Just desserts aren't so
absurd By The Mogambo Guru
Eric Sprott and Sasha Solunac at Sprott
Asset Management write that "the financial markets
are currently in as bad a shape as they've ever
been. Ever? Yes, ever. Or at least, worse than
most of us have experienced in our lifetimes - and
many of us have been around long enough to have
experienced some pretty nasty markets."
And they freely admit, "Yes, we are
alarmists, and we believe justifiably so. After
all, it only stands to reason that things can get
pretty ugly after the party that was arguably the
biggest global
credit bubble in history
comes to an end."
And the bad news is
that, "There is nary a safe place to hide in the
credit markets as all paper that symbolizes debt
and leverage is getting trashed."
So if
bonds are bad, they ask, "what's keeping stock
markets up?"
They don't wait for one of my
long, disjointed explanations that seemingly go
nowhere, and offer instead, "Although the credit
markets are saying that leverage is now anathema,
everybody is still stuck knee deep in it. In a
world where the value of debt is being put into
question, what does that say about the value of
equities, which are at the very bottom of the
financial pecking order?"
I thought that
this was a time for me to speak up, but they shut
me up pretty quick by explaining, "The stock
markets need a surreality check. Connect the dots
and the evidence is overwhelming that the equity
of many companies is at risk of being wiped out.
They are dead men walking. Like all dead men
walking, their only hope is to wait for a
government reprieve … a stay of execution … or in
this case, a Fed bailout."
For example,
"Let's start with General Motors", they say, which
seems apropos since "after the latest write-down
in the third quarter, the book value of GM now
stands at an eye-popping minus $74 per share".
Hahaha! The stock is worth less than zero! Hahaha!
Then they bring up Fannie Mae, the corrupt
clot of dirtbags where nobody ever went to prison
despite rampant, obvious and blatant fraud, and
which is still paying Franklin Raines a huge, huge
retirement package. Fannie Mae is on the hook for
$2.7 trillion in mortgages, almost a quarter of
all US residential mortgages, and "at least $100
billion of these mortgages are in the
subprime/alt-A category, and much of the rest is
also at risk of impairment due to the weakening
housing market".
Again, Fannie is so
leveraged that they justifiably ask, "How much
equity is backing up these mortgage assets and
guarantees? A relatively paltry $40 billion. Which
means that if only 1.5% of Fannie's assets end up
overvalued, then their equity is gone." Bankrupt!
After a mere 1.5% downturn! This is freaking
insane!
Well, Messrs Sprott and Solunac
obviously don't want to get into a discussion with
me about insanity and who is insane and who ought
to be calling 911 because it looks like The
Mogambo is getting ready to go off the deep end
again at the sheer economic calamity of it all,
and instead gently steer the conversation back to
Fannie Mae, which everybody can hate, and coolly
ask, "Is Fannie Mae's balance sheet in a position
to withstand the worst housing market since the
Great Depression?" Hahaha! Good question!
And the leverage nightmare gets more and
more weird as, "MGIC, the largest mortgage
guarantor, has insurance coverage on $200 billion
of mortgages backed by equity that has a market
value of $1.6 billion, or 125:1. PMI Group,
another large mortgage insurer, has guarantees on
$120 billion of mortgages backed by equity that
has a current market value of $1 billion, or
120:1." The biggest dirtbag is ACA Capital, which
"has a market cap that is now $50 million. That
equates to leverage that is greater than 1,000:1".
And just when you think you have turned
off all the alarms and buzzers in the Mogambo
Bunker Of Stark Fear (MBOSF) at such insanity, it
all seems so trivial compared to when they go on
to reveal that, "But the big mess will come from
the big banks." Yow! They correctly say that,
"The problem that was created in the financial
system by too much paper can't be solved by
printing even more paper. Such a simple solution
would defy logic. The imbalances won't go away. We
believe the crisis will continue to resurface
again and again regardless of what steps are taken
to paper it over."
And you can bet your
sweet butt that the government will take steps to
"paper it over", just like Zimbabwe is trying to
paper over its problem. VOA.com reports that
Reserve Bank of Zimbabwe Governor Gideon Gono said
that the bank "will soon issue new bank notes to
replace the current set of bearer cheques, which
have become obsolete due to the country's reported
15,000% inflation rate." Hahaha! Paper over the
problem!
And speaking of Zimbabwe, I think
that it is Highly, Highly Instructive (HHI) that
Robert Mugabe, the President of Zimbabwe, has a
master's degree in economics from the University
of London. Hahaha! Perfect! Just what you'd
expect, as you see this kind of competence
everywhere!
Well, almost everywhere, as
Bloomberg News Service reports that European banks
decided that heroically pretending that things
don't exist is preferable, and, "agreed to suspend
trading in the $2.8 trillion market for mortgage
debt known as covered bonds to halt a slump that
has closed the region's main source of financing
for home lenders". Hahaha!
"We are in a
deteriorating situation," says Patrick Amat,
chairman of the Brussels-based European Covered
Bond Council and chief financial officer of
mortgage lender Credit Immobilier de France. "A
single sale can be like a hot potato. If repeated,
this can lead to an unacceptable spread widening
and you end up with an absurd situation." Hahaha!
Getting one's just desserts is an "absurd
situation"? Hahaha! But then again, it's perfect
French stupidity and perfect European Central Bank
stupidity! No wonder he got the job!
Richard Daughty is general
partner and COO for Smith Consultant Group,
serving the financial and medical communities, and
the editor of The Mogambo Guru economic newsletter
- an avocational exercise to heap disrespect on
those who desperately deserve
it.
Republished with permission from The Daily Reckoning.
Copyright 2007, The Daily
Reckoning.
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