Fannie and Freddie Jeopardize Economy, Housing Falls Further, Bernanke’s Plan, Oil Pulls Back, and More!

by Addison Wiggin & Ian Mathias

  • Fannie Mae and Freddie Mac plunge… how this latest scare could torpedo the U.S. economy
  • Home sales resume downtrend… when to expect a return to normalcy
  • Bernanke hints of worse to come… and puts trillions of taxpayer dollars on the hook
  • Oil sheds $9… what’s behind crude’s about-face
  • Last, a noteworthy trend… what happens when baby boomers and a bear market join forces?

  Now this is getting interesting…

Pretty nasty, eh? Fannie and Freddie, the pillars of the mortgage industry, suffered a barrage of bad news yesterday… both look as if they could collapse any minute.

First, a report (from Lehman Brothers, of all places) suggested that a new federal accounting rule would force the mortgage buyers to write down a stunning $75 billion. The new rule, FAS 140, alters the way companies like Fannie and Freddie can hold assets off the balance sheet… long story short, if Lehman is on target, Fannie and Freddie would have to unload a massive amount of illiquid mortgage-backed securities at a huge loss… a loss big enough to bankrupt both companies.

On top of Lehman’s report, rumors were circulating regarding Fannie’s and Freddie’s upcoming earnings reports. Both are expected to announce losses, and yesterday, word leaked that both would need another hefty dose of emergency capital. As you’d guess, the cost to insure Freddie and Fannie debt shot through the roof. Confidence in either company’s ability to stay afloat is… well… approaching nonexistent.

  Why should you care? We’ve mentioned before Fannie and Freddie’s incredible chokehold on the mortgage market. With pathetically small reserves, the two “guarantee” about half of the $12 trillion residential mortgage market. Most of those trillions have been securitized and sold off to banks, which hold them in their reserves as if they were as good as cash.

So you can see where this is going… already wounded housing market risks having their mortgage masters go under… the equally screwed financial sector risks having to deal with another breed of illiquid assets… or the U.S. government coming to Fannie and Freddie’s rescue with a multibillion-dollar bailout — which would be just awesome for the dollar.

  And it gets worse… pending home sales declined 4.7% in May, says the National Association of Realtors this morning. Aside from falling more than expected, the latest reading of homes under contract to be sold was particularly tough on housing optimists: You might recall April pending home sales surprisingly rising… this month’s return to the downside puts the kibosh on any hopes of a market bottom earlier this year.

“The overall decline in contract signings suggests we are not out of the woods, by any means," said Lawrence Yun, NAR chief economist.

  “The housing meltdown persists and will continue for at least another year or two,” writes David Galland. “Unless, of course, the government gets serious about ‘doing something’… in which case, the downturn could last five or 10 years.

“Why do I say that? What the market needs most of all right now is for house prices to fall, as quickly as possible, to a market-clearing price. The problem, of course, is that thanks to the self-serving exuberance shown by many appraisers during the real estate bubblemania, at this point, nobody actually knows where the bottom is. Another 10%? 20%? 30%?

“There really is only one way to find out… let the brush fire burn, as painful as that will be. But as I don’t need to tell you, ‘doing nothing’ is not a concept that politicians in an election year are very comfortable with. And so, like trained seals leaping after vote-fish, the politicians will jump through any number of hoops to keep people in their homes, even though many can’t afford the carrying costs, let alone the mortgages. That only prolongs the pain and increases the government deficits that are at the core of the current crisis.”

  Government statistics be damned… 75% of Americans believe we are currently in a recession. According to the latest CNN poll, three out of every four U.S. citizens say we’ve entered a period of economic decline.

But here’s the part we didn’t expect… less people believe we are in a recession than the last time CNN conducted this survey. The latest score fell 4% since April, the first time attitudes have improved since October 2007.

  “We are currently monitoring developments in financial markets,” said Ben Bernanke today at a forum in Virginia. The Fed is “considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets."

Translation: Financial risks remain, and the Fed is wiling to keep pumping cheap money into investment banks for as long as it takes.

  Speaking of which, the Federal Reserve injected another $100 billion into struggling financials last week. Bernanke and company dolled out $75 billion in cheap loans to major banks in its 15th TAF. Then, in its 15th TSLF, the Fed brought on another $26 billion in illiquid asset-backed securities onto its balance sheet in exchange for U.S. Treasury notes.

Combine the two auctions and the Fed has now invested nearly $1.2 trillion of your money in this credit crisis. Trillion… with a “T.”

  Shockingly, the stock market is taking Fannie, Freddie and other financial distress in stride. Major stock indexes declined yesterday, but by small margins. The Dow fell 0.5%, the S&P 1%, and the Nasdaq finished nearly unchanged.

  Oil’s big decline over the past two days has been crucial in keeping the market out of the dumps. Light sweet crude is down nearly $9 this week, to $136 this morning. No big story seems to be moving the market, just a handful of bearish news:

Tomorrow’s oil inventory report is widely expected to show declines in oil and gas consumption last week. Reducing oil dependency is a hot topic at the latest G-8 meeting, which started this week. The first real hurricane of the year, Hurricane Bertha, is now predicted to remain in the Atlantic, away from significant oil deposits. Also, saber rattling between Iran and the U.S. has died down a bit… Iranian President Mahmoud Ahmadinejad said overnight that he does not anticipate armed conflict with the U.S.

  Despite oil’s pullback, gasoline remains at its all-time high today. The national average is still $4.10 a gallon.

  The dollar is in a holding pattern, as well. The dollar index is at 72.9, a hair below yesterday’s levels.

  Gold managed to tie off its recent bloodletting yesterday. Spot prices fell as low as $915 before stabilizing. As we write this morning, an ounce of the stuff will cost you about $920.

 Last, here’s a trend worth keeping an eye on…

That’s a pretty loaded chart, courtesy of this morning’s Boston Globe. Investors are racing out of retirement accounts so far this year… that net outflow in April was the first of its kind since September 2005.

Obviously, the market sucks and investors are bailing, but we wonder how the rapidly aging U.S. population is coming into play. We’ve mentioned our interest in demographics here before… tens of millions of baby boomers will open their second-quarter fund statements with a frightful shriek this month. The first official wave of ’em is eligible for retirement this year… 75 million will be entitled in the next 18 years.

So… we wonder… How many will have the stones to watch a bear market eat away at their nest eggs? What happens to an already bearish fund market when the biggest demographic this nation has ever known starts to cash out?

  “America has no enemies that it has not itself created,” writes a reader in response to yesterday’s inbox. “Most people just want a good life, and not at others’ expense. But what your readers haven’t figured out is that this is NOT how the leaders of our country think. To examine this further, get a copy of William Blum’s book Killing Hope. It is about the long history of the CIA undermining democracy and hoping to do so in many places.

“Now, having apparently failed to keep down and control China and many other countries, the leaders of our country are attacking us! Infrastructure is trashed, the health care system is a mess, school achievement is far below that in other countries (Chinese kids take NINE subjects at school — they work very, very hard).

“The leadership of the USA is really sick. It creates enemies everywhere, even treating its own people as enemies, with the Foreign Intelligence Surveillance Act, wiretapping and other legislation. And of course, the military gets the lion’s share, leaving the rest of the economy (like, try solar panels on every house?) starving.

“There is a saying: ‘All beings are the owners of THEIR karma.’

“The world will shrug its shoulders, give us a smile and move on, leaving us in the dust. Americans are collectively mentally ill, and with a few exceptions, it doesn’t appear to be getting better. They’ll keep blaming others for their failed American Dream.”

  “It’s interesting to note,” writes a reader, “that so many people think they have correctly analyzed the problems with America today. They bemoan the failures of government to adhere to the founding principles and identify politicians and others as the culprits. While I agree that there are problems in our country, they are of our own making. The tools for change are written into the founding documents. If you don’t like the current situation, throw the bas***ds out! No politician will refuse to take that which we freely give to him by our own apathy.

“I find myself in agreement with those who say that we get the kind of government we deserve. If one believes that the only way to deal with these problems is to leave the country, in my opinion, he is no better than those he criticizes. It’s hard to grant much credibility to those whose only apparent contribution to improving our country is to whine from afar.”


Ian Mathias
The 5 Min. Forecast

P.S. Interested in bagging 600% profits over the next six months… guaranteed? Get the details, here.

P.P.S. We’re happy to announce the Agora Financial Investment Symposium is SOLD OUT. Later this month in Vancouver, some of the finest minds in contrarian investing will meet to discuss how to protect and enhance your wealth over the next year.

If you’re signed up, fantastic… we hope you enjoy the show and look forward to your company. If not, you can still call (800) 926–6575 and get yourself on the waitlist.

And if you can’t make it this year, don’t sweat it… your 5 Min. crew will bring you the best of the Symposium along with our daily forecasts. Stay tuned; it’ll be a great show.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More