Positive thinking manifesto.
According to the recent reports USA government is close to bail out Freddie Mac FRE & Fannie Mae FNM under the government control:
By Alison Vekshin and Dawn Kopecki
Sept. 6 (Bloomberg) -- Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market. "
Now we can understand that operation in the open market by the world central banks in order to pop up the ailing currency US Dollar was the careful preparation for this bail out. I guess that too much is at stake to allow the newcomer get in the Washington DC mess. Georgia came in handy as well. With geopolitical risk economic worries are going on the second plan, choice is predetermined and USD is rising voting for USA military machine.
Without that intervention such a bail out could easily crash the US Dollar into another waterfall and make its "managed" depreciation impossible. Market manipulation has send USD dollar into Bear market reaction rally, Gold and Silver were trashed into the dust with investors running to the Exit. Investors confidence in Gold and Silver mining companies and Junior mining were shaken with a lot of casualties and money lost. Perfect storm in commodities market amplified by Bubble Vision commentaries on the end of the Commodities Bubble prepared the operation "Election Jump Start the Economy".
It came handy that few biggest US banks went short Gold just before the intervention in unprecedented amount. More details are in this great article.
What will be the consequences of such a bail out and why so many resources were put into this historical manipulation? At stake is a financial system of the world as we know it and its main reserve currency of choice US Dollar. This was the reason why European and Japanese central banks supported the intervention. All financial system is brought down to a still with toxic assets based on not only subprime mortgages, but also "primary" assets issued by Freddie Mac FRE & Fannie Mae FNM. Credit flow has dried out as confidence in a counterparty disappeared. Effective government overtaking of all liabilities issued by these agents means monetisation of this debt and its substitution effectively by government "currency" - Treasuries. More goods to sell with falling demand means lower prices. In case of Treasuries it means higher yield, real rates will go up. What about short term rates managed by FED? If after recent unemployment report anybody things about FED raising rates they better check their water supply. I will not be surprised if FED Cuts Rate in case the markets will tank further into the bear market territory. Welcome to the Stagflation world: Negative Real Rates (difference between FED short term managed rate and Real rate defined by the market in treasuries) like in the 2002 when Gold market was ignited to the new highs.
Threaten by deflationary pressures in the form of falling prices in housing, permanent Sales on the high street for squeezed consumer and falling financial assets prices on the Wall street FED will be always intentionally late to Raise the rate to fight inflation. Inflation is an increasing money supply be definition and with this bail out Pandora Box is open.
What is the magnitude of the situation? Both GSEs are holding and guaranteeing more then 5 trillion dollars in debt, it will go into the government books on the liability side in plus to the current 9.6 trillion dollars government debt. It is an astonishing 54% increase! Why is it negative for the US Dollar "value"? US dollar is a FIAT currency and supported only by perceived value of US government ability to collect revenues in the form of taxes and keep its supply "limited" to the real economic growth in goods and services produced by the USA Corp. When more money is chasing the same amount or falling amount of goods and services we have an inflation.
Let us make a quick "back of envelope" analyses of this M&A deal. USA Corp. is taken liabilities with fixed rates to be paid in the form of interest on Freddie Mac FRE & Fannie Mae FNM bonds to its holders like China, Japan, Russia, Middle East etc. On its assets side it is unwillingly getting falling in value houses as collateral for issued bonds. Assets are shrinking in value with falling house prices, cash flow is falling: people are not able to service their debt, late on payments and are walking away from properties. Common stock of USA Corp is going down - it is our "chosen victim" US Dollar. Then even worse is happening: in order to finance budget deficit and these adding to shortfall difference between fixed payment out to service debt and receivables from housing assets USA Corp is forced to borrow more to cover the cash flow gap.
Situation is becoming more complicated with need to save economy and its subjects from the bankruptcy: maybe Jim Cramer is right after all and USA Corp. will decide to extend mortgages and reduce the payments, US Dollar will be even under more pressure.
How will it play out into our investment approach:
1. Worst case scenario: USA is brought to the corner, depression is looming, elections are falsified, Iran is nuked and war with Russia started for resources. I do not know what to do or even how to live in such situation.
2. Goldilocks scenario: new way of building wealth is found. Make money and take profits; losses will be taken by the crowd - tax payers and they are happy to do it and even asking for more. USD is rallying further, markets are rallying, housing overnight is 30% up. I will write a book "You can do it too", get famous and will make my fortune by selling it.
3. "Positive scenario". FIAT currencies are chosen victims. Bail out is taking out the strain from the financial markets, foreclosures are managed by reducing rates and extending maturity. European agents are using the same medicine - inflation is a world wide normal cause of things. Rates are cut world wide to jump start the economy, government debt is substituting the debt of "falling agents" real rates are negative and all currencies are depreciating against real assets. New credit will make its way into the economy, but not into absurdly priced assets like standard housing or modern paintings, money will chase real resources and go into infrastructure which will make possible to build a new wealth. Gold and Silver will become more and more carrying its monetary function of value preservation, they will appreciate against all FIAT currencies, then will be mania stage with its following collapse. Trust is shaken about "last reserve of confidence" of USA, globalisation as a form of securing global resources market in exchange for Coca-Cola and Bubble Gum is finished, world is becoming more connected and fragmented at the same time. West has accepted the End of Empire stage, its last Prime resource - Military Machine is taken out of political and very costly equation. USA has concentrated on internal problems, new powers are rising, multipolar world is established with "fair" price for diminishing resources, which are rising in their value with rising demand from growing population. Nothing will be perfect as usual: it will put more strains on Supply side. Quality assets in a stable politically situations will be in the big demand. USA Markets will be in a range bound mood between greed, new credit chasing new opportunities and returning reality of hangover with derivative losses making its way throughout the system. One of the complications: WEST will have to reduce its quality of life style under the burden of debt service at least for a while in return for stability. EAST will be catching up with WEST in a new found consumerism happiness.
Deflationary camouflage has made its task: buyers in the commodities and PGM are scared, speculators are ruined, hedge funds are shutting down with fire sell now.
Time is to buy real assets with the best value, best management and best positions to benefit from recent historical event.
Those which are on the radar screens and will benefit first like Silver Wheaton SLW, Silver Standard SSRI, Royal Gold RGLD, Yamana Gold AUY.
Risky plays where fortunes could be made are in Juniors.
Some of them for further study are TNR Gold TNR.v, Silverstone Resources SST.v, Mantle Resources MTS.v, Suramina Resources SAX.to
I am not along this time for sure: clever money are already all over the story and even Used to Be Smart (UBS) guys are making interesting observations.
Back at UBS the Bank states that it has seen "unprecedented" gold demand from India, from European consumers and from other Asian clients, that demand is very strong in Turkey and the Middle East and that it should pick up in Italy as of early September as the holiday season draws to a close. UBS is not alone in seeing this interest, with some Indian jewellers having to turn away clients and, with the Wedding and Festival seasons imminent, demand is expected to remain robust for the next few weeks. Diwali (the Festival of Lights, which is a very important Hindu Festival, the largest gift-giving and shopping festival in India and most popular for gold purchases, falls this year on 28th October."
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