-- Posted Monday, 14 July 2008 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Monday, July 14, 2008
“Phenomenally accurate forecasts”
Although inflationists have always argued the Fed would do “whatever it takes” to prevent a credit collapse, evidence continues to mount that policymakers are in fact taking a deflationary course, even if inadvertently. Why else would they let Fannie and Freddie shares fall to zero even as bondholders lick their chops in expectation of a “restructuring”? Allowing stockholders in these two Government Sponsored Enterprises to bite the dust is tantamount to letting real estate values continue to fall, since, as the capitalization of the GSEs shrinks, so does their ability to buy up mortgage loans originated by others. How inflationary does that sound? Even if so dire a scenario as a shareholder wipeout should come to pass – and it appears increasingly likely it will – bondholders could conceivably come through it unscathed and then reap substantial capital gains when preferred shares issued by Fannie and Freddie are pumped back up to par via taxpayer-backed guarantees.
Because the preferred stock of the two firms is trading at a deep discount, priced to yield between 8% and 11%, we recommended them yesterday on the subscriber page as an enticing speculation. Our reasoning was that if the GSEs merely survive in some form – as how could they not? -- bondholders may live to see preferreds currently trading around $20 rebound to par at $50. We are evidently not the only ones who foresee this happening, either, since scavengers went after Fannie and Freddie preferred stock on Friday with the voraciousness of piranhas. Specifically, they bought Freddie preferred ‘S’ paper for $16 that could have fetched as much as $21 later in the day.
‘The Deal’ Is Dead
To return to the question of inflation versus deflation, the outcome is no longer hypothetical, nor is it even much in doubt. All of the bank bailouts so far have been deflationary to the extent they’ve focused on shoring up reserves of the lending institutions themselves. Will this help them expand their loans, and therefore their revenues? Of course not. The main purpose of the Fed-orchestrated dog-and-pony show has been to provide a nominal basis for propping up the credit ratings of banks, even as equity stakeholders were getting wiped out. Predictably, the more than $1 trillion worth of bailout money and guarantees that have been thrown at the problem so far have caused almost no new lending activity; nor would another trillion change that, so powerful has the deflationary mindset become in the all-important housing sector. And let us not forget that, no matter how much more room banks might be given to expand their loans these days, there are precious few borrowers clamoring for money to do deals. The deal-making aspect of America’s financial economy – which is to say, the overall economy’s raison d’etre in the post-modern era – is likely to be dead for at least another decade. The clear implication is that banks will need to figure out how to survive and return to health on drastically reduced income.
We wrote here a while back that the only conceivable way policymakers could hyperinflate, effectively bailing out debtors at the expense of savers, would be to pay off everyone’s mortgages (and, we might selfishly hope, tossing in enough to cover credit card debt as well.) Bail out lenders and you beget deflation; bail out debtors and inflation will follow. As a matter of policy, the Federal Government has told us clearly which course it will pursue. Compared to the $300 billion Congress is ginning up for new FHA loans, the cost of maintaining Fannie’s and Freddie’s credibility as borrowers could mount into the trillions. This implies that beleaguered homeowners’ mortgage debts are likely to stay on the books, with only token forgiveness at best. It is the expectation that most homeowners will continue to make monthly payments that will keep Fannie and Freddie in business, and bondholders in clover.
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Last Chance to Register
Because of family vacation plans, I will be able to offer the Hidden Pivot Seminar only once this summer – on two consecutive weekday evenings, July 23-24. If you’ve been thinking about signing up, now is the time to do it, since once this class is full there will not be another opportunity to take it until fall. Click here, and then on the “Upcoming” tab to register; or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator (our latest model, perfect for beginners).
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Monday, 14 July 2008 | Digg This Article | Source: GoldSeek.com
