Eric Sprott, CEO, and David Franklin, Managing Director, Sprott Asset Management discuss the U.S. Government debt program in their latest instalment of Market Commentary, "Is it just a Ponzi Scheme?."
Sprott believes the market will overwhelm the Fed's money printing program, striking at the credibility of the dollar, and this will send the S&P500 below its March 9, 2009 low.
Via Bloomberg:
- The Standard & Poor’s 500 Index will collapse below its March lows as an expected rebound in economic growth fails to materialize, according to hedge fund manager Eric Sprott.
- The Toronto-based money manager, whose Sprott Hedge Fund returned about 496 percent in the past nine years as the S&P 500 lost 32 percent in Canadian dollar terms, said the index’s 66 percent rally since March 9 reflects investors misinterpreting economic data. He’s predicting the gauge will fall 40 percent to below 676.53, the 12-year low reached on March 9.
- “We’re in a bear market that will last 15 or 20 years, and we’ve had nine of them,” Sprott, chief executive officer of Sprott Asset Management LP, which oversees C$4.3 billion ($4.09 billion), said in an interview Dec. 18.
- Sprott said the Federal Reserve has kept bond yields and interest rates artificially low through its program to buy agency debt and mortgage-backed securities. The central bank expects the securities purchase program to finish by the end of March. Expiration of the program would reduce demand for fixed- income securities, forcing up bond yields and interest rates and hurting economic growth, Sprott said. (seeing how that plays out in 2010 will definitely be one of the most interesting development's of the year)
You can dowload the whole letter, "Is it just a Ponzi Scheme?," here.
Unfortunately, the debt is a real incredible pyramid. The greater fool buys it long for record low returns, both present and probably terminal, from the US market maker, for now.
Mark,
Thanks for your note. After reading this, it seems so obvious doesn't it, that at some point, there has to be a return to risk aversion away from risk assets for the demand for U.S. t-bonds to take off, just as the government requires it. It is the central bankers who dangle the carrots, and the market which pursues them. We are just pawns in a chess game. Pay no attention to the man behind the curtain, who pulls the levers and runs the machine, and just do what you're expected to do - react...
The question remains, will the U.S. government be able to pull it off. Will they be able to rollover $7-trillion over the next 2 years? Will the commercial real estate market be able to rollover $750-billion in mortgages?
Pierre Daillie
The US debt will roll over, however at what price (interest rate). The US desperately needs low single digit rates. With a budget (tax base) of under $3 trillion, a trillion $ budget deficit already and a huge trade deficit, they cannot afford anything higher. Economist talk about US GDP of $15 trillion and country debt at ~100% of that is nonsense; you can\'t tax 100% of GDP. Either the US interest or currency bubble will burst, or both. Currency erosion is the invisible wealth destroyer, globally, yet much more politically paletable in the US than the alternative.
Where to find a few trillion fast, for free? China probably has better opportunities at home, or in Asia.
What if Japan resumes its support of US treasuries, reinstating the Plaza Accord it abandoned in March 2004? The complete withdrawal of the yen carry trade in 2008 brought Japan to the brink of economic collapse, as deflation caused by the increasingly expensive yen was cratering domestic consumption, and killiing exports.
Japan is heavily long its own currency as a result the total destruction of its previous carry trade 2007-8, to the tune of trillions. The yen is expensive and could use a lashing. Within its toolbox, outside of printing free-to-carry money, Japan can buy US treasuries in order to devalue the yen. Japan, and China can in tandem play an instrumental role in aiding America to recover so that American consumers can resume their consumption of Toyotas and Sonys from both.
And, if as a result of intervention, prices in Japan start to rise again, then the Japanese consumer will have motivation to go out and shop to their pent up heart's demand.
The world and the U.S. need balance, and it is indeed in China's and Japan's best interest, to insure the idea that America is too big to fail - all else is just a lot of rhetoric and hype.