Eric Sprott On The Ministry Of Untruth

Here is the latest from leading precious metals investor (and billionaire) Eric Sprott. For my money, I don’t think the Euro will be allowed to fail easily (and letting even one country out of the asylum counts as failure in my book.) This will not happen until there is real civil unrest– perhaps revolution. The elites (and more importantly the bankers) have too much riding on the current system, and if one country goes, they all go (at least among the PIIGS)- and so does the solvency of many banks and the value of many bond portfolios, etc. Those who think they run the world will not give up the reins as easily as some might think. Still, as an investor/saver/speculator you had better learn to see through all of their dissembling and happy talk, because I too don’t see the light at the end of the tunnel (unless of course it is the proverbial on-coming train.)

“The smart money is finally waking up to the dimension of the problem here and realizing that it’s really a banking issue. Deposit flight has revealed the vulnerability of the European banking system: when depositors make withdrawals, the only assets the banks can sell to raise liquidity are sovereign bonds, which creates the vicious downward spiral that up to this point has always resulted in some form of central bank bailout. Many eurozone authorities still have trouble understanding this. As Spanish Economy Minister, Luis de Guindos, recently stated to reporters at the G20 Summit, “We think… that the way markets are penalizing Spain today does not reflect the efforts we have made or the growth potential of the economy… Spain is a solvent country and a country which has a capacity to grow.”16 Every country has the capacity to grow. Not every country has a domestic banking system that has already borrowed €316 billion from the ECB so far this year (pre the most recently announced bailout), and needs to rollover roughly €600 billion in bank debt in 2012.17 That may be why the markets are reacting the way they are.

If you want to know what’s really going on, listen to the executives of companies that actually produce and sell things. On May 24, Tiffany & Co cut its fiscal-year sales and profit forecasts blaming “slowing growth in key markets like China and weakness in the United States as shoppers think twice about spending on high-end jewelry.”18 On June 8th, McDonald’s surprised the market with lower than expected same-store sales growth in May, following a lacklustre April sales report that the company stated was “largely due to underperformance in the United States, where consumers continue to seek out very low-priced food.”19, 20 On June 13th, Nucor Corp., the largest U.S. steelmaker by market value warned that its second-quarter profit will miss its previous guidance after a “surge” in imports undermined prices and “political and economic uncertainty affect buyers’ confidence”.21 On June 20th, Proctor and Gamble lowered its fourth quarter guidance and profit forecast for 2012. Factors that drove the company’s challenges included “slow-to-no GDP growth in developed markets”, high unemployment levels, significant commodity cost increases and “highly volatile foreign exchange rates”.22 Other companies that have recently lowered guidance include Danone, Nestle, Unilever, Cisco Systems, Dell, Lowe’s, and Fedex. It’s ugly out there, and many companies are politely warning the market about the type of environment they foresee ahead in both the US and abroad.

To give you a hint of how bad it is in Europe today, the most recent retail sales out of Netherlands showed a decline of 8.7% year-over-year in April.23 In Spain, retail sales fell 9.8% year-on-year in April, which was 6% greater than the revised drop of 3.8% in March.24 Declines of this magnitude are not normal occurrences and signal a significant shift in spending within those countries. We fear this is a sign of things to come within the broader Eurozone, which will only serve to complicate an already dire situation that much more.

The G6 central banks are out of conventional tools to solve this financial crisis. With interest rates at zero, and the thought of further stimulus rendered politically unpalatable for the time being, we cannot see any positive solutions to this problem other than debt repudiation. We continue to note the contrast between the reporting companies who by law cannot lie about their fiscal realities, versus the central planners who admit that they MUST lie to preserve calm and control. We’ll leave it to you to decide whose version of the truth you want to believe.”