Wednesday, December 30, 2009

Eric Sprott Calls for New Lows on S&P 500, Wonders if US Debt Scheme is Simply the Biggest Ponzi Ever


To call Eric Sprott a bear, would be a disservice to bears - he is at whatever the next level above bears is.  Sprott is a very successful hedge fund manager from Canada, who runs some $4 billion, and returned roughly 500% in the past decade - so he definitely has the investment kudos to back himself up.  He, much like I have proposed in countless posts, surmises much of what is going on is simply the biggest Ponzi scheme ever engineered.  As we saw with Bernie Madoff - even if true - a Ponzi can last for decades.  And we've never had one sponsored by an entity who does not really require outside investors to keep the charade going, but can print money endlessly (or let banks borrow at nearly free to buy US Treasuries).  So unlike most Ponzi's, which are exposed when at some point when not enough new money comes in to cover outflows (as is the very obvious case when looking at US finances) - the US version is one that only ends when faith in the government / central bank is lost. Hence, I expect the balls to be juggled for quite a long time as the current hero worship of the Fed is akin to Greenspan era a decade ago.

On a related note - the AP reports four times as many Ponzi's collapsed in 2009 as in 2008, for reasons we listed above.
  • Tens of thousands of investors, some of them losing their life's savings, watched more than $16.5 billion disappear like smoke in 2009, according to an Associated Press analysis of scams in all 50 states.  (keep in mind, Madoff's massive scam of $50B happened in 2008) In all, more than 150 Ponzi schemes collapsed in 2009, compared to about 40 in 2008.

Back to Mr. Sprott...unlike Marc Faber who believes any downward move in the S&P 500 will be met with an avalanche of new money printing from the Federal Reserve - Sprott believes the market will overwhelm the Fed and/or this new round of printing would strike at the credibility of the Fed (i.e. the loss of faith mentioned above)

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)
So here is his "turning point" - effectively his thesis is as the powers that be remove their crutches from the economy, some (not all - we have so many subsidization programs running at once) of the reality underneath will be exposed.   As more and more is exposed, it won't be pretty.  When the economy weakens again, all the King's Horses (and Men) will run to put Humpty Dumpty together again - and the world will see that the US cannot function anymore without permanent easy money.  [Jun 3, 2009: A Country that Cannot Function Without Easy Money] I'm paraphrasing of course ;)
  • Should the Fed renew the programs while the U.S. government continues to run record deficits, investors will lose faith in the U.S. currency, he said.
Again, as we've stressed many times, having the world's reserve currency is such an enormous advantage - it has allowed us to do things that no other country would dare to do - or be allowed to get away with.  But currency is all about faith.
  • If they announce another quantitative easing, trust me, the gold price will go up another 50 bucks that day,” he said. Sprott has been bullish in gold and gold stocks, which are used as a hedge against inflation, since at least 2001, when the precious metal was trading below $300 an ounce.
Conceptually I agree with Sprott; or he agrees with me - since I've been typing similar thoughts for many quarters.  The question is "when" - are we in Bernie Madoff year 6? or year 16?  Will our Titanic ship come in, in 2012? or 2022?  Will the rest of the world continue to smile and happily (or otherwise) fund our games of constant state and city bailouts via "stimulus", a now nearly half decade unlimited bailout of Fannie and Freddie (snuck in last week, on Christmas Eve), a complete repeat of the evils of FanFredron by FHA, constant government expansin while happy talk of "we need to take care of the deficit" rings hollow, entitlement programs that have no hope of being fixed - especially of the Medicare kind, et al?  It appears for now - yes.  One day it will be no... but who knows when that day is.  Until then we party like Romans ...
  • Sprott said gold is the only asset about which he remains positive in the short term. His C$1.42 billion Sprott Canadian Equity Fund -- which is up 23 percent in five months -- has 34 percent of its portfolio in mining stocks and another 39 percent in bullion as of Nov. 30.
  • He said though he has no target price for the metal he doesn’t think it has reached a ceiling after quadrupling over the past eight years.  “If you get into this thing where you’ve got to keep printing more and more and more, who knows about the price of gold?” he said. “It will be the new currency in due course.”

Via Reuters:
  • In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008. With the Fed’s printing press turned off, the question for next year is whether “other investors” can buy more Treasuries than they did this year…

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Reuter's blogger Rolfe Winkler also proposes a similar theme in the accompying story

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.

Bernanke says he’ll stop printing money to absorb debts, and he may for a time. But the American Ponzi has grown so large, the private credit system is, IMHO, no longer capable of generating sufficient debt finance to keep it going. So to avoid a debt deflationary depression the Fed will have to rev up its printing press again.

Japan has been wrestling with its own Ponzi collapse for 20 years, keeping it at bay with trillions of dollars worth of deficit spending and money printing.  Hasn’t worked for them and it won’t work for us.

But we're not Japan... ;)
This has little to do with the stock market ot today, because the same "solutions" that will eventually cause massive pain (think "solutions" of 2001-2003, leading to "prosperity" of 2003-2007), can kick the can for a long time. (Japan's been working this angle for 2 decades)  For all I know the market rallies for 12 more months, perhaps 36, perhaps 60 on our Alice in Wonderland journey where the real functioning economy need not support our debt obligations - but a few central planners can take care of all our ills.  But with many other large countries playing the same game of chicken, I think before the 60 months are up, foreshadowing of the eventual fate of America will be seen in nation's without the advantage of the reserve currency.  Too many countries are now following the American game plan, and their chickens shall come home to roost.  And so will begin an era of falling dominos that should make 2007-2009 look like a sideshow.

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