Wednesday, August 29, 2007

Trust

The word trust as defined by Merriam-Webster;
1 a: assured reliance on the character, ability, strength, or truth of someone or something b: one in which confidence is placed.

I don't know how closely any of you have been following the growing number of stories regarding malfeasance across the financial spectrum. Whether it be the Bear Stearns hedge funds that blew up filing for bankruptcy in the Cayman Islands or the Sentinal situation which gets more intriguing by the day should we be surprised the following article out of the NY Times has emerged. This growing overseas investor discontent deserves your attention as this is no small matter here as this cuts to the integrity of our financial system which is the bedrock of the markets. Investors must feel confident that what they are reading, whether it be a ratings report or a research note, that the product actually is what it says it is. At the end of the day confidence in the financial system must be maintained or it will implode. Kyle Bass from Hayman Capital in this letter to his clients, details some disturbing details of behind the scene goings on in the debt markets. I believe this is and will be a much larger issue for the Fed and the Treasury than propping up markets or maintaining liquidity. If the perception exists, even remotely, that the game is rigged in any way, all hell could break loose. Don't lose site of the fact that these insignificant foreigners are our bankers ! I hope I am making more of a situation than it deserves, but I cannot help thinking of the phrase, it takes a lot of buying to put a market up, it takes a mere lack of buying to put a market down.

These overseas buyers are a major part of the liquidity that everyone wants so desperately to bring back. Dennis Gartman has always said capital gravitates to where it is well treated, to places where it is free to come and go as it pleases. I am trying to look at the source of the infection rather than so many others who are looking at the symptoms. Will you buy a money market fund let alone a debt instrument if you cannot trust it is what it says it is. It is often said that when the tide goes out we see who is wearing no clothes and this disappearing tide of liquidity is exposing some very unpleasant facts about our financial system. When trust disappears in the financial it takes a very long time to come back. Good trading to you all.

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