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In my October 4th article titled: “Depression,
Debt Implosion, Gold, and Prosperity” (http://goldmau.com/marketupdateoct04.php), I argued that:
“In the last four weeks (September), we have
witnessed the worst financial event in the US over the last 50 years. The subprime mess shook the US
financial system to the core, as it directly affected the marketability of
the $30 trillion+ US
debt market.
- The worst
possible event that could trigger debt implosion has already occurred,
with demand for the multi-trillion US mortgage debt market suddenly and
completely dried up. Yet the world has gone on with business as usual.
Would you touch beef (US debts) again knowing there
is a significant quantity of mad cow disease (subprime)
going around?”
According to Markit.com, AAA mortgages are now
selling at 80cents on the dollar, whereas BBB (Subprime)
mortgage are selling at 20 cents on the dollar.
According to Mr. Gillian Tett
of The Financial Times, quoting an anonymous trader,
“…as he has embarked on this sordid
task, he has discovered that the only effective way to get rid of these
distressed assets is to avoid putting any tangible price on the trade.
“Barter is the only thing that works
right,” he chuckles grimly. “It is like the Dark Ages.”
Indeed, in some arenas, such as mortgage-linked
securities, sentiment now seems to be getting worse, not better. And that
raises the prospect that we are now moving into an entire new phase of this
year’s credit squeeze.
Take the ABX index, the basket of derivatives linked
to subprime securities. As financial tools go, this
index is far from perfect, since it is barely two years old, and tends to be
thinly traded.
But right now it has the unfortunate distinction of
being the only tool easily available to measure sentiment in the opaque subprime securities world. And in the past couple of
weeks, the message emerging from this measure has started to look utterly
dire.
The experience of living through the Enron scandals
earlier this decade means that the audit
industry is now terrified that it could face lawsuits if it is perceived to
be too lax towards its clients. So some now appear to be demanding that their
banking clients reprice their mortgage assets
according to the only visible market tool – namely the ABX. It is thus
little wonder that some banks have suddenly been forced to increase their writedowns in recent weeks. Indeed, I would wager that
the pernicious combination of ABX and the “Enron factor” is a key
reason for the recent shocks emanating from Merrill Lynch.
However, the rub is that while auditors at some Wall Street banks are becoming
quasi-evangelical about the need to reprice subprime assets, there are still other, vast swathes of
the financial system which have not been touched by the full blast of
transparency yet. Moreover, many financiers outside the world of Wall Street
banks remain very wary of rewriting their mortgage assets to current ABX
price levels, due to a lingering hope that the recent ABX slump will remain
temporary.”
I have long said the inflation vs. deflation debate
is over and the central bankers have told you loud and clear they will print
their way out of trouble, and there is no other way. The Fed injected
(printed) $41 billion on November 1st, the largest amount in a single day
post 9-11. However neither this nor the $70 billion superfund will
solve this mad cow problem, as trillions of dollars of mortgage positions
need to be unwounded. Nor is adjusting interest rates going to make a
difference now.
In public and privately, the Fed needs to redeem any
and all mortgage debts with new paper. It needs to catch up and print
$billions more until the government officials took off by helicopters
Argentine style. Don’t anticipate a crash in the stock market.
The Dow is selling at a discount measured in a free
falling currency.
The dollar has dropped 17% in 2 years and 37% in 6
years.
The dollar’s free fall will continue, while
gold and RMB’s rise will accelerate in pace. We
will look back and kick ourselves for not buying gold below $850. For those
who hold dollar savings, to borrow from the classic line from the movie
“Romeo Must Die” by the Kung Fu master Jet Li to his brother who
betrayed him – “That was a mistake.”
By :
John Lee, CFA
Goldmau.com
John Lee is a portfolio manager at
Mau Capital Management. He is a
CFA charter holder and has degrees in Economics and Engineering from Rice University.
He previously studied under Mr. James Turk, a renowned authority
on the gold market, and is specialized in investing in junior gold and
resource companies. Mr. Lee's articles are frequently cited at major resource
websites and a esteemed speaker at several major
resource conferences.
Please visit www.GoldMau for instant market alerts and stock updates.
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