Eric Sprott: "Have We Lost Control Yet?"

Tyler Durden's picture

Authored by Eric Sprott and Etienne Bordeleau of Sprott Global Resources,

Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. It all started on May 22nd, 2013, at a Testimony to the US Congress Joint Economic Committee, where he first hinted at tapering the Fed’s quantitative easing (QE) program. Then, on Wednesday, June 19th, during the press conference following the FOMC meeting, the Chairman outlined the Fed’s exit strategy from QE.

Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds) (Figure 1A). Moreover, the yield starved, hot money that had flown to emerging markets has been rushing for the exits, triggering significant declines in emerging market (EM) equity and bond markets (Figure 1B). Finally, the prospect of the end of monetary accommodation has triggered rapid and significant decreases (increases) in the price (yield) of longer dated Treasury bonds (also Figure 1B).


It has been clear to us for some time that the Fed was uncomfortable with the relative certainty (i.e. Bernanke Put) that has prevailed in the markets since the introduction of QE-infinity last fall. Officials definitely wanted the market to start thinking about a future without non-conventional monetary policy. However, we seriously doubt that the resulting chaos is what they had anticipated. This was evident in the Chairman’s response to a journalist’s question about the rapid rise in rates, saying the FOMC was “a little puzzled by that”. The genie is really out of the bottle now.

Indeed, we believe that the recent “market appeasement rhetoric” by James Bullard and Narayana Kocherlakota (Presidents of the St. Louis and Minneapolis Federal Reserve, respectively) are further proof that the Federal Reserve has realized it went too far and that it is now in damage control mode. (Update: William Dudley, President of the New York Fed mentioned in a June 27th speech that “asset purchases would continue at a higher pace for longer” if the economy was to grow slower than the FOMC’s estimate).

However, as the Bank for International Settlements (BIS) so elegantly put it in its most recent annual report, “[…] central banks continue to borrow time for others to act. But the cost-benefit balance is inexorably becoming less and less favourable.” To this they add: “expectation that monetary policy can solve these problems [deleveraging, financial stability] is a recipe for failure”. Clearly, the Federal Reserve knows this and wants to exit their QE program. But can they really?

A large portion of the current economic growth depends on housing. However, mortgage rates are closely tied to long-term treasury rates. While housing affordability is still relatively good because of low house prices, significantly higher mortgage rates might slow the housing market. Furthermore, banks are still very cautious about lending and most borrowers have difficulty accessing credit. While gentle increases in yields are good for banks (who lend long and borrow short), meteoric increases in yields (as in Figure 1B) are damaging because they are hard to hedge and create large losses on the banks securities portfolios (mostly composed of government bonds and mortgage-backed securities) as well as mark-to-market losses on their derivatives portfolios. So, the large and rapid increases in rates the talk of tapering has engendered will damage the economic growth the Fed has been working so hard to engineer, potentially requiring even more stimulus down the line.

The US government itself would also suffer from increases in yields. In its Annual Report, the BIS shows that even a small increase in interest rates would have a large impact on the projected government debt-to-GDP ratio. As shown in Figure 2, under the CBO’s base case scenario (bottom line), the US debt-to- GDP ratio would hover around 110%, whereas a 1% increase in rates would take it to 118% in 10 years (middle line). According to the Chairman’s comments, the fiscal drag that has been partly to blame for the lackluster performance of the economy should subside going forward. But, larger debt servicing costs (because of higher rates) will put more pressure on government finances, forcing it to spend an ever increasing portion of its budget on interest payments. This will have the effect of increasing the fiscal drag, going against the hopes of the Fed.


To add to all this uncertainty, the situation in the Euro Zone’s periphery is far from stabilized. Following the surprise Cyprus bail-in, international bank regulators have made a push for a democratization of this alternative to outright government bail-outs of banks. This idea is quickly gaining traction amongst central planners. We recently discussed the shortcomings of the BIS’s “Template For Recapitalising Too-Big-To- Fail Banks”. The BIS, again in its annual report, reiterated that “we need resolution regimes to make it possible for large, complex institutions to fail in an orderly way.” As uninsured depositors and bank bond holders realize that they do not benefit from government guarantee anymore, bank funding costs will rise and funding might dry up for peripheral European banks.

Conclusion: at the last FOMC meeting, by prematurely announcing the timeline and the specifics of an exit from QE, Bernanke might have lost control of rates and volatility. The current US economic growth is still feeble and hinges on housing, which would be slowed down by raising rates. Banks, while better capitalized than pre-crisis, are still not lending to most borrowers and would be dearly affected by too fast increases in rates. Moreover, European woes still threaten the stability of the international financial system and the recent rush to the exit might further exacerbate funding pressures for weak European banks. Finally, the US government (amongst others) debt load, while already unsustainable, would keep on climbing if rates were to increase only by 100bps.

The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.

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kchrisc's picture is reporting:

Central banks sell record sums of US debt

There's a hole in the bucket dear Berstanke, dear Berstanke\there's a hole in the bucket...

James_Cole's picture

Eric Sprott: "Have We Lost Control Yet?"

Yep you sure have, Sprott asset management ETFs are sinking like the Lusitania. 

Machine Parts's picture

Hey pal, invest in US Treasuries then.

James_Cole's picture

US treasuries are no fun, I don't get to pay industry-high fees to Sprott to receive semi-regular updates on how much of my money his clown show has lost. 

Actual Sprott letter:

Arr Investor,

This week your investment is down 35%, but do not fear comrade! Soon we will slayeth the mighty dragon-beast JPM and chief gold manipulating wench Blythe Masters. Arrrr

But! We cannot do it without your help dear investor, send us more capital immediately and we will continue the great battle!! Comrade!! This is it! Soon we shall defeat the evil demons layeth below Chase plaza!!

Arr, join us tonight at One, no no not join us, pick up our tab and we shall whisper sweet nothings into your ear about our golden offices. Our golden chalices and our golden...letterhead!! Infact, we insist you come! Actually, perhaps right now!! Come now, bill is due!!

Comrade, we shall overcome!!

-Chief Scam Artist, Sprott Asset Management

NeverForgetSilver's picture

I wouldn't blame Eric Sprott for the loss. It is the work of the gangster US government, as Dr. Paul Craig Roberts put it.

SafelyGraze's picture

had lunch with the nank today

said, 'hey nank: ixnay with the apertay'

he put down his fork

jpm cufflinks gleaming

he goes, 'equities have to stand on their own. as do treasurys. as do securities. as does the economy in general. the time has come to sop up excess liquidity in light of strengthening indicaters'

and I'm like, 'nank: you're the only thing propping them up'

if you've never seen nank talk while he chews, here's the thing. he moves the bolus of cud to the right side of his mouth. you get glimpses of it during the long-O vowel sounds

anyway, he says 'you completely misunderstand our role in restoring stability to the financial landscape'

and I'm all, 'nank: it's over. your next steps are going to be deflationary, with stocks collapsing, then interest will lift off and cause systemic defaults and bail-ins, followed by exploding price inflation as dollars repatriate.'

and then he tilts his head and goes, 'I'm not following that at all'


spine001's picture

Tyler you are missing tye point. Market participants are not reacting in a chaotic way. But in a very predictable pattern. The problem 5hat you are missi g is that the system that they are interacting with responds to chaos math. The economy is c9mposed by a zillion feddback loops ruled by regulations and operated by the cognitive biases of 5he pwrticipants. When you model this it is clearly ruled by the same set of differlential equations as a high ord3r chaotic system.

Once you realize this it becom3s obvious 5hat you can not know when you have gone beyond the financial stability point with QE since you will always have to taper it at some point. The more you do the riskier it becomes. But there is no clear threshold to cross. Only increased risk as youbgobforward. Those of us that have worked controlling this type of system know that you should never approach the stability boundary if you want to be sure that you can maintain control. What we are seeing is obvious proof 5hat we went too far and that if we go further we'd be incredibly irresponsible and playing with fire. The math experts know what I am talking about. But this is extremely difficult to explain to politicians

dynomutt's picture

Emm Arr j0b5 wi11 c@ptur3 ewww


ph33r d3 b3333g d@@@@@yt@

knukles's picture

True.  It's not yet chaos.
There are not yet bankers hanging under Blackfriar's Bridge.

King_Julian's picture

+1 for the Nankerama. I could really imagine him resonding like that. "I'm not folllowing that at all." Indeed.

deKevelioc's picture

This, sir, deserves a salute!  Well done.

Alexandre Stavisky's picture

Physician with a presciption pad.  Patient with Stage 4 incurable.  Opiates only available at pharmacy.  Rich patient, poor physician.  Writes. Patient Takes.

Patient Likes.  Patient Pays.  Physician worries a little.  Oversight non-existent no fear of any blowback whichever path taken.  Physician weighs death of patient from disease or malpractice.  Patient crys and frowns when pain of disease manifests, Patient smiles when wave of morphine strikes his pain receptors.  Patient writes another check.  Physician writes another prescription.

Easy to see. QE to infinity.  Long term all die, even mature economies.  Especially ones founded upon growth which cannot adapt to the steady-state at best or a managed steep contraction at worst.

Stage 4 late term. Prescription Pad, just there.  Bernanke wears the white coat.  But it doesn't really matter who wears the white coat, it is perfectly predictable, the outcome.

Push the plunger, pupils dilate, patient smiles.  Dreams? Death?  Are they the same?  Dead men smiling from the gurney, emaciated but with still robust veins.  Trackmarks.  Trackmarks individually labeled, surgery ink, (1) Nihon Kanwa Ryudousei Ichi.....(20) USA QE 1, (25) 2-2-2 Abe, little too much dope, (28) Taper dopage (Oops, nearly killed patient from withdrawal) (30) QE (some interation) patient extremely happy but not eating, feeding tube, saline drip--financial cells have metastasized and forming tumour--really elephant man levels (55) more dope--toes, fingers, nose, other appendages--black, necrotic. Still smiling.

Never again going to build a wall, father a child, clear an acre.  Smile and wave, boys, smile and wave away.

FeralSerf's picture

Eat, drink and be merry for tomorrow we die.

This cancer that started long ago in central Europe is going to kill our "civilization"; of this there can be little doubt.  Is it better to die in extreme pain or in an opiate induced dreamlike coma?

When the host dies, the cancer dies with it.  The cancer is stupid.  There is no symbiosis.

The Nameless War

Pareto's picture

+1 just like when he told Ron Paul that gold wasn't money - "then why are central banks buying it Ben?" za za za za zinnnnng!

Midasking's picture

Eric - we lost control awhile ago about 1971!  If you are liberty minded you might like this

bubblemania's picture

Off Topic - I'm re-shuffling my self managed 401k and want to buy a Gold related fund. Looking to put 7%, anyone know about SGGDX. Any recomendations would be appreciated.



Everybodys All American's picture

I'd be careful. I don't think the bottom is in on gold yet.

fonzannoon's picture

It better not be. I've invested too much time in watching it go to zero as paper implodes. If I have to watch fast money tell me how much they made on the GLD on the way back up I will be pissed,

Everybodys All American's picture


Take a look at how Silver traded today. That's the kind of reversal at the bottom you want to look for in gold. Silver looks like a screaming buy and I'd assume gold as it trades so closely is not that far off. But who knows. I'm hearing Paulson has essentially been selling his gld holdings and forcing the price of gold price lower.

fonzannoon's picture

Thanks EA

If Paulson held on this long only to capitulate here that is hysterical.

kliguy38's picture

Invest in physical gold and silver.....if you have to be in paper then buy some of the miners and make sure your shares are registered to YOU before the re hypothecation of them in your brokerage

James_Cole's picture

Off Topic - I'm re-shuffling my self managed 401k and want to buy a Gold related fund. Looking to put 7%, anyone know about SGGDX. Any recomendations would be appreciated.

Yeah, don't get financial advice from anonymous strangers on the internet. If someone makes a really good case for a particular investment consider it, but make sure to get a second opinion and do your own research.

99% of what people write on here is bullshit.

fonzannoon's picture

James, how many people on here jumped at the chance to dispense advice to this person, other than Lawsofphysics blunt analysis?

That says a lot about this place.

"99% of what people write on here is bullshit"

especially when it's you that is talkng.

akak's picture

Yes, James, why don't you repeat some more half-truths and lies from the so-called "World Gold Council" misrepresenting the facts of the world gold market, casting half of it as nothing more than mere frippery and baubles for the ladies.

fonzannoon's picture

"99% of what people write on here is bullshit"

and yet he spends 100% of his time here.

How odd.

James_Cole's picture

Out of many thousands of comments 1% success rate isn't bad. Most sites it's 99.99999% bullshit.

LetThemEatRand's picture

100% of what I write is bullshit so that helps average down everyone else.

James_Cole's picture


"99% of what people write on here is bullshit"

especially when it's you that is talkng.

Telling him to buy physical gold is investment advice. I write a lot of nonsense, but I also don't suggest buying or selling, pretty much never anyway. And either way, my opinion shouldn't be trusted. Compare what I say to other sources.

That said, you're all welcome to click on my name and go through my past 6 months of commentary on gold to see how well what I've been theorizing matches reality VS. the sell side bullshitters and diehard goldbugs on here. 

I say 6 months specifically because before that time I was mostly pro gold still, that changed. My neg opinion will probably change later this year but atm I don't see any reason to be bullish. 

I should actually specify, bullish on phys. You can make a tonne of money in the gld / slv on this chaos, but that's a whole other thing. If gold bounces 100$ that doens't benefit phys as a short term or long term play. 

fonzannoon's picture

"Unless you are buying physical, you are speculating"

Where exactly did he tell him to buy physical?

James_Cole's picture

U: What LOP is essentially saying is, there is no substitute for the real thing. That is the essence of the problem many people will find themselves with.

GUY LOOKING FOR ADVICE: Thanks Fonz, I think it will help to allocate a portion of my 401k to this fund. It's a terrible time for investing. 

Ok fine, not saying specifically buy, it's more a semantic argument. The gold sell-side guys usually say stuff like: "Don't be left with worthless paper" "Gold will be a gazillion $ next week" "last time gold will ever be x $" "gold is the only protection against the apocalypse" "gold is the only safe investment vs. dow" etc. Which is basically what people on here are saying. 

Guy asks for advice on what to invest in, folks respond something along the lines of 'phys is the only safe investment' - to my mind that's a recommendation to buy it.

fonzannoon's picture

That is total bullshit right there. See it however you want to. Neither me, nor LOP advised him to buy gold.

"Guy asks for advice on what to invest in, folks respond something along the lines of 'phys is the only safe investment' - to my mind that's a recommendation to buy it."


Guy says HE IS going to invest in something. Someone responds that if he is going to, it's best to have physical possession.

That is all that happened.

LetThemEatRand's picture

I'm pretty sure you need a cowbell, fancy graphics and rolled up sleeves (in between massive cocaine hits) to give investment advice.

Its Only Rock N Roll's picture

don't forget it is also mandatory to yell boyyyyyyaaaaa at the top of your lungs and have some spittle fly from your mouth during that exaltation

kito's picture

if i lose my shirt on the gold eagles i just suing fonz...........and BOP.....and akak.....and laws........and....and....yeah.........its their fault, not mine......because this is america....and its always somebody elses fault!!!!! dammit!!!!!!!

btw cole.......the mere fact that you have been right about something up until this point does not give you any greater predictive powers as to what will be tomorrow.......just sayin...................

Colonel Klink's picture

I find it decidedly more convenient to blame others than take responsibility for my own actions.  It's the Amurikan way! :)

akak's picture

Fuck you James with your repeatedly disingenuous implication that anyone who is pro-gold is a "sell side guy".

What you adamantly refuse to acknowledge is that most of the pro-gold posters here take a LONG TERM view (as opposed to the typically myopic short-term view of the paperbugs and anti-gold trolls such as yourself), and do NOT view gold as an investment at all, but as a fundamental (and the safest) form of long-term savings.  All your harping and focus on the short-term fluctuations in the price of gold and silver are essentially only so much irrelevant noise to such people, and should be such to everyone --- that is, to everyone with some knowledge of monetary history, and what current corrupt and unsustainable financial and monetary trends presage for those who naively and ignorantly tie up their savings in governmental fiat currency.

You really are one dishonest and shitty piece of work, James.  I have said so from my first encounter with your lies and deceptions, and I still find no reason to alter that conclusion.

James_Cole's picture

What you adamantly refuse to acknowledge is that most of the pro-gold posters here take a LONG TERM

I've never refused to acknowledge that. If you have endless money and time who cares what happens in the short term, why would you even bother to comment?

You really are one dishonest and shitty piece of work, James.  I have said so from my first encounter with your lies and deceptions

Yeah I have noticed that trend. At 1600-1700$ I outlined why I thought gold was entering a bear market and would be in a sustained down. You said I was a disingenuous liar blah blah blah.

At 1500$ you again said I was a liar etc.

At 1400$ same thing..

Then 1300$

And now 1200$

It's a broken record from you, though if I were lying I have an uniquely truthful way of doing it. 

Meanwhile, the people you adore have been WRONG THE WHOLE FUCKING TIME, yet where's the calls of them being liars? Nope, they're all above board I guess akak?

Who's really being disengenuous here??

malikai's picture

Seriously. If you were saying that, and right, awesome work.

But don't expect everyone here to line up to suck your dick because of it.

This is a comment section. People here state opinions. There is a cute little disclaimer on this site which explains how fucking stupid you have to be to take anything here as 'investment advice'.

Are you here to learn, teach, or just fuck with people? Either one is cool, just be honest with yourself about it.

James_Cole's picture

But don't expect everyone here to line up to suck your dick because of it.

I'm not, akak follows me around on zh calling me a liar etc. which gets annoying so I was pointing out the record. He (and a few other commenters) have this conspiracy that I'm trying to trick people into selling their gold or something. 

This is a comment section. People here state opinions. 

Guy asked for "any recommendations" - I gave him one. People can say whatever, I don't care. 

Pareto's picture

+1 The only thing worse than an arrogant piece of shit, is a piece of shit that is arrogant and also dumber than a sack of fucking hammers.  He talks through his ass calling the COMEX as some kind of investment (long or short).  "oh i called it short here at 1700, and here at 1500......".  The question from above was answered by Fonz by akak, et al, with the subtle and silent and obvious disclaimer that at the end of the day, you conduct your own diligence.  And I resent any fucker who comes on here and contends that 99% of what people write on ZH is bullshit.  Fuck you (James Cole), you little prick.  There's fuckers on here that would eat your lunch on any fucking topic of economics, of politics, and of course, the always and forever elusive trade.  Its why I come here you fucking idiot, PRECISELY because the 99% is decent credible, and valuable analysis - even if it is redundant, crass, and the best, really fucking funny. And if the 401 query above ought not to seek advice from here, then I'm fucking dying to know where you think he ought to.  Becuase if you say a broker, or, a financial analyst, I'm going to fucking hunt you down and bash your peanut brain with a lead pipe for giving what can only be considered the shittiest advice you can give anyone fucking EVER.  Fucking retard.  So here, I'll give some advice to the 401k query.  if you don't want the phys - don't want to carry it, try the Canadian CEF.  Trades CEF on the NYSE.  Its value is backed by gold and silver that is physically owned and held by the Fund.  Here's the link.  Fuck you James Cole.

James_Cole's picture

Becuase if you say a broker, or, a financial analyst, I'm going to fucking hunt you down and bash your peanut brain with a lead pipe for giving what can only be considered the shittiest advice you can give anyone fucking EVER.  Fucking retard.  So here, I'll give some advice to the 401k query.  if you don't want the phys - don't want to carry it, try the Canadian CEF.  Trades CEF on the NYSE.  Its value is backed by gold and silver that is physically owned and held by the Fund.

Lol Eric Sprott is that you??

CEF, a real great investment!

But I can ignore past performance because you're a self-described economist, I can trust you right??

RaceToTheBottom's picture

I am not recomending anything to anyone but I also like CEF.  It will be interesting to watch future prices there if the Physical and the paper do separate.

SamuelMaverick's picture

Awesome post Pareto. If there was a best of ZH I would vote for yours ( and AKAK's ) !!!  Also, double thumbs up on the CEF recommendation. CEF is a solid way to enter and exit the Gold market esp. for the average joe who is just starting to put the pieces of this puzzle together. You also get the bonus of not paying Sprott the stupid vig his products have. 

samcontrol's picture

ummmm¿ i have shit loads of miners , not really in a brokerage account , more like offshore... please explain for a laugh your hypo thesis.

Everybodys All American's picture

Paulson has almost 22 million shares of GLD. Can you imagine ...

fonzannoon's picture

I can only imagine that he actually has half a brain, and is scrambling for every ounce he can get his hands on.

Silversinner's picture

Paulsen bought gld not to make a profit.

The elite let him gain billj on subprime by insider

information,his dumping of gld is payback time to the cartel.


Harbanger's picture

Keep the faith and keep stacking Fonz.  The only bottom I'm watching out for is the bottom of the Comex warehouses.  They lost 32% of their physical inventory in only the past few months.  Demand is very high at these prices and they're being wiped out.  It won't be long, just a few months at this rate before they'll dry up inventory and stop setttling in physical altogether.  This is when they can no longer manipulate the price with paper and it decouples.  Because of the shortages, Physical price goes parabolic..

fonzannoon's picture

Man I hope you have it nailed.