 Fat Fanny Falls Out of Bed
Jim Willie
CB
Archives
Jim Willie CB is the editor of the "HAT TRICK LETTER"
Feb 28, 2005
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Fanny Mae's
bloated condition might represent an accurate reflection of the
protruding haunches of many US citizens, either male or female.
The Federal National Mortgage Agency just has a feminine nickname.
The handle could easily have been named after Fat Albert of the
Cosby Kids. Fanny was depicted in my January piece entitled "Queer
Eye for the Bond Guy" as the canary in the bond coal mine. It
justifiably stands as the weakest link in the vast bond chain
of USDollar-based debt securities, that is, of bonds held internationally.
Its foundation has in all likelihood vanished. Its operational
cash flow might be fractured, vulnerable to rising rates and
vulnerable to falling rates. Its integrity is as compromised
as per diem accounts in state legislatures, or credit card accounts
in households, or political campaign funds for losing candidates.
Its portfolio is as cluttered and confusing as any attic or basement
or garage. Its officers are as clueless or corrupt as those of
Enron, WorldCom, Tyco, or Adelphia. What remains to be seen is
if Fanny babysitters go to prison for fraud which is as clear
as day.
THE FANNY CAVE-IN
SIGNALS DISTRESS TO THE BOND MARKET AND A REMOVAL OF A KEY OBSTACLE
TO GOLD AND ITS ADVANCE. MONEY FROM BONDS AND HOUSING SPECULATION
WILL GREATLY ASSIST GOLD.
To say the
FNM share price looks sickly would be a generous assessment.
It has fallen out of bed, her massive hind haunches having rocked
the bond world upon impact with credit market floors, some floorboards
broken to be sure. It will be difficult to replace the bond mine
canary with a mechanical chirping device, made in China. Shock
waves are sure to hit the housing market in delayed reaction,
later, perhaps much later than would be its due. Confirmation
is offered as scattered debris. Critical support had held
at 60-61 for two years, now shattered with a close on Tuesday
under 58. We have the breakdown seen from the 50week moving average
(in blue) turning below the 100week MA (in red), a strong signal
of downward momentum. A memorable event came in March 2003,
when St Louis Fed Governor Poole warned of economic meltdown
if Fanny Mae were to collapse. He warned that its capital foundation
was inadequate, and was curiously criticized. It is my belief
that its capital foundation is non-existent, and now operates
merely as a financial centrifuge, in Doug Noland's keen words.
FNM recovered to 75 per share in the ensuing two months after
Poole's warning, an exercise in total denial of its deteriorated
fundamentals.
What seemed
to have precipitated the breakdown (call a spade a spade) is
Chairman Greenspan's commentary last week before the Senate Banking
Committee. He gave stern notice that rates will continue to rise,
as the Fed continues its tightening cycle. In 1996, our incompetent
Federal Reserve Chairman defied his own best judgment. He issued
the alarm that stock investors were reacting with undue excitement
in his "Irrational Exuberance Speech." Yet he behaved
like a monetary drug dealer in the following months and years
to betray good judgment. His gain was icon status, declaration
as maestro, hailed by clowns in the US Congress such as Sen Phil
Grahm as "the best central banker in history." He has
had his boots licked by Congressional Reps and Wall Street honchos
for years in a disgusting regular display. Why? Because he supplies
the magic elixir. Before the senators last week, Greenspan admitted
that despite his 150 basis point rate hikes at the last six FOMC
meetings, the long maturity bonds are unaffected. He admitted
his confusion and described the puzzle which has confused him.
Let this be known, NEVER IN THE HISTORY OF THE FED HAS THE
LONG END FAILED TO REACT WITH SHOCK TO HIKES IN THE SHORT END.
Welcome to the Kondratiev Winter. Attempts to call back the tide
will fail in all respects except in the financial sector, and
in there for only a limited timespan.
We have made
modern history. Last week Greenspan called the refusal of long
rates to rise a "conundrum." The flattening yield curve
has him and many others perplexed. This is unprecedented, and
will surely go down as the "Yield Curve Conundrum Speech."
Our Fed Chairman essentially admitted his ignorance of what he
has done, and how the world financial system has not reacted
to the maestro cue. The Fed Reflation initiative, to promote
price inflation, to manifest debt as inflated away, to stimulate
with financial amphetamines, it has failed miserably, whether
the Fed and financial markets recognize it or admit it. We
have stimulated Asian economic growth, factory buildup, and job
creation.
We have flat
job growth, unless you maintain childlike acceptance of official
statistics. We have a high jobless rate, unless you maintain
childlike acceptance of official statistics. We have very poor
(if any) economic growth, unless you maintain childlike acceptance
of official statistics. We have negative productivity, unless
you maintain childlike acceptance of official statistics. We
have negative savings, unless you maintain childlike acceptance
of official statistics. We have utter capital hemorrhage in trade
gaps, noted but not recognized in childlike denial of importance.
We have massive federal budget deficits from the costly drain
of war and lowered tax schedules, noted but not recognized in
childlike denial of importance. WE HAVE THE FIRST RECESSION LABELED
AS ECONOMIC GROWTH IN MODERN HISTORY. Welcome to the Age of
Orwell, where almost every single economic statistic is a total
and complete lie. The economic reporting apparatus is as
described for former Treasury Secy Paul O'Neil a "show business"
devoid of substance or credibility.
Even as
irrational exuberance marked 1996 as the top for stocks, this
conundrum comment will mark 2005 as the top for bonds. The Fanny Mae breakdown
confirms it. The 30 basis point rise in the 10-yr TNote yield
from just below 4.0% to almost 4.3% accentuates the point. The
long-term picture might indicate a move in the FNM share price
back to pre-bubble days seen in the year 2000, like the 48-50
range. Would such a dreaded move foretell residential real estate
prices reversing back to year 2000 levels, 30% to 40% lower ???
Look next for extreme heterogeneity and unevenness in US housing
market, as some areas like north Miami, Hawaiian islands, inner
loop Boston, northern Chicago, Orange County, Georgetown &
Alexandria, to remain firm in price. Expect softening prices
in areas without remarkable advantages, where appreciation has
been at least 30% in the last four years. Where the uplift has
been greatest will come the biggest falls. In Podunk and East
Hilljack, don't expect much of a housing price fall. Funding
might get difficult in the coming months, surely by next year.
A bear market
in bonds has been the missing link for the gold bull market to
crank into the next higher gear. There are other missing links, significant
to be sure. The other glaring omission on the landscape has been
rising Asian currencys. Unless and until the Japanese yen is
permitted to lift, unless and until the Chinese yuan currency
peg is released, price inflation WILL NOT be unleashed in its
full fury within the US Economy. In essence, Asia (in particular
China) has blocked with near total interference the reflation
initiative program. They have prevented pricing power in consumer
products. They have prevented as a result a return to profitability
in all sectors outside the financial sector. The end result has
been pathetic job growth. The gold community would do well to
identify China as the biggest obstacle to the gold bull charge.
Trade war will change that though.
Beware as foreign
central banks diversify out of USTBonds. Let's not forget that
garbage paper known as "Agency Debt" which Fanny Mae
so successfully panders across the globe. It is as though Asian
central banks purchase our mortgage bonds in order to keep the
US consumer going like the Energizer Bunny. You gotta love the
word "diversify" which is euphemism for "get the
hell out of US$-denominated debt." The latest is South Korea,
who announced that $67 billion in US$-based reserves is enough,
maybe too much. They join China, Russia, India, Indonesia, and
others who have begun to see the writing on the walls. Their
foreign exchange reserves are in jeopardy.
How much longer
can the Bank of Japan do the US Fed's bidding in secret overnight
transactions in the largest carry trade operation the world has
ever known ??? Is the BoJ the Far East outpost for the Fed ???
Is intervention their M.O. ??? Anyone who claims there is no
inflation cannot define the term, nor notice the monstrous inflation
at work in Tokyo.
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Jim Willie
Archives
Feb 26, 2005
Jim Willie
CB is the editor of the "HAT TRICK LETTER"
website: Golden
Jackass
subscribe: Hat
Trick Letter
Jim Willie
CB is a statistical analyst in marketing research and retail
forecasting. He holds a PhD in Statistics. His career has stretched
over 23 years. He aspires to thrive in the financial editor world,
unencumbered by the limitations of economic credentials. Visit
his free website to find articles from topflight authors at www.GoldenJackass.com.
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