"It's alright, folks! We're from the government, and we're here to help! Everyone just go back to the way you were, spending and borrowing, borrowing and spending... everything is going to be juuust fiiiine..."
That's the message "Helicopter" Ben Bernanke sent the world yesterday when the Fed went all in, buying $300 billion of long-term Treasuries and spending another $750 billion on agency mortgage-backed securities (for a total around $1.25 trillion), plus another $100 billion on agency debt (for a total of $200 billion). The first purchases are planned for late next week, and will focus on two- to 10-year Treasuries, but will include the entire yield curve.
The Fed said the move would "help improve conditions in private credit markets."
Printing money and buying Treasuries and agency debt will push down longer-term rates individuals pay on mortgages and other important loans. American Banker reports this morning mortgage rates are the lowest they've been since WWII. This will help the U.S. government shove more bad mortgages down everyone's throat. And you know how that turns out...
The Federal Housing Administration says it's experiencing "a large number of zero payment defaults." That's when the borrower doesn't even make one payment on his new government-insured mortgage. This confirms a recent front-page Washington Post story about 9,200 FHA-insured loans, all of which became delinquent after one or zero payments over the past two years. Lisa Gore of HUD says it's "a huge red flag" indicating fraud, just like in the 1999-2001 housing market downturn. According to the Post, more than two-dozen "instant defaults" occur every week, and the total has tripled over the past year.
Auto-parts makers are getting destroyed by the failure of GM, Ford, and Chrysler. Major auto-parts suppliers, including Lear and American Axle, have issued going-concern warnings, meaning they might no longer be viable businesses without revenue from the insolvent Big Three. On Tuesday, Lear said banks granted it 60-day waivers, meaning they won't push the company into default. After the 60 days are up, who knows what'll happen?
Of course, again, the government is here to help. The fed has carved out $5 billion of bailout assistance for auto-parts companies.
Big financial companies love to tell the world how great things are when things are clearly not great. GE Capital says even "in the worst scenario" for the economy, it shouldn't need more capital this year. MetLife representatives said yesterday at a conference in New York that the company has $3.6 billion-$5.7 billion of excess capital. You'd think the range of possibilities would be a little narrower than a 58% difference. I wonder if any big financial institution really knows what it owns, or more importantly, what it's actually worth? Even with yesterday's wonderful news, MetLife is down 8%...
I have nothing against GE Capital or MetLife. I just think it's human nature for them to report strong capital positions right now. If you were running a publicly traded company, how eager would you be to report bad news in this environment? I view these companies not as crooks, but as large, beachfront hotels. The tsunami is coming, and it's impossible for them to move out of the way.
Bernanke's big announcement pushed yields on the 10-year Treasury to 2.53% down from more than 3% -- the biggest one-day move since the great crash of 1987. The effects were immediate. Stocks and commodities soared. And investors rushed from lower-yielding Treasuries into higher-yielding corporate debt, easing borrowing pressure for U.S. companies.
Not everyone drank the Fed's Kool-Aid yesterday... Gold soared – rallying to $960 from less than $900 – and the dollar plunged. The market is waking up to inflation. Once the economy recovers, how will the Fed unload all that debt to raise interest rates and counter inflation?
Jim Rogers should appear on camera any minute. He spends a fair amount of time there, anyway. And now that the Fed is printing money to beat the band, Rogers' U.S. dollar short is panning out well. Plus, his Treasury short gave him an engraved invitation to hit the TV circuit yesterday.
I usually enjoy watching Rogers on TV and at conferences. He stands in front of the podium with his bow tie on, squints at the audience, rolls his head around, and says, "I'm buying Norwegian kroner, Swedish kroner, Swiss francs, gold, Canadian farmland, and I wouldn't touch U.S. stocks with your money. If I were in charge of the Fed, I'd shut it down and resign."
The folks at Citigroup have obviously not heard or read a word of the enormous flap over AIG bonuses. Either that, or these are truly the stupidest people on Wall Street – and you have to admit, that's saying something these days.
Citi has disclosed plans to spend $10 million to move and redecorate its executive offices. Citi is moving top executives from the third floor to the second floor... and decking them out with Sub Zero appliances and their own conference rooms. Citi claims the project will help the bank save money over time. How does buying new appliances save money? Maybe there was a big sale at Lowe's with 0% financing... Would it surprise anyone if, like every other boneheaded spendthrift in America, Citi believes it's saving money every time it spends it?
New highs: none.
Afraid to live in a world without AIG or Goldman? Send your prophecies of doom to: feedback@stansberryresearch.com.
"Just playing Devil's advocate here but after the collapse of Lehman and the resulting near total financial meltdown afterward, don't you think it may have been in our better interest to make certain NO other failures occured? And that would have involved shoveling funds to ANYONE needing a bailout, no matter the way the funds finally arrived. If Hank Paulson did indeed know of the tie-up between AIG and Goldman [which I certainly don't doubt], wouldn't he have been the perfect guy to make certain Goldman didn't seize up as well?
"Again, not excusing any of their culpability for this mess, but would you rather have seen the whole house of cards come crashing down? [I think I know the answer to that one] Personally, I would rather not have risked it. We'll never know whether the world would have been a better place had it happened, but I'm rather c
ertain Hank Paulson would have been hanged on the spot by a much angrier mob than the one now chasing bonuses at AIG." – Paid-up subscriber George Earhart
Ferris comment: Don't let the government fool you. It has convinced everyone the world will come to an end if bad businesses are allowed to fail. Not true. Citi & co. aren't too big to fail. AIG isn't too big to fail. They might be too big to liquidate quickly and easily. And letting them fail would have hurt. But it would have been far less painful than what you're going to endure in the wake of all of the demand-goosing interference – inflating, borrowing, and spending – now being indulged by the Fed, the Treasury, the White House, and Congress.
"'Before you watch the video, you need to know two things. First, Corrine Brown did not attend the University of Florida (my alma mater).'
"A native of Jacksonville, Florida, Congresswoman Brown served in the Florida House of Representatives for ten years before coming to Washington. Congresswoman Brown attended the Florida Agricultural and Mechanical University where she earned a Bachelor of Science Degree. She also received a Master's Degree and an Education Specialist Degree from the University of Florida. She received an Honorary Doctor of Law Degree from Edward Waters College. She has been a faculty member at Florida Community College of Jacksonville, the University of Florida, and Edward Waters College." –Anonymous
"Even though forewarned by your Digest, and even though in the privacy of my own home, I could not help but avert my eyes while watching the video of 'Congresswoman' Brown, such was the degree of my embarassment. Not for her. For my country. Once upon a time in my farm employment past I castrated bulls for a living. And even I couldn't stomach this video to its completion.
"Please give me some morsel of assurance that somewhere in her Florida district there is someone capable of defeating this bimbo in the 2010 election." – Paid-up subscriber William Sutton
Ferris comment: Whether someone will defeat her is, unfortunately, a moot point. Any politician who can actually get elected is highly unlikely to be honest or do a good job. Remember, people voted for Ted Kennedy, over and over again, for 46 years. Somebody voted for Joe Biden, over and over again, for 36 years.
"to the idiot who said DailyWealth didn't 'see it coming'. I put all my retirement monies into cash 27 sep.2007 because of my daily ritual of reading DailyWealth. Obviously you had not. (its still in cash!)" – Paid-up subscriber Greg S
Regards,
Dan Ferris
Medford, Oregon
March 19, 2009