A top investor warns of a Chinese disaster... The world's craziest billionaire... the most serious form of theft there is...
These were among the top headlines today from our new investment digest along with a unique "don't buy gold, buy this" insight. Currently, only S&A Alliance members can access the site, but we're "opening for business" on Monday, February 2. You'll receive more details on Monday.
While Jim Rogers has hit the media circuit, bashing the U.K. and its currency, billionaire hedge-fund manager – and former partner of Rogers – George Soros quietly covered his short position in the pound. Soros, who made $1 billion shorting the pound in 1992, covered his position at $1.40 saying, "The risk-reward was no longer clear." He added: "But it doesn't mean I'm bearish on sterling today or bullish... it will continue to fluctuate."
And David Einhorn – manager of Greenlight Capital and the man who called the collapse of Lehman – is buying gold for his $5.1 billion hedge fund for the first time. Einhorn is buying because "the size of the Fed's balance sheet is exploding, and the currency is being debased." In addition to buying bullion, Einhorn added call options on gold and the Market Vectors Gold Miners exchange-traded fund.
This is the third value investor I know who likes gold (Einhorn, Jean-Marie Eveillard, and Chris Mayer from Agora Financial). I really hate to add to a consensus, but you know I've been advising gold ownership for some time now and I continue to do so (see today's essay below for another reason why).
Next month, I'll publish my first-ever gold-related Extreme Value stock recommendation. Click here to get access.
More layoffs... Starbucks will cut 6,700 jobs and shutter 300 stores, in addition to the 600 it said it would close last year. Boeing will slash 10,000 (including 4,500 previously announced cuts) after a fourth-quarter loss. Ford is axing 1,200 from its credit division. The automaker announced a $5.9 billion loss for the fourth quarter.
Eastman Kodak announced a $137 million fourth-quarter loss and plans to cut 4,500 jobs, 14%-18% of its workforce. Software company Citrix Systems will cut around 10% of its workforce, or 50 employees. Insurance company Allstate will cut 1,000 jobs over the next two years. And finally, chipmaker Jabil Circuit will cut 3,000 jobs.
The International Labour Organization in Geneva, Switzerland says the global depression will lead to 18 million to 30 million more unemployed, possibly as many as 50 million.
The ever-insightful Thomas Sowell on Obama's stimulus package, from a recent Washington Times editorial:
Out of $355 billion newly appropriated, the Congressional Budget Office estimates only $26 billion will be spent this fiscal year and only $110 billion by the end of 2010.
Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.
If you cut taxes tomorrow, people would have more money in their next paycheck, and it would probably be spent by the time they got that paycheck, through increased credit card purchases beforehand.
In the end, the Obama bailout will feel as though you've contracted to build your dream house. It'll turn into your worst nightmare, with escalating costs as the contractor digs up more ground and finds more problems with the architect's plans.
New highs: none.
"Risk" is a word everybody uses but few understand. If you think you know something about investment risk, send it to us here: feedback@stansberryresearch.com.
"I won't claim to be an expert historian, but my recollection of FDR's stimulus program is that it was all about getting people to work, even if on subsistence wages. Now for my dumb question: Will the 2009 stimulus pay subsistence wages or will it pay prevailing union wages, er, where an actual job is created. I know, dumb question. We wouldn't want to undercut the dear unions, now would we?" – Paid-up subscriber Neil A. Bourjaily
Ferris comment: Don't get sucked into this sort of thinking. These people aren't trying to create jobs or stimulate the economy or anything else they say they're trying to do. Politicians do two things: They seize power, and they sell it to us. They're like a bandit who puts his arm around you and tells you in a soothing, friendly voice why you're going to give him all your money... how it's really good for your health because if you don't do it, you'll die.
Fake ideas like "job creation," "subsistence wages," "affordable housing," and the like are the marketing buzzwords of politics. They have no meaning beyond the purely emotional connection they create between the power takers and the vast herds of sheeple who give up their power in exchange for the government's non-goods and non-services. FDR was a patrician snob who wanted power. Obama is a slick young hustler who wants power. Keep your eye on the ball, and don't pretend there's ever anything good about stealing from the productive to give to the unproductive.
Obama's boy, Rahm Emanuel, made it clear it's about seizing power when he said, "A crisis is a terrible thing to waste." The Thomas Sowell editorial piece I quoted above is a must-read on the Obama plan (and all the bailout plans).
"$850 Billion Bailout?? Here's a better stimulus plan at half the price: Give every American citizen a check for $100,000. Give every illegal alien willing to be fingerprinted and go home a check for $25,000. (Most) every household would be able to pay off their mortgage with plenty leftover to go back to the mall. The banks would be back in the black and not need to be bailed out. Consumers would go back to consuming (and with the mortgage paid off, maybe even start saving a little). Jobs would come back, tax revenues would go up. Welfare rolls and forced free public services would go down. Politicians would take all the credit for saving the world. Everybody's happy. All for less than $400 billion." – Paid-up subscriber Chuck Nienburg
Ferris comment: The seizure and "redistribution" of $400 billion would certainly be somewhat less bad than the seizure and redistribution of $850 billion, but I fail to see how mass theft is a good thing. How about instead we start this new system where people who earn money get to keep it? And how about we shut down that racket they're running over at the Federal Reserve, where they get to type numbers on a screen and call it money?
The Ginnie Mae 'Inflation Guarantee'
By Dan Ferris
The Government National Mortgage Association, known as Ginnie Mae, says it now has a 40% share of the mortgage-backed securities market.
Ginnie Mae guarantees mortgage-backed securities made up of loans issued by the FHA, Department of Veterans Affairs, Rural Housing Service, and the Office of Public and Indian Housing. Ginnie Mae securities are the only mortgage-backed securities explicitly guaranteed by the U.S. government.
These days, lenders can't get licenses to make FHA loans fast enough. The Department of Housing and Urban Development (HUD) is working weekends, something it's never done before, to process FHA license applications. In the fiscal year ended September 30, 2008, HUD approved nearly 3,300 applications, more than triple the previous year.
About 70% of the new applications are from brokers who are no longer able to sell subprime loans. Mortgage brokers have an incentive that trumps all others: Ram as many loans through as possible, damn the credit quality. It makes me wonder... Where are all these new FHA-qualified borrowers coming from? Where were they two years ago?
I'll tell you where. Fannie and Freddie have had to tighten up their standards. These days, they can't guarantee a loan with a higher loan-to-value ratio than 80%, so they have to go to the private mortgage insurers. But private mortgage insurers have had their balance sheets destroyed, along with everyone else in the industry, so they're not doing much business these days.
Instead, it's off to the FHA for the loan and Ginnie Mae for the guarantee.
The FHA/Ginnie Mae conduit is one of the last places where you're allowed to shove a risky loan through. One of the hallmarks of the credit crisis is that few buyers really owned the properties they were buying. They had as little skin in the game as possible, increasing their incentive to take bigger risks and to walk away if the deal went bad. Many deals are going bad. Many buyers-but-not-owners are walking away.
Today, if you want to buy but not own so much, you don't go subprime anymore. You go FHA.
This feels terribly familiar. It's like a mob of passengers on the deck of a ship. Everyone ran to one side (the Fannie and Freddie side), causing the ship to roll, so now everyone is running to the other side (the Ginnie Mae side).
I don't think Ginnie Mae will ever wind up like Fannie and Freddie, because it has that explicit government guarantee standing ever ready. It's already been taken over by the government.
But what if Ginnie Mae guarantees a whole new slew of bad mortgages the government winds up having to make good on? Ginnie Mae issued $220 billion worth of mortgage-backed securities in 2008. It expects to do at least $300 billion in 2009. Those aren't big numbers, but you know how it goes... $200 billion here, $300 billion there... pretty soon, you're talking real money!
The rapid growth of a government-guaranteed conduit that accepts, securitizes, and guarantees loans with less equity is just the sort of situation that eventually creates yet another reason to print money and keep interest rates way too low.
Add to the Ginnie Mae problem the deterioration of the Federal Home Loan Bank's balance sheet and its recent reduction of capital requirements, and you see another kind of inflation. Ginnie Mae says, "It doesn't matter. The government will pay." It knows the Federal Reserve can print its way out of any problems. The FHLB says, "The capital requirements are whatever we say they are," again knowing that at the bottom of it all sits a Fed bureaucrat typing new numbers into a computer, numbers that raise the supply of money and credit and cause a massive inflation.
The government continues to eschew and even mock the need for any kind of discipline in the allocation of capital. Wall Street did a lousy job of it, so the government took over. Now the government will do an even lousier job because, unlike Wall Street, it can make all its own rules. It can get away with it because we, whipped dogs that we are, have already ceded it so much of our power... power to tax... power to print money... power to tell us what to do or else.
Anyway you look at the current situation, the outcome has the same basic shape: The U.S. government gains more power and the U.S. dollar is burnt toast. Investors need to protect themselves now. Buy gold and hold on for dear life.
Regards,
Dan Ferris
Medford, Oregon
January 29, 2009