Nov 27, 2018 10:57 am
Eric Sprott: All Asset Classes Are Plunging
Renowned investor Eric Sprott truly cannot pass up a bargain. But before heading out for some Black Friday discount shopping, the founder of Sprott Inc. checked in with Craig Hemke of Sprott Money News for an update on the market.
A DIFFERENT MARKET ENVIRONMENT
“We have a different market environment and people should adapt to that,” said Sprott, referring to the general deterioration of asset classes.
“All asset classes are pretty well plunging here … Oil and gas are very weak. We see the stocks are weak.”
And even as the broader market rallies out of correction territory, the weakness is evident. Both the S&P 500 and Dow Jones Industrial Average have wiped out their gains for the year, while the NASDAQ clings to a 2% year-to-date gain (down roughly 15% from its high).
In addition to the technology sector, energy has been particularly hard hit with WTI crude hovering in the $51 per barrel range.
“[Cheap oil] is great for the consumer, of course, because he’s saving money.”
“But it’s certainly not good for corporate earnings in the sense that the oil companies have now lobbed off 30 bucks a barrel, and it’s not as though they were making much in the way of profit anyway. So we could see a bit of carnage there.”
Indeed, we already have. With oil prices down significantly from the October peak, the yield on the high-yield energy index jumped to a 24-month high of 7.99% earlier this month. Meanwhile, the State Street SPDR Energy Select Sector ETF (XLE) is down roughly 10% for the year.
“People are just waiting for a time to sell.”
THE COST OF RISING INTEREST RATES
Of particular concern are the effects of rising interest rates on consumer behavior.
“The things that interest rates are affecting are the worst performing stocks. Look at the whole housing thing and now autos. You don’t have to be a genius to know that people are kind of tapped out.”
The data seem to agree. With rising mortgage rates and home price growth hurting affordability in many markets, sentiment among the nation’s homebuilders has dropped to its lowest level since August 2016.
The case for automakers is no better. Amid slowing sales, General Motors recently announced a major global restructuring that includes a plan to cancel numerous car models and cut production at five assembly plants. The move affects 15% of its salaried workforce.
“These increases in interest costs — they dent your budget … [M]ortgage rates are up 150 bp off the bottom and an increase of something like 40%.”
“How many people can afford to pay [an extra] 40% on their mortgage and still afford to buy food and pay their power bills?”
“The Fed has gone this route because they had to get back to some kind of normalcy, financially. And getting back to normalcy is resulting in economic carnage.”
THE GOLD BULL IS NOT ALONE
Despite a rising interest rate environment and a 6% year-to-date decline in the gold price, Sprott remains bullish on the metal and the associated mining companies.
“There tends to be a rally beginning in the middle of December. That will coincide with the rate decision, and normally, even when they’ve raised rates, gold has tended to go up. So, I think we’re probably in a good spot here,” said Sprott, before adding, “We usually see fireworks once we get through that big [COMEX] delivery month in December.”
According to Sprott, he is not alone in his interest in gold and the gold miners.
“Anecdotally, I’ve heard that there’s been some major institutional accounts asking various gold companies to come in and present their case.”
“Why wouldn’t they be looking around for something that could survive in a crash?”
“That’s one of the beauties of gold — that’s why I got into gold back in 2000. I was a long-only fund manager and thought, ‘My God, I’ve got all this money for people, what am I going to do?’”
“It finally dawned on me that gold lets you survive … and, quite frankly, I was only trying to survive. I didn’t know the stocks would go up 1,700% from when I bought them.”
Click here to listen to Craig’s interview with Eric Sprott.
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