Canadian hedge fund titan and precious-metal investor Eric Sprott is on a roll playing the thesis that the world is going to hell in a handbasket. To say that he has the Midas touch would not be a stretch, except that his latest home run came from silver (Sprott Physical Silver Trust, PSLV), not gold. But his decade-long bet on metals is only half the story.
The other side of the equation is his bearish (he would call it realistic) outlook on the economy, the stock market and the Fed. He sees the over-leverage of banks as the single biggest problem and says the only way to solve a leverage problem is with write-downs. As such, he is short U.S. large cap stocks, and more specifically he is short the big banks, builders and consumer discretionary stocks. As Jeff Macke says, this is playing the ''misery into magic'' trade.
"The financial collapse has caused a fiscal collapse," Sprott says. "At the end of the year we're left with a trillion and a half of debt that we otherwise wouldn't have had a few years back. It's all come together to put great strain on the system. Some day maybe some country can't issue a bond, and goodness knows what will happen then."
But is the system rigged? Will the Fed really allow the banks and markets to go down collectively to make a meaningful retreat?
Strott says, "It's a question of how many people continue to buy in...the more people you get to not buy in, it becomes a bit of an issue to keep raising money."
But would he short the financials naked on the idea that they shouldn't be where they are? "I would never recommend that people do that. You have to have it truly hedged." And for that he's using the metals.
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