Al Green on the Ropes

[Hiding Bear]

FedGov William Poole spells it out, for those who aren't paying attention to Fannie Mae's headlong collapse:

 

In my speech to the OFHEO conference almost two years ago, I emphasized the risk of systemic, world-wide financial crisis should either Fannie Mae or Freddie Mac become insolvent.

 

Fannie Mae and Freddie Mac must roll over roughly 30 billion dollars of maturing short-term obligations every week. At a time of disrupted financial markets, the credit markets might refuse to accept the F-F paper. ... If Fannie Mae and Freddie Mac are unable to sell new debt, then they may also be unable to carry out sales of the ?liquid? securities from their investment portfolio.

 

I discussed liquidity risk at some length in a speech last spring. I won?t repeat that analysis, but the bottom line is simple: the Federal Reserve has adequate powers to prevent the spread of a liquidity crisis, but cannot prevent a solvency crisis should Fannie or Freddie exhaust their capital. In the event of a solvency crisis, the market would become unreceptive to Fannie and/or Freddie obligations; they would have difficulty rolling over their maturing debt. Moreover, their outstanding obligations would decline in price and their markets would become less liquid. Beyond that, it is hard to say exactly what else might happen.

 

http://stlouisfed.org/news/speeches/2005/1_13_05.html

 

"Difficulty rolling over their debt" ... "30 billion a week" ... yeah, uh-huh ...

 

"Hard to say exactly what else might happen" ... right, better to play it discreet rather than speak of burning cities on the horizon ...

 

Fannie = Enron x 10

 

SNARLING BEARISH ...

<{POST_SNAPBACK}>

 

 

I thought the official view 'round here was.....

'BURNING PITS OF DIESEL!!!'

 

Or has the 'six-to-eight'('eight-to-ten', etc., etc.) month

window finally closed on that soapbox?

<{POST_SNAPBACK}>

 

Diesel is way too expensive to waste on barbequing useless asset managers.

 

The most surprising thing here is that they still are able to roll over all their debt with almost no government assistance at present (Fed and FCBs cut back on their holdings lately). FNM has no audited financial statements and under government supervision (OFHEO). What don?t the freaking MF managers understand about that? The are risking their summer vacation in the Hamptons if they can?t see that all FNM debt and common/preferred stock (except maybe mortgage backed securities) will receive a substantial ?haircut? in the event of a FNM insolvency.

[longOnUranus]

My best trade ever:

 

JAN GOOG 190 puts

 

Buy 20 contracts @ $.25

 

Expired @ $1.72

 

700 % for 4 hours...

 

Viva Vegas...

[GregFokker]

AFter reading Poole's piece, there's nothing left to do but rinse my hair with lighter fluid and go base jumping. How can the bulls ignore this stuff?

[Bearbones]

Anybody got a chart of junk and corporate spreads??

 

Would be interesting to see "The Unravelling".

 

Please post them if you have them................

<{POST_SNAPBACK}>

I posted this earlier; GMs 2033 term bond spread to the long treasury.

 

[GTNWORSE]

1160 is where the selling should stop and a bounce will occur.

 

Huge support, right at the prior highs from the last 9 months.

 

Shorts should be ready to cover there, then wait for the bounce.

 

<{POST_SNAPBACK}>

 

Think I might be able to get out of my JDSU? I blinked and it's down 20% since I bought it Well it looked like it was at a support line

[GTNWORSE]

Mark:

 

I have a large % of my funds in High Yield, NBHIX & STHBX primarily. Have seen nominal, if any, price decrease in the past couple of weeks.

[Bearbones]

Headed for the cliff.

 

[NWD]

Hiding Bear wrote:

 

"The most surprising thing here is that they (FNM) still are able to roll over all their debt with almost no government assistance at present (Fed and FCBs cut back on their holdings lately). FNM has no audited financial statements and under government supervision (OFHEO). What don?t the freaking MF managers understand about that? The are risking their summer vacation in the Hamptons if they can?t see that all FNM debt and common/preferred stock (except maybe mortgage backed securities) will receive a substantial ?haircut? in the event of a FNM insolvency"

 

My hunch: FNM collapse means the disappearance of the secondary mortgage market. That can only damage real estate prices.

 

If things really get that wild, holders of FNM mortgage backeds might get a haircut too.

[GTNWORSE]

Interesting read by Carl Swenlin:

http://www.decisionpoint.com/ChartSpotlite...21_PCratio.html

 

Because the Equity P/C Ratio is Dover Sole and prices have been declining, I think there is an excellent chance that the OEX P/C inversion is telling us that a price low is imminent.

[wndysrf]

Hiding Bear wrote:

 

"The most surprising thing here is that they (FNM) still are able to roll over all their debt with almost no government assistance at present (Fed and FCBs cut back on their holdings lately). FNM has no audited financial statements and under government supervision (OFHEO). What don?t the freaking MF managers understand about that? The are risking their summer vacation in the Hamptons if they can?t see that all FNM debt and common/preferred stock (except maybe mortgage backed securities) will receive a substantial ?haircut? in the event of a FNM insolvency"

 

My hunch: FNM collapse means the disappearance of the secondary mortgage market.  That can only damage real estate prices.

 

If things really get that wild, holders of FNM mortgage backeds might get a haircut too.

<{POST_SNAPBACK}>

 

 

Tim Ord is calling for an imminent, dramatic rise in gold prices and the XAU.

 

What would be the catalyst for such a move?

 

Answer is easy.

 

No way Al Green will let things get so far out of hand. He'll start monetizing hand over fist, buying anything and everything as "buyer of last resort" to prop up the FNM and FRE paper.

 

Watch GM and F. There will be a "Seminal Event" announced, which will Bullhorn the corporates around with a vengeance. Maybe Citigroup buys GMAC. Or HSBC buys Ford Credit.

 

Who knows?

 

After all, look how far Leeson has gone this time.

 

S & P is still up 50% from the lows, solely and exclusively based on the Leeson HedgeFund.

 

Do you think he'll stop now?

 

His ego is already inflated as it is, knowing that all business cycles and bear markets can be instantly short circuited by Helicopter Money.

 

I doubt he'd retire without going out in style.

 

That means he's going to inflate, big time.

 

We ain't seen nothing yet.

 

I'm still gaming more upside in the stock market, fueled by an Epic Blast of Liquidity.

 

Biggest money is likely to be made by buying small gold stocks.

 

KRY went up 10% in one day today. That's more than the S & P has lost in two weeks.

 

I don't want to spoil the bear party. I think the bear case will assert itself once we get some type of 4-day short squeeze that fails. Or, when the rest of the banks and mortgage companies break down all at the same time, as credit spreads across the board start blowing out.

 

But that hasn't happened yet.

[Bearbones]

Mark:

 

I have a large % of my funds in High Yield, NBHIX & STHBX primarily. Have seen nominal, if any,  price decrease in the past couple of weeks.

<{POST_SNAPBACK}>

Both of those funds are negative year-to-date in a bond market where TLT is up 2.6%.

If we are seeing the beginning of risk avoidance (and it sure looks like it) spread widening could cost you.

Here is a chart of the "B" rated corporate yield divided by the "AAA" rated corporate as of two weeks ago. It's come far but I'm betting it's over. I have not updated but will next week.

 

[Bearbones]

The long TIPS spread to long nominal bonds peaked in May and looked to be putting in a shoulder just two weeks ago. If that spread falls, it's deflation city.

[GregFokker]

Dow

[Bearbones]

Here's the spread between the 2 and 30 year treasury or the yield curve. It's steepened a bit in recent days but that's because fewer moves from the Fed are likely if the asset bubbles break. What is clear is that the bond market doesn't fear inflation.

 

[machinehead]

Ben sat at his desk in the Eccles Building, puzzling over an e-mail from 'Bare' de Mountebank, his seatmate on a flight back to Washington. Instead of the consulting proposal he'd expected, it was some sort of gnarly obscurantist tract on 'Haywire Theory.' The logic (to use the term charitably) was so woolly and ad hoc as to be unintelligible. As Ben began to drum his fingers in annoyance, the Chief stuck his head through the door.

 

"Ben, would you join me in my office for a moment?"

 

The request sounded casual, but it wasn't too often that the Chief invited him in for a private discussion.

 

Ben followed the Chief's shambling progress down the high-ceilinged hall, sneaking a wink at the pulchritudinous tea-trolley girl, looking most fetching in her black smock and frilly white bib.

 

Al closed the door and motioned Ben to a leather chair in front of his desk.

 

Ben noticed that the perimeters of the chief's coke-bottle glasses lenses were spotted and smudged. He wondered whether it would be appropriate to give him an ultrasonic cleaner at his retirement party. Hmmm, probably not.

 

"Ben, I invited you in to pass on some treasures to you ... my intellectual legacy, one might say. It may seem premature, but time is growing rather shorter than I had expected," Al declared. Unusually, he wasn't mumbling.

 

Taking an old-fashioned warded brass key from his desk, Al turned to the bookcase behind him. After a couple of creaking turns of the key, the entire bookcase swung out on concealed hinges, revealing a hidden compartment behind it.

 

In the shadows of the dusty shelf, Ben saw a single leather-bound volume. Next to it, incongruously, was a shiny brass clarinet. Was it the instrument the Chief had played at George Washington High School, Ben wondered? Though the Chief obviously didn't see it through his smudged glasses, Ben couldn't help noticing a small dead mouse in the corner behind the clarinet, its tiny stiffened legs splayed like bent pipe cleaners.

 

Removing the leather volume from the shelf, Al turned back toward Ben. A gold-leaf '%' symbol was embossed on the cover.

 

"These are the only originals of papers prepared for me by the late chief researcher," Al stated. Ben raised his eyebrows -- he hadn't heard of the man's demise -- but the mask-like look that descended over the Chief's face told Ben that the subject wouldn't bear further discussion.

 

"No one else has read these," Al emphasized. "The subject matter is sensitive and explosive."

 

"Please go on," Ben responded, intrigued.

 

"In the 1970s, as chronic fiscal deficits swelled the pool of Treasury bonds -- which in turn serve as the principal assets backing the monetary base -- I began to research the stability of this evolving system," Al began.

 

"History, unfortunately, shows that no sovereign debt has ever stood the test of time over the long term. Numerous governments, in Europe, Asia, Africa, and Latin America, defaulted during the 20th century. If the sovereign debt backing the money supply defaults, the currency, banking and payments systems are liable to complete collapse. This risk, in my judgment, is unacceptable."

 

Ben nodded gravely.

 

"As you know, gold, being indestructible, poses no risk of default or extinction. But the supply now on hand would be far too puny to back a redeemable currency."

 

"Quite so," Ben agreed.

 

"What I have done, therefore -- tentatively at first, and then with growing boldness -- is to revive the practices of the early goldsmiths. I have now established fractional-reserve gold banking on a massive scale. That is to say, committing the same stock of gold to multiple -- even dozens -- of different transactions."

 

Ben's jaw hung wide open. "But ... the goldsmiths used to be wiped out by periodic runs," he objected.

 

"Ben -- you're overlooking a vital difference in market structure, are you not? They were individual proprietors, taking deposits from the public. But the banks we deal with are licensed and regulated by us. Ultimately, we don't have to redeem any commitments. The gold never leaves our vaults anyway, even if it simultaneously has ten different nominal owners," Al stated flatly.

 

"But ... but ... why would you take the risk of fractional-reserve gold banking, when we could just expand the conventional bond-reserve currency?" Ben demanded.

 

"Ahhh ... that's why I called you in here. Ben, the fractional gold reserve now serves as a parallel, shadow monetary system, fully as large as the visible bond-reserve system. We now have an indestructible 50% backing for the system, should the bond-reserve portion ever falter. The shock would be severe, granted, but unlike sacrificing the whole system, preserving half of it would permit us to survive and rebuild."

 

"I get that part, the safety angle," Ben assented. "But ... where is all this fractional gold credit going?"

 

"No one would have guessed it," Al replied. "But there's a kind of binary segmentation effect. Bond-reserve credit drives traded goods inflation. Gold-reserve credit drives asset inflation. The hidden expansion of fractional-gold credit is what drove stock and real estate prices so high."

 

Ben stared goggle-eyed.

 

"But the truly wonderful aspect of fractional gold-driven asset inflation -- a feature so important that I believe it will become known as the Greenspan effect in honor of its discoverer -- is that bond prices also benefit from it. Thus, by expanding fractional-reserve gold at the same pace as conventional bond-reserve credit, we can nail the T-note yield to the wall, and preserve it in amber for years if we want."

 

"Greenspan's Law: parallel expansion of fractional gold and bond-reserve credit neutralizes bond price movements as a kind of accounting identity, as rigidly as equal numbers of protons and electrons in the gold atom ensure its eternal, inscrutable inertness," Al concluded with a flourish.

 

Ben slumped in his chair, dumbfounded. "Chief ... this is absolutely astonishing ... it's like the unified field theory of finance. I never suspected."

 

Then an anguished look came over Ben's face. "But ... but that means the asset inflation paper I wrote with Gertler -- the one we presented at Jackson Hole in 1999 -- is all wrong. In fact, it throws my whole professional career into question."

 

"Ben, Ben," the Chief soothed, raising his hand in benediction. "You didn't know. And your paper did yeoman service in our ongoing campaign of disguising the true source of asset inflation. What's that old saying -- a diplomat is a man sent abroad to lie for his country. Heh ... heh ... heh ... " The chief's attempt at levity subsided into a bout of wheezy coughing.

 

Then with a suddenness that caught him by surprise, the Chief peremptorily ordered Ben to kneel on the carpet in front of his desk. Coming around the desk to face him, Al pressed the precious leather-bound volume of secret research into Ben's hands.

 

"Vilius argentum est auro, virtutibus aurum," recited Al, waving a hand over Ben's bowed, balding head.

 

Then, holding his knuckles toward Ben, Al commanded: "Kiss my ring."

 

Focusing with difficulty inches in front of his face, Ben discerned a gold signet ring, with a large, bold '$' sign deeply engraved in the polished flat face. Reluctantly, he leaned forward and did as the Chief had directed.

 

Returning to his side of the desk, Al produced a crystal decanter of scotch. "The Chancellor of the Exchequer gave me this after my knighting," he explained. "Thirty-year-old single malt from the Isle of Skye." Al poured a finger's breadth in each glass.

 

After a perfunctory toast and sip, they sit silently for a couple of minutes, the wan sunshine of a January midafternoon failing to warm them. Finally Ben felt emboldened to make inquiry.

 

"Oy, this ring-kissing and Latin mumbo-jumbo, Chief. Isn't it vaguely ... papist?"

 

"As Maimonides said, Ben, 'you are thoroughly fitted for the task of translation, because the Creator has given you an intelligent mind to understand parables and their interpretation, the words of the wise and their difficult sayings,' " Al admonished somewhat obscurely.

 

"In fact, the ring was given to me by Ayn Rand," mused the Chief reflectively. "It's part of my estate. But you may want to have a replica made ... for the day that you pass on the baton, as it were."

 

Ben thought this suggestion over for a moment, without enthusiasm, then glanced back at the Chief. But Al's rheumy eyes had a distant look ... he had 'gone off' from the conversation, as he was increasingly wont to do in his dotage.

 

From Ben's perspective, Ayn Rand was as grey and grandmotherly a figure as Susan B. Anthony or Margaret Sanger. Rand had been assez ?tonnant in her day, no doubt. But Ben was of a different generation. His tastes ran more toward ... well, toward Monica, his sweet, saucy dancer friend at the Leather 'n Lace.

 

One late night at the club Monica had spoken of the gold benwa balls in the exquisite black-lacquered box, Ben's gift from one of his bond-peddling visits to Fukui-san. Leaning close and expertly flicking his earlobe with her pinky finger, Monica recited in calm, lurid, baroque detail how she'd incited herself into a frenzy of release with Ben's golden gifts.

 

An engagingly perverse thought entered the mottled mind of 'Benwa.' In this arcane central banker ceremony of having the chairman-elect kiss a golden object ... who said it had to be a ring?