The US Economy is Beyond Simple Repair

Currency trader and banker Chuck Butler publishes a daily foreign exchange newsletter called The Daily Pfennig. We read it via email every morning for which you can subscribe at no charge. Chuck knows his stuff and is a straight shooter.

Today Chuck made an observation that we need to keep in mind.

"The Government's decision to bail out Fannie and Freddie and place them into
conservatorship may shore up the mortgage meltdown in the short term... But to
me, this is just another in the line of things the Fed and Treasury have done in
an attempt to bring calm to the financial markets... (Bear Stearns, mortgage
bill, money supply, low interest rates, and dollar intervention, stimulus
checks, and more!) But, when you step back and look at all this, none of it, and
I mean NONE of it had done anything to alleviate the pressures on rising home
inventories, falling home prices, upside down mortgages, unemployment, the
deteriorization of the financial markets (see the dead man walking list of banks
that are in deep dookie) and that doesn't just mean banks... The major
Brokerages are standing on the street corners with their hands out, begging for
any sovereign wealth fund that might give them a capital infusion."

The basis of the US economy is broken. The bubbles and busts are not incidental, but represent the essence of what it is. Even if Ben and Hank can patch this up by printing money in the short term, it does not fix the problem that the US is not a going concern, does not have a positive cash flow, is relying on credit lines and new debt that cannot be repaid.

The system will stop and fail when we default on the debt or can no longer service it by paying the interest.

Based on our calculations we are already paying the interest with new debt. That is one step from default and insolvency.

The Fed and Treasury are trying to patch the ship of state and keep it afloat. But the problem is that we are in shallow waters grinding through shoals. We need to change course.

SP Weekly Chart Updated - Target to 1180 and Below on Track

The updated chart shows the formation is still working. Depending on where we place any additional necklines the ultimate target can be significantly lower, on the order of 700 or less barring an exogenous event such as war or a more significant monetary inflation.



Original Chart Posted on 6 June 2008

Gross Profits

Bill Gross and Pimco reportedly made a profit of eight billion dollars in one day on the bailout of Fannie Mae and Freddie Mac by speculating on their bonds. This was a wealth transfer from holders of US dollars to Pimco and did nothing on net for the real economy, except to drain valuable resources and mindshare.

At least Soros made his one billion in currency arbitrage by actually opposing a government financial fiction rather than encouraging it when he pounded sterling.

Bill was on CNBC today touting the attractiveness of these instruments for general consumption. Time to book profits and find a new wealth transfer angle to play Bill?

The Costs of Fannie and Freddie

Nothing to see here, move on.

We can certainly let a doubling of the publicly traded debt go unnoticed as long as our cyber colonies keep sending us their people's life savings.


Cost of US loans bail-out emerging
By Krishna Guha, Michael Mackenzie,and Nicole Bullock
September 10 2008 00:34
Financial Times

The US on Tuesday began to face the financial consequences of the bail-out of Fannie Mae and Freddie Mac after Congress’s budget watchdog said the housing giants’ operations should sit on the government’s books and the cost of insuring against a US default crept higher.

With the stock market tumbling, the non-partisan Congressional Budget Office said the government takeover of Fannie and Freddie meant the companies should no longer be regarded as outside the public sector.

Peter Orszag, CBO director, said: “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.” (They are right, but keep in mind they could not get the Iraq war on the books - Jesse)

The Bush administration appeared to be caught by surprise. A spokeswoman for the Office of Management and Budget told the Financial Times: “We are working through this issue with Treasury and other stakeholders.” (Watchdogs? We don't need to listen to no stinking Watchdogs! - Jesse)

The White House could take a different view on Fannie and Freddie and exclude them from its budgets. But this would be difficult because the CBO is regarded as the leading independent authority on US finances and its assessments guide spending decisions by Congress. (Yeah the Bush White House is so concerned with peer pressure - Jesse)

The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn.

The CBO bombshell came as it raised its baseline estimate for the US budget deficit to $407bn this year and a record $438bn next year owing to falling revenues and higher spending, some of it related to the fiscal stimulus.

The price of credit default swaps on five-year US government debt hit a record 18 basis points in early trading, according to CMA Datavision. This means that it costs $18,000 a year to buy insurance on $10m of US government debt.

Tim Backshall, chief strategist at Credit Derivatives Research, said the price implied that the US was more likely to default on its obligations than Japan, Germany, France, Quebec, the Netherlands and several Scandinavian countries. Traders said the CDS market for US debt was illiquid and it was hard to see evidence of increased concern over US creditworthiness in broader market prices. (Give it some time and we might be able to add Venezuela, Argentine, Trinidad and Tabago to that list - Jesse)

The price of US government bonds rose and yields fell across the board, as concern over the economic outlook overwhelmed any rise in perceived credit risk. Jay Mueller, senior portfolio manager at Wells Capital Management, said: “We are seeing flight-to-quality buying of Treasuries.”

Both Standard & Poor’s and Moody’s Investors Service said the government takeover of Fannie Mae and Freddie Mac did not affect the US’s triple-A sovereign credit ratings. “It does represent some deterioration in the US balance sheet, but it’s well within what we would call the triple-A space,” said Steven Hess, senior credit officer at Moody’s. (These jokers didn't problems at the monolines as they were going bankrupt. They must be wearing political beer goggles - Jesse)