Sprott Asset Management's September "Markets At A Glance" Commentary
Author: Jim Sinclair
Dear CIGAs,
I have to share this month's Sprott Asset Management "Markets At A Glance" commentary with you:
http://www.sprott.co...nce/09-2007.pdf
Posted On: Thursday, September 13, 2007, 4:24:00 PM EST
[/b] Author: Jim Sinclair
Dear CIGAs,
The crux of the present problem is not sub prime loans, but the constituent assets of various kinds of collateral which are bundled into the composite vehicles. In reviewing collateral on these items, it is not uncommon to find that 90% represented are derivatives of the credit and default nature, making valuation nearly impossible to admit as the answer is nothing. The mathematicians will assure the Fed that in time markets will return to their norms which is the principle upon which all derivatives stand. The problem is that the derivative has been demonstrated to be market-less and hollow in terms of sound asset requirements. Faith in derivatives will in all probability not return to the norm of the past 17 years. To expect that would be akin to an expectation that the US dollar will tomorrow be once again adopted as the universal reserve currency of choice.
I do not believe there is a solution to today’s "credit defrocking." This condition of denial now taking place while quietly praying the unprecedented low tide of credit acceptance is not the forerunner financial tsunami coming quite soon is a strategy of last resort. The fix to buy time must have all the aspects of proper targeting, significant duration and maximum impact. I reviewed each option below and found none that fit. This is true even for that time buying vehicle yet to and possibly never to be designed.
For the first time in my now more than 49 years of experience in finance, I see NO way out of this except by a liquidity explosion that rather than curing the problem only causes additional distension after some respite.
Mr. Bernanke knows, or should know, that this is not a situation a short term fix will heal. For practical reasons the liquidity injection, even if made by the normal short term tools, cannot be withdrawn without actually making the situation worse.
There is nothing below that fits all the categories required for even a short term fix.
Study the German Weimar Republic experience for cause and effect, not for amplitudes. Here the derivative meltdown and collapse in credit based on people’s trust in the value of collateral is akin in the sense of cause to the war reparations that were the cause of the currency debasement in Germany after World War 1.
In closing, do you really believe the Pilots above and the retired Chairman who defended the derivative vehicle as a spread of risk and something requiring no regulation from any regulator can actually fix this? This defense was ongoing while the same people were encouraging borrowing on homes for consumption of good and services and were therefore part of creating this problem. I am sorry to say there may be no fix to this fix! It simply must work itself out in a most destabilizing manner over many years.
Fed mulls options in tackling liquidity problem
(article highlights)
“Mr. Berner said the Fed’s main concern would be to ensure it did not end up taking any credit risk and that any unorthodox arrangements were truly temporary.”
“It is like a military operation – you need an exit strategy,” he said.
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(my comment to Mr. Berner's comment is just like in Iraq: We have no exit strategy ! eom - nimblebear)
[b]
Edited by nimblebear, 13 September 2007 - 05:47 PM.
