Jul 12 2007
Another Day, A Dropping Dollar, and the Subprime Meltdown now Contained to Australia
“May you have the hindsight to know where you’ve been, The foresight to know where you are going, And the insight to know when you have gone too far”
– Irish Blessing
It is said that hindsight is the injury foresight might have prevented. When it comes to understanding what is transpiring in the U.S. economy, we worry that far too many players will learn only in hindsight they’ve made huge mistakes given so many appear to not be properly discounting much of what stands next in the line of dominoes that have started to fall in the subprime debt sector. This suggests to us a fundamental misunderstanding of the intrinsic nature of the problems we’ve covered for several years nowhere at Vigilant Investor, and since 2002 in our prior hard copy publication, The Ernharth Wealth Report.
Certainly a handful were ahead of the Curve with subprime. Deutsche Bank joined our side of the fence last year by predicting doom and gloom for the sub prime sector. Today DB is joining VI in criticizing the excesses in leverage finance in general, albeit tepidly so.
As for subprimes, the the carnage is now contained to another continent as Sydney, Australia based Basic Capital, a hedge fund manager with $1 billion in structured credits and junk rated loans warned investors it will probably restrict withdrawal requests in order to prevent a collapse from selling assets into an extremely thin market. That’s just the kind of message that should give any holder of subprime related debt instruments lots of confidence: “the market’s so thin now we can’t liquidate.” In a letter to investors, Basis Capital notes they’ve been hit by “indiscriminate” repricing of “otherwise fundamentally sound collateral.” Hmm. Not seeing the forest from the trees, anyone? Mind you, this comes in the wake of Denver based Braddock Financial closing down its $300 million Galena Street fund due to redemption requests.
The best analogy for this sort of denial comes from an editorial by John Authers, who reminds us all of Warner Brothers cartoon character, Wile E. Coyote, running off the edge of a cliff: So long as he keeps running, he’s ok. Its only when he looks down to acknowledge his predicament does he actually fall. Indeed, the attempts to keep these mortgage backed securities from being priced at market are not dissimilar. (If we don’t mark them to market, they’ll never drop!)
Meanwhile, the dollar is taking serious blows as the rest of the world further questions the U.S. economic situation. Yesterday the Euro hit as low as $1.3798 — a record low, $2.03 to the pound, and 122.48. While the general assessment is that this is related to the sub prime situation (which clearly does not help), we can’t help but tie the dollar’s woes to the global inflationary breakout we’ve seen since 2000 in hard assets that can’t so easily be printed as the dollar and other currencies. With all the world’s major currencies running their M3s in the double digit, you have to take note.
That the dollar is losing vs. the USDX despite that all, well….
With that, we’ll remind you that vigilant investors — fiduciaries or otherwise — know that every exit used means you’ve simultaneously used an entrance to another space. Doom and Gloom? Hardly! That’s where opportunities may be found.
