Eric Sprott, Chairman, CEO, and portfolio manager of Sprott Asset Management, has released his most recent newsletter, and presents the following facts and opinions:
- the shares of Citigroup, Bank of America, and the Royal Bank of Scotland fell 77%, 66%, and 92%, respectively, in 2008.
- So far this year (remember, this is only three weeks) the same stocks are already down 50%, 55%, and 74%, respectively.
- Last month, Sprott reported:
- auto sales in the US were down almost 40%.
- housing starts were down almost 50%.
- industrial production is falling off a cliff, with each month worse than the last.
- jobless claims are at multi-decade highs.
- consumer confidence is at multi-decade lows.
- company surveys we follow are showing dramatic declines across the board in economic activity.
- "We challenged the idea that this is a run-of-the-mill, minus-low-singledigit recession and we characterized this Depression (there is no other way to describe it) as "global, pervasive, and deep".
- Since last month the numbers got worse:
- US housing starts fell a further 15.5% in December to 550,000, the lowest on record.
- US industrial production fell a further 2.2% in December, to a 7.8% year-over-year decline.
- European industrial orders (a leading indicator of industrial production) are down 26% year-over-year, the largest decline on record.
- Japanese exports plunged 35% in December.
- US jobless claims are now running almost 600,000 per week.
- Layoff announcements are coming at a fast and furious pace.
- We believe the announced job cuts thus far are only the beginning.
- Stimulus amounts are ineffective - even $10-trillion "just isn't going to cut it."
- Stocks have lost $30-trillion in value and globally housing values have dropped an estimated $30-trillion.
"Although there are those who would espouse that the ‘free markets' have failed, we are of the belief that it is government involvement in the free markets that failed."
"There's been a paradigm shift - a permanent change. People will save rather than spend more than they make. The implications for the economy are enormous. Just envision a world where 25% of all shopping malls close down and try calling that a recession.
"governments the world over [are] taking an increasing role in the functioning of the economy and the financial markets. But are they trying to solve the main problem; namely, too much debt? Quite the contrary, every single solution they've adopted has been trying to get the good ol' days back. Cutting interest rates to zero. Throwing money at the banking system so it can lend again. All these solutions have one goal: to bring back debt."
Eric Sprott makes a compelling case for depression, the ensuing deflation, and the eventual (hyper) inflation that follows, and it should, and must, be taken seriously. In the meantime, the message here is that if you thought 2008 was bad, 2009 looks like and could very well, turn out to be a whole lot worse.
Sprott's argument makes a compelling case for Real Return Bonds, Gold, and on a longer-term basis, commodities and commodities producers, especially the underlevered ones.
To read the complete letter, click here.
"Eric Sprott makes a compelling case for depression...and it should, and must, be taken seriously."
Who writes this stuff?! Talk about hyperbole. Ironic that it's published the same day that Buffet's buy signal is reported. I know which advice I will take based on the long-term record. 2008 should have been the perfect storm for a gold bug like Sprott. It wasn't but that doesn't change his opinion.
Tom,
Eric Sprott's ideas are not farflung; in fact, most of what he has written in his current letter is factual, and it should not be taken as hype. We have consistently advocated during the course of the last year that the systemic problems of the credit market and its by-products are not being taken seriously, largely because their gravity is under-recognized.
Sprott is among minority of asset managers who is positing this way, and for most of last year, Sprott, et al. have been dismissed as gold bugs and doomsayers. For the longest period, they have been discussing the idea that some day, America would have to pay the piper.
Last year, John Embry, wrote that America must borrow $5.00 just to create $1.00 of GDP growth. Even in that assertion, he may have fallen short of what it costs. At the very least its a cautionary view, and worthy of consideration.
You are free to dismiss it if you wish.
By the way, as much as I revere Buffett, and as good as he is at getting, I can't help pointing out that lately, things have not been going his way. These are strictly short term concerns to the oft richest man in the world. I suspect that he is not too worried though, considering the fact that he customarily protects his specific holdings with hedges against the general market, using put options and short futures, and has traditionally amassed huge amounts of cash during periods like this by betting against the market while he continues to buy and hold. What he does seems, at times, so simple, but it is never, never easy. Buffett is a complex logician, and wizard at mathematics and probability, a savant. He really means it when he says he is willing to hold on to the businesses that he owns, even if the stock market closes for 5 years. How many of us can really do as he does?