By: Dan Weil

Hedge fund manager Eric Sprott predicts stock prices will plummet 40 percent, as the economy remains in recession.

The Standard & Poor’s 500 Index will drop below its March 12 closing low of 676.53, he told Bloomberg. That was the lowest close in 12 years.

“We’re in a bear market that will last 15 or 20 years,” said Sprott, CEO of Sprott Asset Management.

He notes that despite investor optimism, payrolls continue to shrink, with unemployment at 10 percent.

The low level of interest rates is artificial, engineered by the Federal Reserve’s bond purchases, he says. Those purchases are scheduled to end by March 31.

Once that happens, demand for bonds will drop, pushing interest rates higher, Sprott says.

And rising rates will stifle the economy.

If the Fed decides to resume the bond buying, then the dollar will be in trouble, as investors lose confidence in Fed policy, he says.

“If they announce another quantitative easing, trust me, the gold price will go up another 50 bucks that day,” Sprott said.

He has been bullish on the precious metal for at least eight years.

Nobel laureate economist Paul Krugman shares some of Sprott’s concern about the economy.

“What we’ve got right now is a recovery that first of all isn’t showing up very much in jobs yet. It’s being driven by fiscal stimulus, which is going to fade out in the second half of next year,” Krugman told ABC.

Adding to the dire forecasts is Mohamed El-Erian, chief executive of giant bond manager Pimco.

He says the recovery may be gaining steam but is no different than a kid who eats too much candy.

“We're on a sugar high,” El-Erian says. “It feels good for a while but is unsustainable.”

He says the recent burst of economic activity fed by government spending and near-zero interest rates will soon peter out.

El-Erian says stocks will drop 10 percent in the space of three or four weeks, bringing the S&P 500 Index to below 1,000 — though he's not predicting when.

source HERE

Posted by Mr Thx Tuesday, January 5, 2010


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