The monthlong slump that erased 12 percent from the Standard & Poor’s 500 Index is the beginning of a collapse that will drive the measure below its weakest level of 2009 in the next year, money manager Eric Sprott said.
The $1 trillion European rescue package announced May 10 has failed to stop the global equity drop, showing investors are skeptical that efforts to address the debt crisis will work, said Sprott, manager of the best-performing Canadian mutual fund with at least $1 billion in assets in the past 10 years. In response, Sprott is buying gold and betting against stocks.
Sprott is betting that governments around the world have run out of ammunition in their attempt to boost economic growth and counter banking losses through stimulus spending and lower interest rates. The S&P 500 surged as much as 80 percent after sinking to a 12-year low on March 9, 2009, after the U.S. government spent, lent or guaranteed up to $9.66 trillion to end the financial crisis.
“Our thesis is we’re in for a long, deep cycle, and we’ve thought that since 2000, but up to this point, governments and central banks have always tried to stave it off,” Sprott, manager of the Sprott Canadian Equity Fund, said yesterday in his Toronto office. With budget deficits surpassing 10 percent of gross domestic product in Ireland, Greece, the U.K. and Spain, and the U.S. at 9.3 percent, policy makers have no choice but to pare spending, threatening economic growth, he added.
The Sprott Canadian Equity Fund returned 519 percent in the 10 years that ended April 30, compared with a 62 percent gain for the S&P/TSX Composite Index. The Sprott Hedge Fund, which the 65-year-old investor also manages, has jumped more than 488 percent since its establishment in November 2000.
Sprott’s bet that molybdenum, a metal used to strengthen oil pipelines, would rise failed. He closed Sprott Molybdenum Participation Corp., a fund established in 2007, last year after it lost 70 percent since inception because the metal plunged. The commodity had surged 15-fold between the end of 2000 and June 2005, prompting companies including Freeport-McMoRan Copper & Gold Inc. to boost production.
U.S. stocks surged today, joining a global equity rally, as China said it remains a long-term investor in Europe, damping concerns that the region’s debt crisis will worsen. The S&P 500 rose 3.3 percent to 1,103.06 today.
Biggs on Stocks
In December, Sprott said the S&P 500 would eventually sink below 676.53, its closing level on March 9, 2009, without providing a timeline. European deficit concerns helped drag the gauge down 12 percent from its 2010 high on April 23 to a close of 1,067.95 yesterday.
U.S. stock markets are oversold and may rally strongly in the next few days, investor Barton Biggs, who runs New York- based hedge fund Traxis Partners LP, told Bloomberg Television.
Sprott said U.S. consumers, China and the turmoil in Europe have convinced him this month’s equity retreat, unlike previous drops in the past year, marks the return to a bear market. The S&P 500 plunged 57 percent between October 2007 and March 2009.
U.S. consumers are showing signs of financial stress that wouldn’t be present in a sustainable recovery, he said. Chain- store sales as measured by the International Council of Shopping Centers fell 2 percent in the first three weeks of May. In a conference call on May 18, Wal-Mart Stores Inc. Chief Financial Officer Tom Schoewe said, “More than ever, our customers are living paycheck to paycheck.”
China, the fastest-growing major economy, is starting to struggle, Sprott said. The Shanghai Composite Index has tumbled 23 percent since climbing to a 14-month high on Aug. 4. The government took steps to cool the nation’s expansion and reduce the risk of asset bubbles, or unsustainable price increases.
Finally, the European debt crisis has raised the prospect that austerity measures will reduce growth -- a phenomenon Sprott said will spread to the U.S. because of the record American budget deficit.
“We can see the dots aligning that the world’s economies are not what they thought they would be, and they’re not going where we thought they would go,” he said. “It seems more clear-cut now.”
Economists anticipate 3.2 percent growth in U.S. GDP this year and 10.1 percent in China, according to the median estimates in a Bloomberg survey.
10th Annual Rally
Sprott has added to his holdings of gold, which is rallying for a 10th straight year in New York, and shares of the metal’s producers this month.
He boosted bets against financial companies and maintained short sales on Toronto-Dominion Bank and Bank of Nova Scotia, both based in Toronto, and National Bank of Canada, which has its headquarters in Montreal. His view puts him at odds with the World Economic Forum, which has said for two straight years that the nation’s banking system is the soundest globally.
Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.
Investors have driven the S&P/TSX Bank Index to an 11 percent gain since Jan. 31 as analysts forecast a 22 percent combined profit increase this year for its nine companies. The bank measure advanced to a record 112 percent premium yesterday over an index of insurers in the S&P/TSX, which started at the same level as the bank gauge in 2000.
Not Enough Analysis
Bank taxes are likely to rise around the world despite the opposition of the Canadian government, and Canadian lenders remain overleveraged and too dependent on government support, Sprott said.
“There hasn’t been as much critical analysis of the government’s involvement in the Canadian banking system as there certainly has been in the U.S.,” he said.
Sprott continues to favor precious metals as a haven. On March 31, gold and silver accounted for 34 percent of the net asset value of the Canadian Equity Fund, with reseller Gold Wheaton Gold Corp. of Vancouver the top equity holding.
While both gold and the U.S. dollar have gained this month as investors shy from risk, only the former will continue to advance as the crisis deepens, Sprott said.
“The debt, the deficits are enormous. The industrial capacity has been gutted,” he said of the U.S. “One cannot make a positive story for it other than some temporary trading phenomenon because something else is uglier than the dollar.”