet.
But hang on a second. There was no difference between the internet (and the potential for commerce) and that of a catalogue or a telephone. If worldwide commerce hadn't shifted to catalogue sales or telephone sales, why were they now going to magically shift to internet sales?
What was going to make the internet different?
Yet the valuations coming out for these new companies were huge (and grossly unrealistic). You would have some new company… say doorknobs.com… and they would start up. Now even if they sold every doorknob in the world, they couldn’t possibly be worth the multiples that the company suggested in their prospectus.
Yet once they went public, their value shot up and there was no possible way they could be worth the multiples that the company was now trading at on the stock market.
Somehow it didn’t matter.
And company after company took flight this way. They would come out with a concept. Draw up a prospectus. Go out and get $5 million in start up funding, not because they were worth anything, but on the promise that investors would reap a huge return when they went ‘public’ and listed on the exchange.
It was crazy. Why would people invest in a company that had no land, no assets, nothing!
And the reply was always, ‘you don’t understand the stock market’.
It wasn't about what a company could produce, it was all about the promotion of the stock.
People were sold the malarkey that this was the way the stock market worked with internet startups. And company after company was like this. Many of these companies never made any money at all.
And how could that come as a surprise?
The central premise of most of these internet companies was that somehow it was more cost effective to Fedex every single item currently for sale in the marketplace to a consumer rather than having the consumer come in, buy it and take it home himself.
But it didn’t matter. People were getting rich when these companies were listed on the stock market. And they were getting rich, not because the companies were successful; people were getting rich because investors were buying their stock.
And after the bubble burst, everyone realized how stupid it all was.
But within a year of the collapse of the Internet Bubble, we moved seamlessly into the Real Estate Bubble.
Nobody could see that there were any similarities.
But the exact thing that had happened with the Internet Bubble… now starts to happened with real estate.
And we moved so quickly from the unwinding of one bubble and into another that we simply postponed the unwinding of the consequences until now. And we are still trying to postpone it today with all the bailout money being thrown around.
But this time the damage is so great and the problems so huge that I don’t think there is another economic rabbit they can pull out of their hat at this point. We are just going to have to face it now.
Tomorrow: The Real Estate Bubble.
Whisperer Summary: The key point that Schiff is making is that the internet bubble developed because the fundamental law of commerce was ignored. In the bubble, the value of these companies rose due to irrational speculation. The value did not rise because these companies were producing something and providing a return. And when these companies were promoted, they were promoted on flawed and irrational values. It was a giant gamble because they lacked a real 'value-based' foundation. It was gambling. And when the gambling stopped, the values crashed.