Fannie and Freddie bail out will downgrade USA debt and US dolar better change its name.

Is it just a nightmare or we are serious here talking about "debt burden" like in any Third Word Country after "stabilising" IMF loan? With 5.2 trillion debt outstanding and 5% (we will come to discuss this figure later) interest payments by USA Corp. will be 260 billion dollars annually just to service these agencies debt, assuming that there will be no any dramatic Yield Rise in coming refinances demanded by potential buyers. To put it into perspective:

"Silver State is 11th failed bank this year.

The FDIC oversees an industry-funded reserve, which currently stands at about $45 billion, used to insure up to $100,000 per account and $250,000 per individual retirement account at insured banks."

Every year you can build 6 FDIC funds to protect your citizens savings (here I have a question - does anybody still have any?) or make every year 6 Olympics games like they did in China (40 billion spent) in six different cities across USA. It will be nice to have "Bubble" pools all across the country in couple of years time.

The quality of assets which USA Corp. gets vs this "fixed" debt obligation are under question at least: Freddie, Fannie worse off than thought Housing values are still falling down and people are going away from their properties. More and more money will be printed to cover the gap.

Another food for thought with this kind of bail out and strain on the US balance sheet what government can do in another case of "Too big to fail"? Like GM or another investment bank?

Foreign buyers have cut dramatically on their appetite for Fannie and Freddie debt just before the bail out. Now when this debt will be substituted by Treasuries does it mean that its quality will be upgraded to their "AAA" status? I will think that contrary with deterioration of Federal Balance Sheet this debt quality will be downgraded. Buyers will demand discount on these "assets" in the form of higher yield. Next thing we will have to watch is TYX 30-Year Treasuries Yield, time of historical lows for the yield (now at 4.276%) is over, welcome to the 70s when Yield raise from below 8% in 1977 to over 14% in 5 years time. Should I remind how Gold behaved in those years?

Everything must be taken in comparison: recent intervention by central banks before "Operation Bail Out" was portrayed as "comparative" advantage of USA economical situation vs Europe troubles. I dare to think situation is different and magnitude of this intervention in the "free" markets will not be challenged by any other economy in the world or for this matter by all of the rest world economies combined. Europe CB and Bank of England have hold their respective rates at 4.25% and 5% last week. According to Jim Rogers China has raised its interest rates 7 times and increased Banks reserved requirements 15 times (!) in order to prevent overheating in the economy and take out pure speculation from its long term rising stock market.

Recent manipulation has brought new opportunities into the market :

1. Time is to sell USD assets using recent spike in its value.

2. It is The Inflation, forget about deflation and let FED to worry about it.

3. Sell Treasuries, buy Gold, Silver and commodities.

4. Emerging markets could be carefully considered on case by case bases as wave of new credit will penetrate the boarders.

5. Could not resist: this recent USD spike is not in favor of Google GOOG on shrinking market it has getting a nice boost from its overseas operation with falling US Dollar. Without that tail wind results are going to be on track showing slowing rate of growth further.

6. Oil is too political for me to consider any trade here, Saudi friends will help old buddies try to stay in office and can pump like there is no tomorrow, but long term life is going to be more like in 150-200 range at least.

"NEW YORK, Sept 4 (Reuters) - Foreign central banks reduced their U.S. agency security holdings at the Federal Reserve by $9.75 billion in the latest week to a total of $958.57 billion, according to data from the central bank released on Thursday.
The data may add to recent evidence that overseas investors are worried about the troubled mortgage giants.
The drop marked a seventh straight week of declines in offshore central bank holdings of bonds issued or guaranteed by government-sponsored enterprises like Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), which have recently taken center stage in the U.S. housing crisis.
Overall, the Fed's holdings of U.S. Treasury and agency securities kept for overseas central banks, including Treasury notes and bonds as well as agency securities, fell by $13.48 billion to stand at a total of $2.395 trillion in the latest week ending Sept. 3, the Fed data showed.
Overseas central banks reduced their Treasury debt holdings by $3.72 billion to stand at $1.437 trillion.
Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years, and own over a quarter of marketable Treasuries."

Jim Rogers on Fannie Mae FNM and Freddie Mac FRE bail out

This was recoded before recent decision:

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vIQvD7yNni2I.asf

Freddie Mac FRE & Fannie Mae FNM bail out and its downside for US Dollar.

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:

"Paulson Plans to Bring Fannie, Freddie Under 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.

"UBS urges clients to buy gold - we already are say investors

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."

Fannie Mae FNM and Freddie Mac FRE test of the System and Hedge Fund Dream

If you are still puzzled with last week developments in crises management of these two pillars of housing market in USA controlling over 5 trillion assets, look no further then to our distinguished regulator - SEC: you can continue to sleep assured that everything is under control. While Mr Paulson and Mr Bernanke honestly are making all possible attempts to decide when they are going to bail out the falling agents, somebody is making a huge amount of money based on their true beliefs in the effective markets. They are so successful that you can not stop help thinking that you can smell on the back of your mind so familiar smell...of well used cooking oil.

http://www.faulkingtruth.com/Files/aguirre_congress0623.pdf

We can hardly turn the tide here with our doubts. We can only observe, be alert and try not to get under the freight train. If we make somebody think a bit more and make them better we will be extremely happy. We have sold our PUTs on FRE, banks, GM, AMR, INTC, SMH and will continue to build our strategy on falling USD and rising Gold, Silver and commodities. We still think that with so well managed financial system crash will be prevented with all means in the election year and US Dollar is the only way to make it....something has to give. And by the way folks from Iowa will hardly spend their vacation in Paris this year. System is rotten to the core and markets can be turned on a dime from this oversold short term condition. Even in Bear market rally could be explosive. Take the profit and preserve your capital. Investment strategy is "obvious now" - we will invest in "dimes" - they will need a lot to manage the orderly crash in the Trust and Confidence in the System.