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Jim Sinclair: Day of reckoning for derivatives has arrived

Section: Daily Dispatches

By Jim Sinclair
Wednesday, September 5, 2007

It is not just coming -- it is already here.

I am convinced that all that has been anticipated since 1968 has now occurred. I see the mountain of over-the-counter derivatives that, including all types, exceeds $30 trillion. The mountain is shaking badly.

The situation now resembles the Weimar Republic (the German state from 1919-33) in the sense that the Weimar case study is predicated on planned currency destruction to avoid war reparations that got out of control.

The present situation is based on the ultimate sin of greed called over-the-counter derivatives. This mountain of unfunded special performance contracts is shaking and, as a product of declining US business activity and profits, will fall precipitously.

Before the fall of this unimaginably large mountain of garbage paper, all central banks in concert will prime the pump any way they can. Priming for this
purpose has no practical way of being drained. What is going to get out of control now is monetary inflation to offset the shaking mountain of over-the-counter derivatives. The beginning of this fall is in progress and will be history by 2012 or sooner.

Simply stated: This is it, today, now! Think the best but protect yourself under a worst-case scenario.

There is no more "if this happens, that will happen" scenario. It has already started to happen and the result will be a bull market for all commodities to a level that even the wildest (rational) bull cannot even imagine. The dollar is headed below the estimates of the biggest (rational) bear.

I take very seriously what I have said here. What I have just said I have never uttered before.

The over-the-counter shaking mountain of derivatives can't be fixed by trying to hide it. The problems cannot be fixed by any interest rate action. The problem will not even be fixed by a monetary inflation of unprecedented scope. The problem is coming home by 2012 or much sooner.

Keep in mind that the $20 trillion-plus over-the-counter credit and default derivatives generally have the following characteristics.

They are:

-- Without regulation.

-- Without listing on public exchanges.

-- Without standards.

-- Not in the least bit transparent.

-- Without an open market of the bid/ask type.

-- Dealt in by private treaty negotiations.

-- Without a clearing house.

-- Unfunded without financial guarantee of any kind.

-- Functioning as contracts of specific performance.

-- Of a character or ability to perform that is totally dependent on the balance sheet of the loser in the arrangement.

-- Evaluated by computer assumptions made by geeks, market-inexperienced mathematicians who assume religiously that all markets return to their normal
relationships regardless of disruptions.

-- Now in the credit and default category and are considered by accepted authorities as totaling more than $20 trillion in notional value.

-- Notional value becomes real value when the agreement is forced to find a real market for ending the obligation, which is how one sells it.

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Join GATA at these conferences:

The Silver Summit
Thursday-Friday, September 20-21, 2007
Coeur d'Alene, Idaho

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Sunday-Thursday, October 21-25, 2007
New Orleans, Louisiana

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