​Popular: Eric Sprott doesn’t buy the bull talk

The infamous money manager tags a key trend emerging in the current earnings season.

​Popular: Eric Sprott doesn’t buy the bull talk
Speaking of Oakville money managers, Eric Sprott is, as usual, calling markets dead-on.

No one can accuse Sprott of resting on his laurels. The well-known money manager is a legend in the industry. Decades of sharp-eyed market calls that have left him in contention for a run at the Top Ten wealthiest people in Canada. He’s got his own profile on Forbes.  

But it has been his market acumen that has got him to the top. Few are more perceptive of the deep trends in markets. Looking back at his July market commentary (posted on the Sprott site) in the context of the current earnings seasons, he seems to be getting things right again.  

A month ago he predicted in that commentary that the current economy cannot be considered solid as American consumers are still in rough shape. Recent earnings news suggests he is exactly right on in this call.

In the July commentary he pointed out it was ridiculous to blamne the tepid market conditions on the bad winter weather, as so many have done. Sprott doesn't buy that. According to him the dismal economic activity is "just another symptom of a much deeper malaise." The U.S. economy has been on life support as a result of central bank stimulus, the American consumer is still in rough shape. He quotes, Bill Simon, Wal-Mart's Chief Executive Officer for the U.S., suggesting that, "We've reached a point where it's not getting any better but it's not getting any worse -- at least for the middle (class) and down."  

Going on to reference real data Sprott points out that "real disposable income per capita in the U.S. has increased only modestly since the Great Recession. However, all of this increase is due to Government Transfers, not from an improvement in the real economy... If we exclude those transfers from the numbers, disposable income per capita is actually lower than it was at the end of 2005 and has been painfully flat since 2011.”

That is, American consumers don’t really have any ‘real’ new money. They’ve just coasting on funds printed by the government. The reality..."for a large portion of the population, things are not anywhere close to being better, in fact they are worse than before the recession. According to him, “40% of U.S. households spend about 40% more than they make...by borrowing, selling assets, assistance from family, etc. …total expenses increased 14%, driven by very large increases in shelter (22%) and health care (18%) spending.” That is, “five years into this so-called economic recovery, on average 40% of the poorest U.S. households still spend more than they earn (including government transfers) for basic necessities!”

He goes on: “How can we have an economic recovery when there is barely any discretionary disposable income for 40% of the population? As we have shown above, those that have seen their incomes grow are not the ones most likely to spend, while the bottom 40% of households still rely heavily on government assistance, have had stagnant incomes and have been faced with increasing inflation for "non-discretionary" goods that constitute a very large share of their incomes.”

His conclusion: “There is clearly no recovery..."

Posted a month ago the commentary runs against the recent protestations of a current recovery. All eyes have been on the most recent earnings season, which has shown some real promise for a recovery. However, there are some worrying signs of stress, one of which was the less-than-stellar performance of Visa and Amazon, two closely-watch consumer discretionary stocks. Both released disappointing earnings that weighed on markets. As one money manager quoted in the Globe and Mail yesterday, put it, "Amazon and Visa are significant components of the overall market and bellweathers of their respective industries. That gives you pause," said the manager. That is, the American consumer is not a source of great economic strength, Sprott continues to call out the key, deep trends.