There’s a mix of suits and office casual attire, and a collegial flow of banter as Eric Sprott guides the session with questions and comments. But there’s also a feeling of tension, of wanting to say something that piques the interest of a boss who is good-natured and sociable, and yet intimidates with his obvious grip on market developments. The milk-as-gold idea is the sort of thing that might conceivably appeal to Sprott, manager of the amazingly successful Sprott Canadian Equity Fund and a keen prospector for investing themes with a future. Sprott was buying gold back in 2000, when it traded below $300 (U.S.) per ounce and few people envisioned the $800 prices we’ve seen recently. He took a shine to uranium in 2003, on the cusp of a gradual 10-fold price increase, with the expectation that nuclear power will have a big future in an era of high oil prices. Lately, his search for the next big score has led him to stocks in commodities like molybdenum, phosphates and silicon. “When looking at a stock, we ask, ‘What could happen that would make this thing triple or quadruple or quintuple?’ ” Sprott says, later, after the meeting. “We’re a sucker for big things. If someone says, ‘I have something big,’ that appeals to us.” 

In the February 2008, Sprott Asset Management newsletter, Markets At A Glance, Eric Sprott shares his point of view that the market’s darkest days are not upon us yet, that there is in his estimation, more Unidentified Flying Objects from Mars to come. Sprott writes: 

It’s been yet another awful month for the financial markets, even though the stock markets continue to be blissfully impervious to the carnage that is taking place in the rest of the financial world. This is not to say that the stock markets are by any definition bullish. But they certainly aren’t in the panic state that the credit markets are in at the moment. If they were then we’d be talking a full scale stock market crash, for that’s what invariably happens when bidders cease to show up. This is the state of the bond and credit markets right now. For all intents and purposes, save for government bonds, there is no functioning bond market. The stock market seems to be playing to a different tune. So, for now, the prognosis is for a long and drawn out bear market that could last for years to come, for the authorities are loath to allow a quick resolution to the bursting of the credit bubble. In our minds it is difficult to rationally reconcile current equity valuations with the washout that is occurring in the credit and bond markets and the US recession that we believe is now in full swing. But as bad as things are in the financial world, they seem to keep getting worse because problems heretofore unanticipated are coming at us from unforeseen quarters, like Unidentified Flying Objects from Mars. Things we already knew, about the credit bubble and the risks that were being taken, tell us that the problems in the financial system are bad. Things we don’t know, but that are only now coming to the fore, tell us that the situation could be unfathomably worse. 

Which brings us to the point of the article:

Which brings us to the main topic of this article: UFO’s… the unanticipated surprises that are ravaging the financial system. With or without rate cuts, we already know that the banking system is in deep trouble. On top of the hundreds of billions lost in subprime, MBS’s, CDS’s, CDO’s, SIV’s and other toxic waste (the losses from which keep mounting by the day), what remains on bank balance sheets is also falling in value.

And Finally…

Have you ever heard of auction-rate securities? Neither have we. Before this month they were on no one’s radar screen. Out of the blue they’re suddenly a $360 billion problem.3 These are bonds that have been issued by municipalities, student-loan organizations, and others that seek long term financing with short term flexibility.

…What other incidents such as these have yet to be reported in the banking/insurance industries? We do not, and cannot, know. What we already know is worrisome enough… but what we don’t yet know can be downright frightening! 

Make sure you read the whole newsletter. After all, it is coming from one of the brightest guys in asset management.