Exclusive: Interview With Eric Sprott

Tyler Durden's picture

Zero Hedge had an opportunity recently to ask Eric Sprott a variety of questions touching on everything from investment recommendations, to policy guidelines, to a general outlook for the world economy. As Sprott has long been a rare voice of contrarian reason in a field of lemming-like uniformity, lately driven by nothing more than a pursuit of centrally planned momentum and Bernanke-induced "heatmapping", we believe the answers were vastly more interesting and illuminating than anything available for mass media consumption.

Interview with Eric Sprott of Sprott Asset Management

1. The conspiracy of optimism, suggested by the likes of almost anyone appearing in the MSM (print and cable), is that the US is the place to invest in 2011. A glance at the hedge funds you manage (as of the end of 2010) suggest that you are not buying into this hype. Are the short positions you have in your Hedge Funds still mainly in the US? If so what sectors and why?

A: Our short positions are all exclusively in large cap US names, with a focus on the financial and consumer discretionary sectors. We’ve been bearish on US equities for some time, particularly those in the financial sector that remain severely over-levered in this environment. We’ve managed our long/short hedge fund with the view that we entered a long-term bear market in 2000, and we’ve enjoyed maintaining an active short portfolio throughout the decade. It’s provided specific opportunities to produce alpha, and also provided negative beta exposure during the sell offs when downside protection was needed most. I urge all my investors to consider adding a hedge fund that can short effectively. It really is one of the best investment vehicles to own during a long-term secular bear market for equities, which I firmly believe we are still in.
               
2. Conversely you are mostly long Canadian equities, with some international exposure. What international countries and sectors do you have exposure too?

A: Most of the equities we invest in long are listed in Toronto. Their underlying assets tend to be distributed globally, however. In the case of our mining exposure, we own mines all over the world: Africa, Southeast Asia, United States, South America. Our location in Toronto has proven advantageous in that it grants us access to the best management teams in the resource industry. Toronto is a major mining-finance capital and we have one of the busiest foyers on Bay Street, with various resource management teams visiting with us regularly to provide updates. We’ve been investing in this space for almost ten years now, so we’ve developed deep contacts within the mining industry internationally. Our sector focus is currently concentrated in precious metals and energy equities. We manage all the company-specific risks on an individual basis, but the sector weights are guided by our macro views.
 
3. We are currently seeing a massive rise in commodity costs across a broad spectrum of raw materials. The result of the Bernanke "wealth effect". What do you see as the consequences of the rise in commodity prices, for equity and credit markets?

A: It’s unbelievable to see. The food inflation is astounding,… when you see vegetable prices rising 40% in a month, grains up 20% on the year, eggs, sugar,… meat, all up 20-30% since July, it makes you wonder how they manage to massage the CPI so effectively. It’s becoming quite a serious issue, really. The Brent price is especially problematic – we always wonder about the consequences higher oil prices could potentially have on this “recovery”. We all saw the peripheral damage it caused in 2008, completely aside from the banking collapse that was happening at the time. There’s little doubt that these price increases are having a major impact across the globe – look at Egypt, for example. How much of that situation was initiated by food inflation? Same with UK with their recent numbers. It’s only a matter of time before we see more direct effects on prices here at home.
 
4. How do you see the end of QE2 playing out across the credit and equity markets?

A: I don’t think the market is prepared to go it alone yet. I don’t think we can have a strong equity market without more stimulus. It was amazing to see the sentiment shifts in January, as pundits began declaring the end of QE2, and no need for QE3,… but of course a few weeks pass and problems surface somewhere, this time in the Middle East, and Obama has to get up there and promise more printing to prevent a sell-off. I think the US is in such a difficult situation now with their Treasury auctions. We wrote about this in late ’09, asking how the US could realistically fund their debt requirements. The big question is how much of QE2 has been indirectly funneled back into on-the-run issues. It’s obvious the market doesn’t want to go there yet, but that is a vital question in anticipating the need for QE3.
 
5. Now that the "Wealth Effect" seems to be the main mandate of US the Federal Reserve, do you envision Bernanke having the ability to implement further incarnations of QE? If so under what circumstances?

A: I just think of how much they’ve spent up to this point to keep this thing going. Think of all the programs they’ve initiated. QE 1, QE 2, TARP, TALF, Fannie and Freddie – it’s all adds up to trillions, so it doesn’t seem far fetched to assume they’ll institute more measures to plug the dam.
 
6. Do you see any bubbles present or being blown in the world right now? If so, where and what are they?

A: I don’t see any greed bubbles in this market. Nobody’s buying T-bonds to get rich. While I do think the US bond market is a ‘bubble’ in the sense that it’s widely mispricing US risk, I don’t think investors are buying bonds with the expectation of selling them higher down the road. Investors are just trying to maintain some level of real return in here. Many are also trying to game the Fed, stay ahead of them. The commentators who call the precious metals market a bubble are laughable. Nobody owns the stuff. It’s extremely tightly held. Plenty of paper gold floating around, but that’s another story.
 
7. What possible or probable black swan event (timeline of 12-24 months) keeps you up at night?

A: A major supply disruption in the oil market would throw us over the edge. The economy isn’t strong enough to withstand high energy prices for an extended period.

You also have to wonder what happens if they don’t extend QE2 – and the impact the inevitable rise in rates would have on the US and global economy. We’re obviously in a very precarious environment today, so we have to be prepared for a “black swan” type event at any time. We’ve been managing our funds with a defensive view for over ten years now, so I would hope we could weather them better than most.
 
8. Your views on precious metals are well known. If there is a collapse in the USD and/or fiat currencies in general, how will gold be valued?

A: They’d likely be valued in terms of other goods, rather than in units of fiat currency. Investors won’t care what an ounce is worth in USD if the USD can’t be exchanged for anything. They’ll want to know what an ounce is worth in water, or food, anything consumable.

I think most mainstream investors still struggle to appreciate the changes that have occurred in precious metals market since 2008. Gold is reverting back into a world reserve currency – it’s so clearly visible now. It’s one of the only asset classes that has ‘worked’ for investors and savers. And yet there remains this large contingent who continue to question its legitimacy as an asset class.

One of the great struggles investors continue to have with gold, particularly in the US, is in embracing it as a monetary alternative. There are money managers and pension trustees who refuse to view gold as a store of value. They don’t understand the value argument. It’s a peculiar thing. If we lived in a different environment today, I’d understand their hesitance to embrace gold, but after everything we’ve gone through, and after acknowledging the fiscal reality of the Western powers, I just don’t understand why anyone would question the benefits of a hard currency. We need a hard currency today for SAVERS. Gold is for savers. We all need some sort of risk-free return vehicle in a properly functioning financial system. Bonds pay a negative real return today, so we’re forced to up our risk tolerance into equities or high-yield. You can’t save capital in cash in this environment – it’s as simple as that. You have to find another asset class to perform that function, and precious metals are once again reverting to their traditional monetary status to meet that need.
 
9. If you had the opportunity, what 3 policies would you enact that you believe would put the US on a path towards sustainable growth?

A: That’s a tough one. I try to focus more on what they’re doing, rather than worrying about what they should do. I think I’ve been fairly clear in articulating the challenges Western governments face today. Realistically, there is only so much austerity a country can take – look at the impact it’s already having in the UK. I just don’t see the US making the sacrifices required to put them back on the right path long-term. When you see the CBO forecasting budget deficits into 2021, one can only assume that the US plans to borrow in perpetuity. That only works as long as you can get the borrow. But we all know the game changes when the US can’t get the borrow through traditional means. We may already be there.

If I were to make recommendations, I’d focus on addressing leverage in the banking system. I firmly believe 20:1 is far too high a leverage multiple to maintain in this environment. I don’t even know what the right number is – maybe it’s no more than 5:1. But we can’t keep this situation going where a mere 5% shift in asset prices can completely wipe out your tangible equity.  I would also try removing the “too big to fail” safeguards that allow the financials to reach such insane levels of leverage. And then of course there’s the derivatives issue, which almost nobody even wants to talk about anymore… but it never went away. It’s probably an even bigger problem today.
 
10. You have been in the financial industry for well over 35 years. If you had to create a portfolio for a 30 year today, what would it look like. How would you advise one to manage said portfolio?

A: I would be invested heavily in precious metals, both the bullion and equities. I would maintain exposure to energy, and I would have some shorts on the table. Buy-and-hold isn’t dead if you hold the right things, but 30 years is probably too long a timeframe to park capital and forget about it. I’ve always been more of a long-term investor than a trader, and although my themes tend to last for many years, I’ve seen many different markets throughout my career. I’ve definitely repositioned my funds over time. I sincerely hope we do see a true bull market in equities again at some point – I would be the first to applaud one because it’s easier to pick stocks in a secular bull market. But for the time being, until we solve the debt problems, I think our current positioning is the best way to be invested. And for what it’s worth I also think there’s plenty of opportunity in this market as well – there certainly has been for us. It’s just a matter of staying on top of macro developments, focusing on valuation and investing with conviction.

Special thanks to Lizzie.

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Herd Redirection Committee's picture

Well, if you are already "all in" then a plunge in price wouldn't help you at all, would it? Timing is the most difficult aspect of any trade, always waiting for one more dip to buy will leave you empty handed, in the end.

Any way, check out the latest from the Capital Research Institute:

http://www.capitalresearchinstitute.org

What is Wealth?

The Capital Research Institute presents: The Top Alternative Measures of Wealth for the 21st Century

6) Human Relationships.  Last, but certainly not least, meaningful relationships are one of the greatest forms of wealth.  If you need any proof of this, remember the maxim ‘Its not what you know, its who you know”. The people who currently run the world (of finance, and business, at least) achieved their lofty positions (Treasurer, Fed Chairman, etc.) by way of who they knew, not what they knew.  Why are Princeton, Harvard, Yale graduates in nearly all positions of power?  Why are the heads of atleast a dozen central banks Goldman Sachs alumni???  Clearly it is because of who you meet, while on Wall St/in the Ivy League/at secret society meetings.  “Active collusion isn’t necessary.  Jackals, hyenas, vultures, wild dogs – none of them collude but there actions conspire to the same end.”

Clearly, if those in power are using networking to the utmost, to remove them from power will require similar networking.

lynnybee's picture

j.c.almighty, god help us all ......... i just read that link you provided to DAMON VRABEL's blog.    I need to get off the grid & take my kids & grandkids with me ..... where do we run ?   How will we ever get rid of these parasites.

snowball777's picture

Uhhhh....jackals, hyenas, and wild dogs...all pack hunters...they survive almost entirely by virtue of collusion.

Vultures, on the other hand, being carrion eaters, live the closest thing possible to a karma-free existence as they take no life and serve a useful purpose.

http://www.youtube.com/watch?v=K4ApWNFUJ4E

unununium's picture

Never be "all in".

See special relativity.  It should require infinite return to get you to invest that last bit.

tmosley's picture

All you got isn't all there is.  It would cost an infinite amount of money/labor to obtain 100% of the supply. 

ElvisDog's picture

I agree. Diversification and debt-free-ness has one important benefit - a reduction in stress. If you're all-in, you have to worry about what happens to your wealth if you're wrong. Reducing stress is one of the big things you can do to improve your health, and good health is certainly one of those things people should invest in.

Robot Traders Mom's picture

Read about DTC from their annual report. In 2009, they settled $1.48 QUADRILLION. DTC is a private company, owned by the banks, and mandated by the FED. This number isn't fathomable. The amount of derivatives outstanding make all currencies in the world worthless. Like Sprott says, metals won't be priced in fiat, but how much they can get from barter and hard assets (like food, land, guns, etc.).

That being said, I completely agree with you and that is where there is a divide in the metals community. I would personally like gold to go under $1,000 for some time so I can keep buying more. Anyone with a fucking brain and IQ above 58 knows the dollar will be worthless at some point and is losing value on a daily basis. I am very thankful there are so many functional retards in the world, otherwise I would have to sell my house and property to get a few ounces. Right now, I can keep buying at reasonable levels.

SoCalTrader's picture

Anyone with a fucking brain and IQ above 58 knows the dollar will be worthless at some point and is losing value on a daily basis. I am very thankful there are so many functional retards in the world, otherwise I would have to sell my house and property to get a few ounces. Right now, I can keep buying at reasonable levels.

 

 

Well said.

h3m1ngw4y's picture

this troubles me. if the iq 59 have already caught the word (which i think is just not true) who is on the other side of the trade? martians? considering a fool (58 and less) and his money are alway soon parted no equity here. reinventing the exit seems to be ordre du jour.

ElvisDog's picture

I might agree on the eventual outcome, but not that the dollar's demise is imminent. When I think about the World's Elite, the one thing I think has the potential to upset the apple cart for them is social unrest. Hyperinflation is guarenteed to cause social unrest, therefore the Elite will not intentionally allow hyperinflation to happen. I think a slow, stagflation type death of the dollar taking place over 10-20 years is much more likely

cranky-old-geezer's picture

I tend to agree, we're all surprised how well the US dollar is holding up given the massive money printing we're seeing.  WRC status with military enforcement working way better than anyone thought.

Iam Rich's picture

Sprott suggests Au~2100, Ag up to 50.

Can't argue with a big blowup in equities taking Au/Ag with them.

Can't argue with your ratio either...Netflix at 70 (~70% decline) = silver at 20 (~30% decline).

There would be no silver left on the planet at 20 in "weak" hands.

 

unununium's picture

Market sophisticates take note:  Sprott has bigger balls than you, and has actual short positions.

jus_lite_reading's picture

Silver will be ~$40-$45 in a month. Mark this post and come back. We'll see who is the bigger dick.

Pladizow's picture

He who predicts the future lies, even if he tells the truth!

tao400's picture

I need to see a bigger picture of your rack!

solgundy's picture

go to National Geographic....search: beached whale

h3m1ngw4y's picture

"He who predicts the future lies, even if he tells the truth!"

n1

tekhneek's picture

you're off by a month. April 1st is going to be hilarious.

Especially when these guys rape the COMEX: http://standfordelivery.com/stand.php

Bigger Dickus's picture

A bunch of rednecks is gonna rape the politically connected TARDMEX? Get real.

BigJim's picture

How do you know their necks are red, anyway?

Oracle of Kypseli's picture

Still good return when we bought at $15

ElvisDog's picture

$25 is my re-entry point. I stopped buying at around $20 to see what would happen. From my point of view, the action of the last month or two is muddled as to whether it's going to keep going up or has reached a short-term peak. If it goes down to $25, I start buying again.

Camtender's picture

Dickus, is your personality your main birth control method?

 

Have you had a chance to look at some of Sprott's fund retuns?

 

Pladizow's picture

I'd guess Sprott's net worth is just a tad higher than your own.

So if I was forced to choose which of the two of you to listen to, I'd pick the billionaire.

unununium's picture

Careful with that logic.

jus_lite_reading's picture

Oh and check out his response to question 8. He thinks, as do I. GOLD right now has a value of ~$1400 fiat USD per oz. When it collapses with the financial system, it might be woth $50k/oz or $50mil/oz but at that point we'll be pricing it in bottles of potable water and cans of food. Say, if I already have both and you have your "stocks" what are you worth to me?

Snidley Whipsnae's picture

JFReading... Don't forget that which makes the industrial world function...Oil.

If the dollar is the reserve currency and the one that most oil is settled in, then the question is; what will oil be settled in? This is a very important question to answer for the all soverigns. The US currently imports 2/3rds of the oil that it consumes.

Without sufficient oil the earth will not support the number of people currently living here.

In the end game, oil will be purchased with PMs or soft commodities...imo.

ElvisDog's picture

And we're already seeing that in places like Egypt. It's not just the end of oil that matters, but the end of oil cheap enough so people earning $2000 a year with 6 kids can no longer afford food. The removal of Mubarak is great from the Liberty point of view, but isn't going to reduce food prices for the poor of Egypt.

somaplease's picture

Eric Sprott is the 55th wealthiest person in Canada.  Not bad!  He certaintly isn't up to par with Porter Standbury - but what can u do!

bankrupt JPM buy silver's picture

Wait till I release part 4 in an hour 'smaller DICKus" you will realize whats going on you duch sac.  Netflix at $70?  $238, and silver is at $30 you fucktard.

 

www.silvergoldsilver.blogspot.com

Bigger Dickus's picture

If gold breaks under €1000 per ounce again the door will be wide open to €950.= proportionately greater plunge in silver.

Mongo's picture

Well then I shall buy like crazy!

tmosley's picture

And if gravity reverses, we'll all be flung into space.

Ignatius J Reilly's picture

Can we vote on whom will be flung first?  I have a nomination.

Ignatius J Reilly's picture

To be clear, I didn't junk you.  I thought your comment was hilarious.

philgramm's picture

mad props on the handle.  Ignatius may be the funniest character in modern literature IMO

ElvisDog's picture

Why do people bother to junk anyway. Does anyone give a flying fuck if their posts get junked? This isn't fucking Junior High School.