Jim Sinclair: When Does Notional Value Become Real Value?

When Does Notional Value Become Real Value?

February 24, 2012, at 3:14 pm

My Dear Friends,

There are various points that I feel are critically important to define so that going forward we can better understand the implications of developments.

1. Definition of ‘Notional Value: The total value of a leveraged position’s assets. This term is commonly used in the options, futures, derivative and currency markets because a very small amount of invested money can control a large position (and have a large consequence for the trader). (From Investopedia.com…)

2. Keep in mind the notional value of the total amount of OTC derivatives outstanding reported by the BIS was reduced by 50% about two years ago when the BIS changed their computer basis for valuation by considering all derivatives as going to closure as value to maturity. The actual total value of all outstanding OTC derivatives that was then carried for two reporting periods on the books of the BIS is one quadrillion, one hundred and forty four trillion US dollars notional value. This is fact. The $700 trillion US dollars that is quoted now has not changed since it was manufactured by a change in the method of accounting for notional value by reducing the number by approximately 50%.

3. The size of notional value of derivatives outstanding granted by US banking entities is reported to the US Controller of the Currency. US Banks that have non-US financial entities on their books as non consolidated subsidiaries do not report to the US Controller of the Currency.

Now for the most important concept to understand:

When does notional value become real value? That is, under what circumstance would a credit default swap require financing to 100% of its insurance undertaking? The answer is in default. You can equate this for understanding purposes to the soybean trader with a faulty memory who holds a long contract into settlement day and does close it or roll it over into a future month. All the soybeans that contract represents will either be delivered or for the short must be delivered to the contract owner according to the storage arrangements of the contract. No ifs, ands, or buts. This example is given simply for the purpose of understanding.

Should the International Swaps and Derivative Association credit event committee deem a credit event to be a credit default as an involuntary occurrence, then the notional value of the credit default swap granted by the American bank to a speculator or holder of the defaulted bonds then that instrument has guaranteed that bond’s full value as defined in the CDS. This is how notional value becomes full value. It was this same committee at the International Swaps and Derivative Association that ruled in favor of Paulson’s short of securitized debt instrument OTC derivatives. Those derivatives resulted in his multi-billion dollar profit even though exactly how you would be short such an instrument seems to be to be very creative.

This is another reason why the can must be kicked down the road, not only at the February or March payments due by Greece, but to infinity. This is why QE is going to infinity. Once you have kicked the first can down the road you cannot stop. Your hope is that business conditions become ebullient and by earnings, the balance sheets that are truly a disaster are rebuilt. This is not the case now nor will it become the case. The can is going to get kicked forward again and again until in 2015 when it simply becomes too big a number to imagine. QE is the only way to create unlimited liquidity in less than one second without the help of anybody or anything. There is no other tool in the tool bag of the US Federal Reserve, the global lender of last resort, other than QE that can provide such liquidity in such a way. Operation Twist is a silly little thing in comparison.

Since there is no strong economic recovery out there and the can must be kicked as there is no other choice, liquidity has but one direction to go and that is higher. Because liquidity can only go higher, gold cannot do anything but go higher on balance because of the fact that liquidity must go higher. The equities market is a better buy on a break than short sale on a point of temporary overvaluation. Because the desire for a strong economic recovery depends both on lenders ability and willingness to lend, there is no significant business recovery on the horizon.

The only way out is the historic way out. That is the instillation of a new monetary system based on commodity money, gold. This need will remain intact to its strongest period in mid 2015 when the need will be critical. Gold is headed into the system and not away from it. Gold will be the last man standing in terms of asset categories when the piper must be paid, more than likely in June of 2015.

This is why I am so confident in what I am doing in TRX and some others are doing in other companies such as McEwen in MUX. Acquiring mineable gold in the ground and moving towards production is the correct direction to go. Mining money is the final goal. The leverage exists in upgrading gold in category and nature held. A discovery is just that. A total windfall is this without the use of margin. This was my plan in 2001 when interviewed by Forbes. It is set in cement in that article which you can easily research. The book I wrote in the 1990s, “Boom” outlined the country selection and business plan. I have made that plan and worked it without any deviation. I will succeed without the use of margin in what I think will be my maximus opus and last great business before I return to purely trading markets, my love, and exchanging notes with my dear friend, Harry Schultz.


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2 Responses to Jim Sinclair: When Does Notional Value Become Real Value?

  1. Thank you so much regarding giving me an update on this theme on your blog. Please understand that if a brand new post becomes available or in the event that any adjustments occur with the current submission, I would consider reading a lot more and knowing how to make good using of those approaches you reveal. Thanks for your efforts and consideration of others by making this blog available.

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