Eric Sprott on tumultuous markets (Weekly Wrap-up, February 9, 2018)

Transcript:

Announcer: You're listening to the "Weekly Wrap-Up" on Sprott Money News.

Craig: Hello, greetings once again from Sprott Money News and sprottmoney.com. It's Friday the 9th of February. It's been a crazy week in the markets, but this is your "Weekly Wrap-Up." I'm your host, Craig Hemke. Joining us to wrap it up is Eric Sprott himself. Eric, good morning.

Eric: Hey Craig, happy to be here. Lots of wild and crazy things going on, so let's try to cut through it.

Craig: We'll do our best, won't we? But hey, you know, gold has been up and down this week, and I know you watch it like a hawk and you're seeing this week's crazy fluctuations. I think there's a great opportunity for our listeners to take advantage of this amazing deal that Sprott Money is offering. For a limited time only, you can actually buy a 1-ounce Royal Canadian Mint gold bar for only $19.99 over spot. That's about half off what the regular premium is.

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Eric: Pretty good deal. I remember back in, I think, it was '05 or '06, I had a lot of gold sitting at the Royal Canadian Mint in Ottawa. And they had a little downtime and they asked me if I'd convert my bars to coins and I said, "Yeah, I might do that, but what would you charge me?" And they charged me $6.50 and that was a huge...you know, tens of millions of gold at $6.50 an ounce. But that's when gold was, like,$400. So, if you can do that at $19 at $1,300, that's a hell of a deal. So, that's something that, if I didn't already own as many coins as I need, I'd be right in there.

Craig: Yeah, no doubt about it. I'm sure, especially, our Canadian listeners. They know all about the 1-ounce Royal Canadian Mint gold bars. And to get them for $20 over spot, that's outstanding. And given the world as it is and the way the markets are and the way this year is shaping up, man, I'll tell you what, this is probably a good time to be buying some, Eric. We had a draw back in price this week, but that's probably more because of what's been going on in the equity markets around the globe. And that's probably all because of what's been going on in the bond market. So, we'll just leave it there and I'll let you pick up and run with it.

Eric: Sure. Well, I think you should always go back to first principles to try to figure out what just happened, okay? Because what happened has been very dramatic here with 2,000-point down days in a four-day period. And of course, what happened was that interest rates started rising. And some people put it down to the jobs report on Friday that you and I discussed. And by the way, it wasn't even that strong a jobs report when you took out the hours worked that fell during the week.

But nonetheless, the market went on its way and raised rates. But when you step back and look at the interest rate environment, with the U.S. government in particular, I mean, here you have the Fed saying, "We're gonna be a seller of bonds." And then you have a budget they passed this evening or this morning, and we're gonna plunk another 300 billion on top of the debt. And if rates are already up a point, you've got another $200 billion of interest. You'd finally say, "Well, how can rates possibly stay here?" And I think that is by far the overriding story.

Now, within it and mostly on Monday, we had this blowup in short-vol, and they were notes. I call them "Goldilocks Notes." Goldilocks Notes are notes that people think, "Well, everything is going to stay the same and I'm just going to sit here and clip coupons all the time." And then, they find that they we’re not in a Goldilocks environment. Now we're finding out we're in a Wicked Witch environment and things, I think, are going to spread from the short-vol to other things, let alone having margin calls and things like that. Because unless the market goes down, I think rates go higher. You almost have to have the stock market go down to keep rates under control. And that's only for a very short time because ultimately, you got to do bond issues. I gather that the 30-year bond issue was just a joke. I think that was yesterday. Like, the bid to cover was weak, and they priced above new issue expected price.

So, I think all eyes should be on the bond market here. And think of it, all the repercussions that could come through. We also saw that equity fund sales last week, I think, were something like...well, they were a record high for quite a while...might even be a record all-time high fund sale. So this is people cashing in.

So, I think to our listeners, don't get to hung up in, you know, whether we have inflation or deflation, or stuff like that. I think that we have a market, the bond market, that's out of whack here, where the people who have to buy the bonds are going to be outweighed by the people who are supplying the bonds, and the rates are going to go higher. And if the rates go higher, of course, the obvious impact on the economy and valuations is incredibly negative. So, that's what we should all be watching for.

Craig: Let's stay there for a second, Eric, because there seems to be a real conundrum in that, twice now, the 10-year has gotten to this point of 2.88%. Now, why it's that point, I have no idea. We were 2.02% five months ago, and now we're at 2.88%. That's a tremendous move. It's a 40% move in that rate. And it's twice it's gotten 2.88% and twice the market has crashed. I mean, are we in a spot here where, I mean, we just can't have longer rates go any higher?

Eric: That's what the issue is, that because the mortgage rates move in lockstep with the 10-year, and all of a sudden, you know, mortgage rates go up 80 basis points. Well, that makes everything unaffordable, right? It was pretty skinny getting in the way it was because by reducing down payments by having low interest, you know, you'll raise interest rates. Oh, my goodness, the cost to the first-time buyer just explodes.

So, that's why, and it's not just the economic impact, as I pointed out about rates. It's the valuation. Because we compare bond yields to the stock yields. So, if bond yields keep going up and stock yields are flat, stocks start losing the contest.

So, we all have to be very wary of it. And one of the things that I might point out to listeners, having been a person who has to trade in markets, and one of the worst things that ever happens to you in a market is you show your hand. In other words, you put the sell order in. Well, you know, you're like a chicken going off to slaughter here because the HFTs are just sitting there waiting for you. And they see your order coming into sell and/or it's put in by your broker because it's a margin call and he doesn't hide the fact that he just wants to pound it. And then, of course, the HFTs jumped all over it and you get a faster decline than you would otherwise get.

And this, of course, is one of the great weaknesses of the market, has been the whole non-regulation of high-frequency traders, which was great when things are going up. But it's going to be the opposite when things are going down and you're going to get more extremes in daily changes. And I think that's part of it here. You've got lots of people trading against you all the time here, and as we get more and more people, kind of, being forced to do things or panicking, or whatever, then the HFTs just have a field day.

Craig: And one last question on this, then, Eric. If we've reached the ceiling, you know, if the 10-year can't go past, let's just call it 3%. Let's round up to 3%. If the 10-year can't go past 3% without crashing the market, due to all the leverage in the bond market and everything else and the leverage in the stock market. If the 10-year can't go past 3%, what does that do to all this, you know, Fed goon stuff about how many times they're going to hike rates this year?

Eric: Yeah, well, of course, it puts it all at risk, right?

Craig: Yeah.

Eric: And that's the question. When does the Fed step-in? How low do they let the market go before they have to say, "Okay, well, maybe we should reconsider all of this." And, of course, the minute they say they're reconsidering, gold and silver will go crazy on the upside. But that's the risk they have. You either let it tank...and maybe there is some resolve there, Craig. It's hard to imagine there's resolve, but maybe there is some resove at the Fed, that they want to get these rates through. God knows why they would because they're going to destroy the economy and the markets at the same time. But it's a risk we have and it's very omnipresent, right there. It's all negative for long holders in the stock market. It's all negative unless the Fed capitulates. And we're not seeing much in the way of that, having listened to the Bank of England yesterday talking about rates increases sooner, more often. It looks like Fed speak is likely to remain hawkish.

Craig: Well, we'll see. S&P's down 8% since last Friday, Eric. So, if we're down another 8% by next Friday, we'll see how that changes. In terms of gold and silver though, my friend, let's wrap up here. It's been a tough week, kind of the baby getting thrown out with the bathwater to some extent. And not unlike what we saw in 2008, where gold from $1,000 down to $700 before going to $1,900. How do you feel about, we'll just call it, the "metals" at this point, given what we've seen?

Eric: Yeah. Well, I think, look, relatively, they've done well. I mean, I could sit here as a guy with a big portfolio, and I'll say, "Well, thank god my gold's only down 2% and my silver's only down 2%. Why, everything I could have owned could be down 8% or 10%. So, I'm not hurting here.

So, I think, relatively, these things have done exactly what we would expect. They've probably been suppressed, like the natural instinct should be to buy gold in this kind of environment. We'll see what happens today here. You know, lots of people in the world are going to be trying to find things to invest in that can hold their own. And I think we're already seeing that gold and silver look like they're filling that role.

And, you know, to me, I mean, I love the fact that the cryptos have crapped out here. We're a bond bear market and we're getting close to a stock bear market. You couldn't ask for it any better for people to pay more attention to gold and silver.

Craig: Yeah, we're getting washed out in the Commitment of Traders report too, Eric. The new one today will probably show a pretty bullish configuration.

Eric: I would hope so.

Craig: Well, all right, my friend. It has been an interesting week. It is going to be another interesting week ahead, I'm afraid.

Eric: We're going to look forward to it next week.

Craig: Yeah, I think you're right. I think it's intriguing to see all the machinations, kind of, back and forth between the Fed and the banks and the equity investors. It certainly gives us a lot to talk about, doesn't it?

Eric: It will do it, for sure.

Craig: All right, my friend, have a great weekend.

Eric: Okay, Craig. You too.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thanks for listening. Hey, be sure to go to sprottmoney.com and check out that deal, $20 bucks over spot for a 1-ounce Royal Canadian Mint gold bar. That's a heck of a deal. Go check it out today and we'll talk to you again next week.