Why the Meltdown Should Have Surprised No One
It is my great and distinct pleasure to introduce the Henry Hazlitt Lecturer, Peter Schiff.
Schiff, president of Euro Pacific Capital, is familiar to everyone who has watched financial coverage in the last year. He is famed for being the most vocal financial economist to have perfectly predicted the crash.
He also happens to be a dedicated student of the Austrian school. He is the author of the prophetic Crash Proof and, most recently, The Little Book of Bull Moves in Bear Markets. Whenever he speaks about finance and economics, he also seeks to teach sound economic theory, writing for publications such as the New York Times and the Washington Post. Today he will speak on the relationship between theory and practice in financial markets. Peter Schiff.
I just looked at the topic for my speech about thirty seconds ago before I walked in the door. But apparently I'm talking about why is it that people didn't see this coming, or should people have known that this meltdown was coming.
Is there anyone in this room that was surprised by the economic meltdown? Does anybody think it's over? Anybody? Raise your hand if you think it's over.And does anybody think that the government solutions are going to work or that they're going to help? Is there anybody? One. All right. So, I guess there's really no reason for me to speak here. I don't know that I'm going to tell anybody anything they don't know. But, if you want to indulge me, I guess I could talk about it a little bit anyway.
But I don't know why so few people seem to understand what was going to happen. I guess when you're living inside a bubble, it's very difficult to actually see what's going on, from your point. But I lived through two of them, because I'm a stockbroker. I lived through the NASDAQ bubble.And to me, at that point in time, it seemed pretty obvious what was going on, in 1997, '98, '99. It seemed obvious to me that these companies that people were touting couldn't possibly be worth the prices that people were paying. Yet nobody seemed to be able to figure that out back then.Everybody seemed to be living in this new era, and the Internet had captured everybody's imagination. To me, I couldn't see the difference between the Internet, really, and a catalog or a telephone.People were saying that everybody's going to buy everything on the Internet. Why? Why aren't people just shopping by telephone? Or why aren't they just buying everything in a Spiegel catalog? It didn't seem that it was any different.
And I knew that the valuations they were putting on a lot of these companies, I knew they'd come out with a company, maybe it'd be Doorknobs.com, or whatever it was.And you'd say, "Well, gee, even if they sold every doorknob in the world, they couldn't possibly be worth the multiples that they're trading at." And of course they didn't even make any money selling them.And the whole idea behind so much of the e-commerce was just nonsense. The idea that it was more cost effective to individually FedEx items to people, as opposed to letting them show up and buy them and put them in their cars and leave. There's no way.There are certain items that lend themselves to online sales, but most items didn't, but it didn't matter. Everybody was going public.And people were getting rich, but none of the people were getting rich because the businesses were successful. The people were getting rich because suckers were buying their stock.The guy that started eToys lived in my apartment building in downtown Los Angeles. And I started my company, Euro Pacific Capital, about the same time he started his. He made a lot more money than I did, but he didn't make a profit.He never made a profit. But he made a lot of money because he found people to buy into his idea. And at one point, eToys was worth more than Toys "R" Us.
I remember when I was trying to get clients, back when I was starting out at Euro Pacific Capital, and I was trying to get people to buy foreign stocks.And I remember one country I was active in was New Zealand, and I remember trying to convince people who owned shares of stocks, like Yahoo, why they should sell their Yahoo and buy a stock in New Zealand.I would point out that Yahoo was worth twice the entire country of New Zealand; every stock they had, all the real estate.I'd say, "What would you rather own, this entire country?" The dividend yield on the New Zealand stock market was over a billion dollars a year. That was the dividend yield. Yet Yahoo was trading for more than twice the value of that whole stock market.I said, "What would you rather own, this company that just got started a couple years ago, or this whole country? And you could take all the dividends." No. No one cared; they wanted Yahoo. But it was just all nonsense, but nobody saw it.Of course, after the Internet bubble burst, everybody was talking about how crazy it was. And the politicians were ready to throw people in jail and they vilified Wall Street. But it didn't last very long.
The whole thing was, in a year or two, we just moved right from that stock-market bubble, almost seamlessly, into the real-estate bubble, and nobody could see that there was any similarities.There was one. Somebody recently put together another one of those Peter Schiff videos. There was one that somebody made, this "Peter Schiff Was Right" video that was on YouTube that I know about a million three hundred thousand people have seen.But someone else put together a CNBC version of that recently and I happened to watch it. And there was one particular clip he put on with me and Mark Haynes, and I'm talking to him about this impending collapse and the economy and the real-estate market.And Mark Haynes just says to me, he says, "Peter, bubbles are like a once in a lifetime occurrence, we just had one." He said, "Do you expect me to believe that we have another one within ten years?"
但是好景不长，几乎在同一时间，人们就从纳斯达克泡沫，迅速转向了房市泡沫，而没人看出两者的相似之处！有人剪辑制作了一部名为《彼得-希夫是对的》（Peter Schiff was right）的视频，放在了YouTube上，大约有130万左右的点击量，我无意中看见其中有一段我在CNBC电台的访谈，我说房市泡沫即将破灭，经济会遭遇崩溃，但主持人马肯（Marcaine）问我：“希夫，我常听说，一个人一生只会经历一次泡沫，我们才刚刚经历过一次！难道在不到十年的时间里我们会再经历一次？【台下笑】”
And he was just incredulous that there could be another bubble so close to the stock-market bubble. But, of course, they were really interrelated. It was almost like the same bubble, because we never really had the fallout from the bursting of the NASDAQ bubble.We simply replaced one bubble with a bigger bubble, and we postponed the consequences of the unwinding of the imbalances until right now. And, of course, we're still trying to postpone it.But I think, at this point, the damage has been so great and the problems are now so huge that I don't think there's another economic rabbit they can pull out of their hat at this point. We're just going to have to face it now.
And, basically, what happened is, why did we have a stock-market bubble?We had a stock-market bubble because the Federal Reserve was too easy; they were too loose in the 1990s. Interest rates were too low, we created too much money, and that fed the investments in the stock market.And we had a lot of malinvestments. Companies were created that never should have existed. They were created not because they could generate a profit, but because they could go public, because investors wanted these stocks. It didn't matter that they couldn't make money.
So what did they do? They took land, labor, and capital; they took all the factors for production, and they combined them in ways that actually destroyed value.But it didn't matter, because these companies got financing. The Fed made the financing cheap, so they were able to flourish. They were able to flourish despite the fact that they were losing money. The saying used to be, they'd lose money on every sale but they'd make it up on volume.And, so, but as long as they could raise money. And when I was working at Euro Pacific Capital, I would see deals and people would send me prospectuses on new companies they wanted to fund.
公司的人做了什么？他们把土地、劳动力、厂房集聚在一起，虽然这一组合未必合适，甚至降低了生产能力，但是却取得了融资的资格，美联储的货币政策使得融资非常便利。这样他们就兴旺了，虽然一直在做赔钱的买卖，但还是能兴旺。不是有句俗话吗：“卖一件亏一件，但是赚得盆盈钵满”（We lose money on every sale, but make it up in volume）【台下大笑】我很清楚这些人所关心的只是能否融资，我明白这些是因为那时我还是欧洲太平洋公司的调研部经理，分析公司的盈利能力和发展前景是我的工作。
I remember one I got from a small Internet company that was, I don't remember. They were - I don't know if it was a browser or whatever they were, or a service where you go on the Internet, a provider. I don't even remember what they did.But it was a small start-up, and they had their prospectus and they were coming around looking to raise money. And they were trying to raise, I don't know, five or ten million dollars. They weren't public yet. But they were selling a little small piece of their company, so they were valuing their company at about fifty million dollars.Now, these guys were in their twenties. They probably started the company less than a year ago. I remember saying, "Well, how could you possibly think your business is worth fifty million dollars?"I said, "You have no assets, you've got no revenues, you've got no customers. It's like, you don't have anything. I could recreate your entire business from scratch myself for next to nothing. And yet you want me to pay you five million dollars to get five percent of this thing? Why would I do that?"
And all they kept telling us, "Well, you don't understand, we're going to go public, and you're going to make a lot of money."And I said, "You think you're going to find people to pay even more than this in a public offer? How are you ever going to make any money?"But that was the concept. And he said, "Well, you know, you don't understand how the stock market works." I was like, "I understand how business works and I understand that you guys are not worth fifty million dollars because you started an Internet company last week."But this is how it was working for a while. It was crazy.
But I got the same things. During the real-estate bubble, I remember, I was renting houses - and I'm still renting my house now in Connecticut - and I would go and I would go to houses for rent.And I remember one time I went and there was a house for rent. I looked at it and the realtor was there. And, apparently, the person who was renting it out was an investor who just bought the place.And I asked them what was the rent. I forget what it was. Maybe it was $4,000 a month, whatever it was for this place. And I knew, I said, "Well, what'd the guy pay for this? What'd he pay?" I said, "Well, how could he make any money renting it out to me? Isn't this going to lose money? Doesn't he have negative cash flow?"He said, "Well, yeah, he loses a couple thousand dollars a month." And I said to him, "But you recommended this as an investment?" He said, "Yeah."
But why would you recommend, as an investment property, a property that has a negative cash flow? Why would you have him buy it?"And he said, "Well, you don't understand, this property's going to appreciate. This property could double in the next couple years."And I said, "Why? Why would it double? You can't even cash flow it positive at the price it's at now. How's it going to go up in value?"And I said, "Real estate is a function of rents." And then the guy said to me - same thing - he said, "You don't understand real estate." He was telling me that rents don't matter to real estate.Just like when I was telling people to buy stocks, they were telling me dividends don't matter. I'm buying this stock because it's going to go up. Well, why should it go up? It doesn't even pay a dividend. Who would buy it?
I did the same thing, when I rented my apartment. After I got divorced, I was renting an apartment in Stamford, and — beautiful apartment, right on the water. I had my boat there. Beautiful views of the Sound. Right on the corner.Great unit, beautiful building. I had a concierge. It had a pool; it had covered parking; it was a security building; it had racquetball courts, had a gym with a trainer on staff; a lot of amenities.Right next door, there were maybe 20-year-old townhomes for sale. And I went to one of the open houses just for kicks.And there was a unit on sale, whatever they wanted, five or six hundred thousand dollars for this unit, that was about the same square footage as what I was renting, but it had no view of the water; it was dark, it was old, there was no security; it had none of the amenities. Yet the property taxes and maintenance fees alone were like a thousand dollars a month.
And by the time I would have paid the mortgage, if that's how I financed it, I would have been spending more money per month to live in one of these little places than this really nice apartment that I was renting, right next door.And I asked the realtor, I said, "Why would anybody buy this place? You can just rent right next door. There's more units available; I know, I just rented." And the lady said to me, "Well, but when you rent, when you move out, you're not going to have any equity."I said, "Well, what do you mean?" She says, "Well, when you buy this property, then it appreciates, and then you can sell it when you move out and you make money."And I said, "Well, why the hell should it appreciate? Didn't you understand? It's already overpriced; you can rent right next door. Why should it go up?" And she said, "Well, that's how real estate works."
I said, "So, you mean the way real estate works is I have to sacrifice; I have to turn down the opportunity to live in a really nice place; I live in this dump for a while and because I did that, I make money. And somebody else is going to come to me a year or two from now and overpay by even more and say, 'I don't want to live in that nice place next door, I'd rather pay more to live here because this is going to appreciate'."And they totally forgot what real estate meant. Real estate's a place to live. But everybody thought it was going to go up, so they were all crazed.
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