Eric Sprott founded Sprott Asset Management in 2001 and has over $5- billion (U.S.) in assets under management. He has been an outspoken gold bull since 2000 and warned that the bursting of the Nasdaq bubble was the start of a long-term deflationary trend that is playing out.
You've loved gold for a long time but, when the crisis hit in 2008, gold and junior miners got killed like everyone else. How do you explain that?
I treat what happened to gold stocks in 2008 as anomalous. Now, two years later, gold's at a record price and gold stocks have come back from an absolute pasting.
I'm not convinced the market is always right. The market can be very wrong for a certain time period. I remember in 2006 when homebuilder stocks rallied 60 per cent because people thought housing was turning.
We love gold and silver stocks. I'm still bullish on my prior stock picks of . Why? Because there could be times in the life of investing when people only buy one thing. That's what happened in the mid-1930s. They only bought gold stocks. So much so, there were 80,000 gold mines in the States then because they could get financing.
More on gold:
I just get the feeling that that could easily happen again. When you look at a system that's in trouble, you think: what's the one thing I could do to get through it? You're thinking survival, because it's not going to be fun. By owning gold, you can survive it because it will have its purchasing power vs. anything out there. If we're still eating food and trading things, you will be able to use gold to buy those things.
So you see us staying in a deflationary environment?
I do, certainly for paper assets. I think you might end up getting necessary inflation in food, energy, precious metals, where there could end up being real shortages.
Is that why you like energy?
Yes. Unfortunately, one of the things that could happen if the whole financial system has a problem is that your whole ability to produce things goes down. If you can't borrow money in the energy business and you can't drill, your production is going down this year... immediately.
The same thing happens in agriculture. When they had the credit crisis, the farmers couldn't buy fertilizer -- just as little as a year ago. The shortages could develop quickly because of financial problems. So prices will initially drop due to a lack of demand, but then supply plummets.
Oil, natural gas, uranium, and coal should all do well. The one problem with energy is that you've got to be able to survive the first six months of when the economy turns down, because demand is going to fall off a cliff.
Do you also like agriculture and fertilizer too?
Absolutely. Same reasoning.
Let's talk about the Canadian banks. We're constantly reading that the IMF, Andrew Ross Sorkin and other luminaries are lauding the Canadian banks: "These guys got it right when everyone else got it wrong in the world." You're Canadian. Should the rest of the world copy Canada's banks?
No. Listen, the Canadian banks aren't any better or worse than anyone else. I have a problem with the basic banking model in the world which says you should use leverage at 20:1 levels. That's ridiculous. I just can't believe that still exists. Excuse me: you have 5 cents in assets supporting a buck of loans? When Greek bonds are falling 50 per cent in a month? Heck, the stock market can fall 4 per cent in a day.
It's not a safe model. If they ever had to liquidate, there'd be nothing left of the equity.
I What others can learn from what some have called the world's soundest financial system
Every week on "Bank Failure Friday," you have all these U.S. banks being taken over by the FDIC. The deposits are X. What's the cost to the FDIC? It's always 0.25 of X. The guy's already lost his capital, so now he's lost it 6 times over. That's not a sustainable business model.
The Canadian banks will have problems like all banks in the world have had problems. It's inevitable. They're not different zebras from the rest. In fact, there was massive support for the Canadian banks in 2008, but no one paid attention because the dollars being spent in the U.S. seemed so much bigger -- even though the U.S. is 10 times the size of Canada. We also didn't have a high-profile failure here like the U.S. had, so that's helped people think the Canadian banks are better when they're not.
Is there a housing bubble in Canada now?
Yes. The government created a housing bubble here recently. It's funny, because we had been quite reasonable when it came to housing until we lowered rates so low and started getting all the Canadian agencies controlled by the government to start buying up the mortgages. I've said to myself: "Oh my God, I've seen this before. It's so reminiscent to what I saw in the U.S." I'm sure the Canadian government looked at the storms on the horizon and decided to stimulate the economy through housing by following what the U.S. did four years earlier. And it worked. But look at the cost. Canada went from having a surplus of $10-billion to a deficit of $54-billion. What GDP growth did we get? I think our GDP is $1.3-trillion. We got $50-billion of GDP growth but we also got $50-billion of liabilities.
Why do you think Fannie and Freddie get no attention from the mainstream business press?
It's shocking. Think of the losses of those two companies. I think Fannie lost $11-billion last quarter. It's like it's been buried. The stock trades for nothing. It doesn't have any market cap, so what does it matter what it loses. That seems to be the mindset. It probably loses its market cap every quarter. It's owned by the US government so somehow we forget it.
When do things seize up in the financial system? Will it be sooner or later?
It's hard to know about the timing. People have to repudiate government debt. That's what has to happen. So far, they've repudiated it in Europe.
They might have repudiated the debt in the States, but the Fed came in and bought $1.7-trillion last year. That's a lot of money. They say they've stopped quantitative easing at the end of March. The Fed balance sheet is still growing. I don't know why it's growing. They say it's a hangover of previous trades from the prior QE. But, we'll just see who really wants to own U.S. government debt. I can't imagine that there are really many people who do with all the risk involved.
It's not just the U.S., either. Look at Japan. Who would buy Japanese debt that yields 1 or 2 per cent? There are lots of problems out there. We change every couple of weeks who we're picking on.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.