Eric Sprott, Sprott Asset Management
When it comes to a bearish view of the markets, veteran money manager Eric Sprott takes a back seat to no one. So it's not surprising that his firm, Sprott Asset Management, would organize an event, called A Night with the Bears, in Toronto next Tuesday, or that he would be one of the four prominent pessimists who will be addressing the latest market currents.
With everything governments are doing to repair the financial system and prop up markets, is this really a good time to be such a committed bear?
Here's how I characterize what a bear has to put up with. It's like you're in a Texas Hold 'em, no-limit poker game. You're the one bear at the table, and you've got the Federal Reserve, the U.S. Treasury, the Bank of England, the ECB. And they keep coming up with these moves that are all-in, all trying to prevent what is in fact transpiring ... So far, none has been successful.
Are you saying they won't work?
It's very difficult when they're fighting what I would call the forces of nature. The forces of nature would have had us in a bear market back in 2000, which was aborted by interest rate policy. ... Now we have, in essence, multilevel quantitative easing. It's everywhere. We'll see how that does.
From where you sit, what worries you most?
It's the irresponsibility of the monetary authorities. These [moves to buy up toxic assets and guarantee debt]are not in any rule book you or I have ever read. It's a little surreal. We're trying to defy the laws of nature. You had a credit bubble that has broken, and you're trying to prevent the logical outcome.
What's your sense of the sentiment out there now?
There are two sentiment measures. One is the economy, which has got to be about as bad as it's ever been. And then there are the financial markets, which in some ways are a bit of a game. It's the game of trying to get financial assets to inflate, which may have nothing to do with the economy. The accepted belief in the U.S. is you cannot get an economic recovery without stability in the banking system. That's why all this effort, for the most part, has been dedicated to the financial system and very little to the economy.
You disagree?
I think you've got to fix the economy. You can keep stock or bond prices moving. But ultimately people have to want to lend. And if the economy gets weaker, they're not going to lend. And ultimately, people may not want to borrow. It can cut both ways.
Do you see a widening divergence between the markets and the economy?
I could see a scenario where they disengage. If you throw enough money at the system, the money has to go somewhere. Typically, it seeks out a paper asset. You could have stocks going up, because they're hyper-inflating the money supply.
How do you think that will play out?
It's a tough call to know whether the economic weakness supersedes the quantitative easing. It's not something that I've ever been through before, and I truly don't know the answer. But those are the two forces at work. Whether quantitative easing has an impact on financial prices, irrespective of what the economy does, is very difficult to gauge.
Do you regard this unpredictability as an opportunity or a handicap, given your investing approach?
I have to be cognizant of what could happen. As a guy who's short the market, you always have to look at all the range of possibilities. One of the possibilities is that people buy stocks.
If you're living in Japan today and you're a bear, and the government comes in and says it's going to buy stocks, what do you do? Maybe you say: If they're going to start buying, I'd better cover my shorts. I may not believe in it, but that's the way it is.
So what does the ordinary investor do in this environment?
I can only tell you what I do and what I do on behalf of our clients.
There are only two things we do today: precious metals and shorting. There are only three things in the world that have worked [during the crisis] Having cash, which I question, because of the quantitative easing. ... Owning gold and precious metals or shorting the market.
I know you have been deeply bearish on financials. What else are you shorting?
I've actually been going a little further into the economic stocks lately. You know pretty well that anybody who's related to the economy cannot be doing well.
Any that you care to discuss?
To me a classic example is Caterpillar . We've seen many, many instances where the makers of big things get orders cancelled [in bad economic times] Whether it's airplanes, ships, front-end loaders, the orders just get cancelled, because there's enough equipment around already. They've already announced layoffs [at Caterpillar] And I'd hate to see what the order book looks like.
Do you ever second-guess your bearish approach, knowing that governments may be doing enough to prop up the markets, if not the economy?
We always question it. I was asked a question today: Do you see any signs of an economic turnaround? No, I do not. But trust me, every day every piece of information that comes out on anything [is analyzed closely]
So to sum up, you've still got a solidly negative outlook, despite the heavy intervention of governments, or perhaps because of it.
I would guess that it's too big to bail. ... They're trying to solve a very complex problem that I suspect they're not going to be able to solve.