David Morgan of The Morgan Report and Silver-Investor.com is the world's foremost expert on silver and precious metals and has been for decades. He is a guest and contributor to the Ellis Martin Report.
The Ellis Martin Report Interview with Jim Sinclair
January 30, 2012
TEMR:I'm Ellis Martin with an editor's note for The Ellis Martin Report. Usually when I do a phone interview with a guest analyst and sponsor companies I'll spend time editing it down, sprucing it up taking out long pauses and gaffs, et cetera. In fact I'll even rerecord some of the questions for the sake of clarity in order to provide you, the listener, with a concise piece for review. Well, this take quite a bit of time and today there's no time for that not with this message from Mr. Sinclair. It's fairly urgent and very news worthy. Therefore, breaking tradition here you'll hear an unedited interview between Jim Sinclair and myself about the impending non-declared bankruptcy of five U.S. banks. Perhaps this week we're essentially going to float the eurozone and the euro. This may be the only place you'll hear this news and at least perhaps the first. Here's my interview with Jim Sinclair dated today January 30th, 2012.
Jim Sinclair: Ellis.
TEMR: Good morning Jim. How are you?
Jim Sinclair:I'm doing pretty good.
Jim Sinclair: Just a wild morning with things I had to do.
TEMR: Ok. Well, Mondays are Monday.
Jim Sinclair: They always are, aren't they?
Jim Sinclair: I've got news for you. Nobody, nobody knows what running a business is like. Ok.
TEMR: I hear you.
Jim Sinclair: It's not a question of what you produce in terms of ounces or earnings or mines or whatever. The day to day running of a business is without a doubt an undertaking that if a person wants to do correctly he should go to bed first and try and see if he forgets about. But, that being said I think I've got a great interview for you. I've got an important interview for you today.
TEMR: Great. What do you want to talk about?
Jim Sinclair: I want to talk about the ISDA, the International Swaps and Derivatives Association.
Jim Sinclair: Or the people who determine whether a creditor bank is in default or not.
Jim Sinclair: Who they are and what it means.
TEMR: Ok. Well, let's do it then.
Jim Sinclair: Well, nobody's talking about it. It is the singular most important organization with more power than governments. It will determine whether five U.S. banks go insolvent tomorrow.
TEMR: We're talking tomorrow as in Tuesday or Wednesday?
Jim Sinclair: I'm talking this week as in what the final, what the final arrangement will be governing the amount of payoff on Greek debt.
TEMR: Are these big American banks you're talking about?
Jim Sinclair: Five of the largest U.S. banks control 97% of all the credit default swaps.
TEMR: Ok. Why isn't this in the so-called mainstream media right now?
Jim Sinclair: Media blackout.
TEMR: And, the market is almost completely unaware of it. I mean . . .
Jim Sinclair:The market is oblivious of it. Even though the decision they'll make it will certainly be in their favor the question is, how do you do it with a straight face?
TEMR: How are you doing it with a straight face?
Jim Sinclair:I'm just; you know, ISDA governs whether or not a credit event will be called a default. If it's called a default then the credit default swaps have to function. The credit default swaps are a type of insurance offered by the, to interested parties guaranteeing the sovereign debt. 97% of the guarantee of the sovereign debt is held by five of the largest U.S. banks.
TEMR: So we can . .
Jim Sinclair:They're basically writing insurance, getting paid for insurance. They are at the control of the ISDA. So, obviously if what everyone expects to happen happens and the Greek debt is haircut down to 30%, how in God's, how do you declare that not to be a default?
TEMR: So, Greece with a population of a million; Greece with a population of 11 million people is setting off this potential default here with five U.S. banks.
Jim Sinclair: If the ISDA determines the credit event to be a default, which obviously they won't. The question is, how in the world if you get paid back $0.30 on a dollar have you not been defaulted on?
TEMR: So, it's bankruptcy.
Jim Sinclair: If only; only if the ISDA declares it to be so.
Jim Sinclair: The ISDA is the organization; The International Swaps and Derivatives Association is the organization who defines what a credit event is.
TEMR: So, this is an arbitrary decision that may be made.
Jim Sinclair: It's an arbitrary decision that in all probability will not be made but it's the contradiction. If you're getting back only 30% of an investment how in the world do you not consider that a default. Must a default be zero?
TEMR: This news is a little bit unsettling at least to me and I try to follow everything. You know more than most people being who you are.
Jim Sinclair: Well, you know, I've been in this stuff for over 50-years.
TEMR: Well, we're going to publish this interview fairly soon and everyone is going to hear it. A lot of people are going to hear it. And . . .
Jim Sinclair:Who will determine the fate of five major U.S. banks is the five major U.S. banks, which heavily influences the organization that decides and defines what credit event is internationally.
TEMR: So, the banks are determining their own fate.
Jim Sinclair: And, therefore, what are they going to determine? Not a default.
TEMR: Alright. Are we just continuing to pour gasoline on the fire here or are we . . .
Jim Sinclair: Of course we are because, what is a default? You know, who determines what a credit event is determines whether or not credit default swaps are called into action. The International Swaps and Derivatives Association is the body which will determine what a credit event is. If a credit event is determined to be a default then the five banks that are holding 97% of the CDOs, CDS, credit default swaps, will be insolvent.
TEMR: Well, certainly they're not going to let themselves, they're not going to let themselves . . .
Jim Sinclair: Of course they're not. But, the point is all it does is, you know, weaken the system on a constant basis because many people have taken the trade where they're long the euro bonds and they bought credit default swaps to protect themselves in a spread. Now this is how MF went broke. MF went broke on the 50% haircut. They had bought credit default swaps but the International Swaps and Derivatives Association said that the 50% haircut is not a default. That took MF out.
TEMR: Well if the banks . . .
Jim Sinclair: Who's going to be taken out when the 30% is declared not a default?
TEMR: What's left?
Jim Sinclair: Well, the question is, what is a default? If it gets to zero the ISDA is going to have a hard time saying it's not a default and then they go. We've sold worthless paper as an occupation called over the counter derivatives, which is responsible for the huge profits and bonuses made on Wall Street. Rather than learn their lesson the banks have gone wild on issuing credit default swaps. Five of the largest U.S. banks have issued 97% of amount of credit default swaps outstanding. There's an organization called the ISDA which will determine arbitrarily whether or not a credit event, a new word they've created, is or is not a default. The 50% haircut on the Greek debt was originally determined not to be a default. When it was determined not to be a default the ones who suffer are the ones who thought they had insurance because the ISDA determined that the credit default swaps did not have to insure the haircut to 50%. Today all we hear is that the probability of a further haircut on the Greek debt to somewhere in the area with a 3 in front of it, possibly 30% repayment on the debt is about to be agreed upon. If it is what will the ISDA say? Will they call that a default? Well, the ISDA is made-up of the member banks who could suffer the most if it is called a default therefore it's reasonable to assume that in the great wisdom of the ISDA a 30% repayment is not a default. Therefore, it has to have repercussions amongst those who have hedged themselves using the credit default swap.
TEMR: Which are?
Jim Sinclair: All the guys just like MF that just went bust at the clearing house because they thought they had a riskless trade having purchased the euro debt insured themselves by purchasing a credit default swap.
TEMR: So, all of the rest of these clearing houses, these major clearing houses . .
Jim Sinclair: Anyone else who's using other people's money and that's what basically they were doing. To speculate on these instruments as of tonight is a very serious problem.
TEMR: And, no one's backing these clearing houses.
Jim Sinclair: No. And, the worst part is all this is doing is stalling off the time when that debt may be zero and the ISDA cannot say that a default didn't occur in which case we're in worse shape than we were in 2008.
TEMR: Is that a timeline for this year do you think?
Jim Sinclair: It's a timeline for a collapse of the euro and one of the reasons why the euro collapse will be fought so hard. But, it's an event that can take place because certainly 50% is a default. Certainly 30% is as default. And, when it gets to zero what in the hell are you going to call it but a default in which case they self-immolate. I mean, anyone who thinks that the system out there right now is without risk right now is just totally out of their minds. It's more at risk right now thanks to the credit default swap than we were in 2008 due to the over the counter derivatives written on real estate.
TEMR:Well, that's untenable risk.
Jim Sinclair: It is untenable risk. But, you go to, just go to Google. Put in International Swaps and Derivatives Association. This industry association is more powerful than any government.
TEMR: What is the risk to our listeners, to people listening to this program right now?
Jim Sinclair: A repeat of 2008 but worse. In other words, the risk to the listener is having to go through a second financial crisis requiring significant financial intervention equal to or larger than what's already taken place.
TEMR: Can that happen?
Jim Sinclair: Sure.
TEMR: Can a rescue happen?
Jim Sinclair: It can print paper but there's consequences.
TEMR: Will that happen in an election year?
Jim Sinclair:Every single effort will be made not to allow it to happen. So, we're going to go now; we are going to go now to a 30% haircut not being a default. But, you see by doing that we're doing the exact same thing as when the real estate market was constantly declining and everything was being done to consider these things triple A rated on your securitized real estate investments. But, you play this game and there is an end point to the game because you don't go, all you're doing is plugging the hole and not doing anything to make it right. There's nothing going on that will make Greece right. Greece will, it's going to 50%. It's going to 30%. Yeah it probably will go to zero. Then what?
TEMR: The dollar strengthens. The gold pulls back, correct. But, ultimately all this downward pressure on gold . . .
Jim Sinclair: The dollar goes in the ash can because you've got to go to a global quantitative easing.
TEMR: Well . . .
Jim Sinclair: There's no tool to fight this but QE. QE is dollar negative not dollar positive.
TEMR: Well, you predicted a QE3 will happen this year.
Jim Sinclair: And, it's been announced last week.
Jim Sinclair: That's absolutely happening. So, what you're going to do now is, you know, people don't understand the fragility of the system. And, you going to paper over one more time because yes you're right not only in an election year can't this happen but if it was papered over at 50% they'll paper over it again at 30%. The mechanism is the ISDA will declare the credit event not to be a default.
TEMR: So, this will be a quiet papering.
Jim Sinclair: Yeah. But, all you do is your marching forward to a point where there's nothing further you can do.
TEMR: So, unlike 2008 where the papering, the quantitative easing, were big news stories whereas this one won't be.
Jim Sinclair: This will be a new story but it will be a new story as if everything has been made relatively ok again because the ISDA will declare the credit event about to take place not a default which further weakens the system.
TEMR:So, the news hype about the quantitative easing in 2008 has to be political helping the party that won the office.
Jim Sinclair: It had to come out ahead of this thing because quantitative easing is good for your equity markets. And, the reason why the equity markets aren't performing is there are enough people around who understand what in fact is taking place. But, QE is extremely good for equities.
TEMR: Precious metals?
Jim Sinclair: Equities.
TEMR: Equities in general.
Jim Sinclair: Equities in general.
TEMR: Well . . .
Jim Sinclair: Netflix.
Jim Sinclair: Well, not particular. I'm saying, QE, the grease of the wheel of the equity markets has always been liquidity. And, the grease of the wheels of the equity market will always remain liquidity. And, what's good for gold right now is equally as good if not better for general equities. The fact that general equities are not performing spectacularly after the announcement that we are headed back to a global QE3 and an international QE3 is concern over how the ISDA will define the credit even about to take place, the greater haircut of the Greek debt. Because it's an election year and because it's too much to think of that you would call into service the default swaps which can't and are not financed to service you have to go through another bank rescue. Eventually it's going to have to happen because eventually this can kicking down the road is not going to witness a major economic recovery in Europe that finances the government's ability to meet their deficit responsibilities.
TEMR: This bank rescue . . .
Jim Sinclair: It's complex crap but let me tell you it's real.
TEMR: Well, this bank rescue couldn't possibly happen during 2012.
Jim Sinclair: Well, put it this way if it had to happen it would. But every single thing possible would be done not to let it happen such as the financing of the rollovers which has already taken place. The Fed has announced the swaps. And, the IMF has come out with its emergency lines. The combination of which equals the amount of the rollover for the first quarter without any more financing required. As you go out into the second quarter it's a different story.
TEMR: Well, let's talk about general equities for a moment and stocks.
Jim Sinclair: Sure. General equities and stocks, the IBMs of the world, the Netflixs of the world . . .
TEMR: Googles, Facebooks of the world.
Jim Sinclair: . . . not the gold shares, ok? Are strongly supported by the return to QE. So, why aren't they through the roof today? Because a credit event is about to take place.
TEMR: Alright. Now we're talking to not only investors in precious metals, gold and silver and what have you, but, we're talking to investors across the board with a variety of things to invest in stocks like Netflix and Google, Microsoft and what have you. And, then we've got gold in the picture. And, we want to make some money right now. Where are we to go?
Jim Sinclair: Well, you have to understand the critical nature of today, today the time we're talking our listeners and between ourselves. The return to quantitative easing is an event which impacts liquidity. Historically always and into the future the main motivator for the general equities markets, the Netflixs and the Googles, of the world is liquidity. The reason why we came of out the bear market in 2009 was quantitative easing. The reason we've been able to hold the general equity levels that are relatively high levels meaning circling around that 1,200 on the Dow is without any question liquidity. The grease of the wheels of the general equities market has always been not necessarily earnings per share. Not necessarily valuations historically. But, rather the presence of liquidity or lack of liquidity in the in the market at any given time. The advent of quantitative easing is good for gold. It is good for the general equities markets. It is negative for the dollar and positive for other than dollar items. However, QE is not a solution to anything. Quantitative easing or the increasing of liquidity or the actually creation of money out of thin air is the bubble making mechanism that you saw in real estate. It's a bubble making mechanism that you see in asset values. It puts money into the hands of people that have to make investment decisions and will make them generally along the lines of what their most familiar with and what they're most used to dealing in. Today we are standing on the threshold of a credit event that is the determination of how the Greek debt will be handled amongst the euro nations. The people who will define what that credit event is, is the International Swaps and Derivatives Association. The International Swaps and Derivatives Association will determine whether a credit event is a default, sovereign default or not. In the most practical sense we're in an election year. In the most practical sense and recognizing that five of the U.S. major banks hold 97% of the obligations on credit default swaps that is that they have guaranteed the buyer of this instrument against the default of an instrument primarily euro debt. So, the credit default swap is actually an insurance policy that brokerage firms issue. And, there is an organization which oversees that basically writes the master agreements. Came into existence in the early 1900/1992, I mean, early 1990s. It was the body that determined that Goldman and Deutsche Bank and all those should be paid out on the shorted backed issues. It's the body that will determine whether or not a sovereign nation has defaulted. So, as we kick the can forward we'll have to for practical reasons, 97% of this insurance policy granted by five the U.S. largest banks, this credit event about to happen the 30% or approximately, it's got a 3 in front of it, where the euro will, where it will be determined that Greece's debt will payout is either going to be determined to be a credit default or not a credit default. Excuse me. Yes, a credit default or not a credit default by the International Swaps and Derivatives Association. The International Swaps and Derivatives Association is primarily made up of representatives of the banks that deal in these items. And, logic would say that their determination would be that no matter what happens to the Greek debt it's not a default because if they decided otherwise they'd have to payout. What I'm doing for you is giving out a case of why more liquidity not less liquidity is forthcoming, why we've already set up and why the Fed last week already announced the return to QE. While even before that in late December the Fed provided over $500 billion dollars worth of swaps to the ECB who in turn lent that money to their member banks who in turn used that money to buy euro debt, which is global quantitative easing. The bottom line is what's taking place is good for equities as it is good for gold investments as it is not that good for the dollar. It's very complex. We've made this world so complex that simplicity no longer exists in casinos everywhere. Bottom line of this analysis, both equity markets and equities of gold and gold itself should rise. Bottom line of this analysis 80 to 82 is the top on the dollar for fundamental reasons. The real importance of this analysis is that you cannot kick this can of credit default swaps much further down the road because there is a point, the point is zero. How in the world would the International Swaps and Derivatives Association say that Greece was not in default if they paid back 10% of what they owed? We're nothing of what they owe. And, five major banks holding these had to insure the debt. And, in going to insure the debt compared to the capital of the banks they don't have it. It's another paper game we've created to enrich the banking industry and to put the entire world into potential jeopardy.
TEMR: So, if we like the two previous bubbles we're really going to love this one . . .
Jim Sinclair: You're going to love this. You're going to enjoy it to no end.
TEMR: For at least a year or two maybe.
Jim Sinclair: Absolutely.
TEMR: And, then watch out.
Jim Sinclair: Yeah.
TEMR: So, wrapping up what is the best way to position ourselves as investors against this right now?
Jim Sinclair: Well, it's a point, you know, I'm a firm believer in gold as a currency. I tend to be a conservative. But, the truth of the matter is what's happening now, what your airwaves are talking about general situations in general equities shouldn't be ignored.
TEMR: Are you investing in general equities Jim?
Jim Sinclair: Special situations always. Things that I happen to like for one reason or another I always have interest in.
TEMR: Are these anything that you ever talk about or is this between you and you.
Jim Sinclair: This is between me and me as a trader.
TEMR: Ok. Fair enough. I had a the pleasure of meeting with David Duval in Vancouver at the recent resource conference up there. And, there was a lot of exuberance in the room. And, it was over attended. I would say the investing public, if you want to get a feel for the talk of the two days I was there are very charged up about the precious metal sector for the coming few years.
Jim Sinclair:And, it would perform better if general equities are going in the same direction up.
Jim Sinclair: Not falling apart and going down.
TEMR:Do you think there's going to be as much liquidity in gold stocks as there are in, as there are going to be in general equities?
Jim Sinclair: No. The entire capitalization of the gold shares isn't equal to one major entity, IBM. So, the idea that you'd ever get more liquidity in anything related to gold is false. You might get price violence but you're not going to get liquidity.
TEMR: And, let's also talk about recent happenings of the company you're President of Tanzanian Royalty Exploration Corp.
Jim Sinclair: Well, we've had some extremely good drill results and our hope and our focus is on the continuing these two new discoveries we've made at Lunguya and at the Buckreef. We have additional 43-101s coming online. We're in various applications for additional mining licenses. it's a period of major growth for us. And, I think it's going to please all of our stockholders.
TEMR: Well, after pulling back somewhat in recent months the stock has performed nicely over the last 6-weeks.
Jim Sinclair: It has. And, that in many situations not just ours because if you look around and take a look at comparative companies run by excellent people but with excellent assets they experience the same thing. There was a major play by certain hedge funds which I think has played itself out by having over done it.
TEMR: Well, Jim it's always . . .
Jim Sinclair:Take a look at McEwen's company as being a clear example of that.
TEMR: You want to elaborate on that a little bit more?
Jim Sinclair: Well, if you take a look at us and U.S. Gold and ran the two charts together there's very little difference on the down. And, you know, McEwen is extraordinarily well-known in the gold business with extraordinary successes and good assets and activity right now. He suffered exactly as we suffered. We suffered exactly as he did. It was patterns that were so alike that they had to be drawn by the same people. Not by others. These things don't happen by chance. Technical analysis may be considered by most to be the finest way to know what the price of a situation is going to do. But, in truth it's also something that's easily painted and manipulated to make people, to skin people.
TEMR: So, it is personal?
Jim Sinclair: Yeah.
TEMR: Jim it's always a pleasure to speak with you. Thanks so much for this fantastic interview.
Jim Sinclair: You and the listeners please look up the ISDA. Go to their Google or whatever crawler they use and get a full definition of the International Swaps and Derivative Association.
TEMR: It's ISDA.org. That's the website.
Jim Sinclair: Go and learn about it.
TEMR: Thank you Jim. I appreciate your being with us here on the program as always today.
Jim Sinclair:Well, I enjoy it because what we talked about today, the ISDA is more powerful than any government in terms of the financial decision they're going to be called upon to make probably this week.
TEMR:Thank you Jim. And, that's my unedited raw interview with Jim Sinclair over the telephone today. I'm required to note that Jim Sinclair is the President of Tanzanian Royalty Exploration Corporation trading on the New York Stock Exchange under the symbol TRX. We spoke about the company in the interview as we always do and Tanzanian Royalty is a paid sponsor of The Ellis Martin Report. Thanks for listening. I'm Ellis Martin.
copyright 2012 The Ellis Martin Report