-- Posted Sunday, 2 December 2007 | Digg This Article
| Source: GoldSeek.com
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, he asks, "So 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" (NYSE:GM) 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 (NYSE:FNM), 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 for committing the frauds, which has Fannie Mae on the hook for $2.7 trillion in mortgages, almost a quarter of all U.S. residential mortgages, of which "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 9-1-1 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 asks, "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, where news.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 filthy, stinking 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," Patrick Amat, chairman of the Brussels-based ECBC 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 ECB stupidity! No wonder he got the job!
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Editor's Note: 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.
The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.
-- Posted Sunday, 2 December 2007 | Digg This Article | Source: GoldSeek.com
