Fannie Mae drops another bomb. The GSE (government sponsored enterprise) announced a $19 billion loss for the third quarter which brings it’s current loss to $101 billion (8 year total loss). Thankfully, the U.S. Treasury is waiting in the wings with another $200 billion taxpayer bailout of this miserable excuse for a company. Fannie now wants another $15 billion in emergency funds (it’s 4th withdrawal this year) bringing it’s annual total to $60 billion YTD (so far).
If Fannie ever actually earns a profit, the $6 billion it owes the guv’ment in annual dividends would swallow it whole. Fact is, Fannie Mae and Freddie Mac are completely dependent on the Treasury to support their continued operations.
Their non-performing loans rose to $198 billion in the 3rd Q up from $171 billion on June 30, ‘09 and have doubled from Dec. ‘08.
Last years subprime lender is today’s FHA. Loan defaults, as of Sept. stand at 456,000 and 87% of their entire portfolio has less than 3% equity (a 1% decline in current property values would completely wipe it out) not to mention that the portfolio is growing by 6,000 loans per day (4 x’s the amount in 2006). The sheer number is masking the problem loans as most mortgages don’t get into trouble in the first year. Like a driver going downhill without brakes, FHA is telling Congress everything is just fine. Fortunately for us, FHA loans are bundled as MBS’s (mortgage backed securities) and guaranteed by Ginnie Mae and thus, it is the taxpayer who is responsible for paying Ginnie’s bond holders when FHA backed mortgages default. Same old story.
FDIC bank closures have risen to 124 this year (in 2007 there were 7 and about 10 in 2008). On the brink of insolvency themselves, they decided to charge participating banks 3 years premiums prepaid in advance to fund their continued operations or about $45 billion worth (should last them 6 months at the present pace) and then it’s back to the Treasury for mo’ money (Imagine if your car insurer asked you to pay your car insurance upfront for for the next 3 years). This should do wonders for the bank balance sheets. But that’s what the bailouts are all about anyway, penalize the healthy banks for the ones that that made the riskiest loans and should have been closed down before their assets needed to be seized.
The Commercial Real Estate Crisis should be in full swing by 2010. Current CRE market value is in the order of $3.5 trillion and the loan defaults are expected to come in close to a third of that. Lenders are using loan moratoriums and modifications to postpone the inevitable. They don’t want these frickin’ properties on their books either.
How High Can Gold Go?
People say we’re in a bubble, the price has risen too much, too fast, Gold has no value and pays no interest (otherwise known as a dead money). Let me be clear about this. Gold (and silver) have been used as a store of wealth for thousands of years before the printing press was invented. With the repeal of Betton-Woods in ‘71, Dick Nixon unpegged the dollar to the price of gold (artificially priced at $35.00 at the time) and backed it with the full faith and credit of the government (an IOU), essentially, the US taxpayer’s ability to repay the governments debts. Since that time the dollar has lost 70% of it’s purchasing power.
The latest $12 trillion deficit is nothing more than another nail in the coffin. The world’s central banks have been printing money at a breathtaking pace not to prevent a collapse of society but prevent voters from experiencing the necessary pain and restructuring that recessions bring in an attempt to continue to get re-elected.
Bankruptcy serves a purpose. Failed business models need to go out of business to make room for healthy businesses as surely as dead leaves must fall from the tree in winter making room for a new leaf.
Today, the largest employer in the United States is the government with unfunded liabilities totaling $50 trillion dollars (pensions, social security, medicare, medicaid and a host of entitlement programs).
Government spending is a cost to the economy, not a source of wealth. No amount of deficit spending can produce prosperity.
If the economy recovers, demand for goods will increase and supply will tighten. If the Fed’s “hot money” policies turn into price inflation (highly likely), investors will turn to gold.
If the economy falters, federal stimulus spending will increase and set the stage for greater inflation and further dollar decline, investors will turn to gold to protect themselves. It seems like a one-way bet.
Top Picks
Silver Wheaton (SLW) gold will undoubtedly go higher, silver will out pace gold’s gains.
Eldorado Gold Corp (EGO) gold exploration and development (many will do spectacularly but this one is a great valuation).
Tesco (TESO) designs, sells services “top drive” motors for oil & gas drill rigs (another great valuation play).
Nalco (NLC) patented “enhanced oil recovery (EOR)” system and one of the largest water purification companies in the world.
In the words of Thomas Jefferson, “The government that governs least, governs best.”
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