Fed Speaks & Traders Sell, The Return of Mortgage Backed Securities, A Front Lines G-20 Report and More!

by Addison Wiggin & Ian Mathias

  • Fed speaks, traders sell… what’s causing the new bout of investor apprehension
  • Remember mortgage-backed securities? One chart says you’ll soon be talking about them again
  • Dollar the winner, yet again… Bill Jenkins on which currency will likely be the biggest loser
  • Want the scoop on the G-20? You’ll have to drive outside of Pittsburgh, says Byron King


  You know this feeling…

You’ve been waiting for a package all day, keeping one eye out the window for that little white truck. Then the mailman comes… he’s got a box! He’s at the door. Ding-dong! Sign here, please. You hurry the package inside and rip open the box with a crude combination of car keys and brute strength. The packing peanuts spill out and the contents are revealed. You grasp your prize with both hands…

Crap. This is what you ordered, but not what you thought it would be. The color’s off. Size isn’t right. Euphoria is slowly replaced by doubt… then disappointment… and finally frustration. Now you’ll have to go about undoing this mishap, and the process of shipping it back and battling with customer service makes you quietly wish you never ordered it in the first place.

If you haven’t picked up on our metaphor yet, here’s a hint:

  So what got traders in such a tiff? Heh, we could think of a couple different things. First, here’s the quick-and-dirty version of the Fed’s announcement:

  • “Economic activity has picked up following its severe downturn,” but “economic activity is likely to remain weak for a time”
  • The Fed will continue its plan to buy $1.5 trillion in mortgage-backed securities. They’re now looking to end this program in the first quarter of 2010, later than originally planned
  • Planned purchases of Treasuries will be completed by October, at a cost of $300 billion
  • Rates stay at near zero and will stay “exceptionally low” for “an extended period”
  • “Inflation will remain subdued for some time.”

  “Investors figured out,” says our friend Chuck Butler, “that by leaving the stimulus in place longer than originally planned, the Cartel, I mean the Fed, is confirming that the U.S. economic recovery isn’t nearly as robust as Big Ben and his compatriots have led everyone to believe. Stock markets fell and the Treasury rates rose. With the stocks backing off, the risk assets of currencies and precious metals backed off VS. the dollar.”

  The mere thought of the Fed leaving the mortgage-backed security market likely caused much of the stock sell-off too. Bernanke and his brood have been relentless consumers of the housing-backed garbage this year:

Of the $8.9 trillion mortgage-backed securities market, the Fed will own almost 17% of ’em when it’s all said and done. Of MBS issued since the recession began, The New York Times says the Fed owns up to 80%.

So now the Fed says it wants out by March 2010 — right at the time, we hasten to add, that the infamous second wave of ARM resets is supposed to crash ashore. When the Fed abandons this binge, who will belly up to the bar and take their place? Will the Fed then become a net seller, or will it just let these toxic assets rot on their balance sheet? How could mortgage rates possibly stay so low? Maybe we’ll have to choose between another MBS crisis or selling the U.S. housing market to China… assuming they even want to buy it.

Could the whole housing recovery be a fraud?

  Evidently not content with souring just yesterday’s market, the Fed kick-started a sell-off today too. The market was wandering up, but quickly fell into the red when the Fed announced it is pulling back its TAF and TSLF programs. The TAF, in which they auction off loans from the discount window, will no longer have an 84-day auction — just the 28-day. The size of the TSLF, which loans Treasuries to banks in exchange for toxic securities, will be downscaled by over 33%. 

This is boring stuff, we know. But the two programs have thrown hundreds of billions of dollars on top of this mess, and the market is none too pleased to see the Fed scaling back. As we write, the S&P is down 0.8%.

  Just like this time last year, nearly every commodity is following stocks down today. Oil is down two more bucks to $66 a barrel. Copper is off a dime, to $2.68 a pound.

Even gold, as Bill Bonner predicted two weeks ago, is losing its luster. The spot price fell right through support around $1,005 and goes for $997 as we write.

  And yet again, the dollar is today’s sole winner. A flight out of everything else has bumped the dollar index up half a point, to 76.6. Ditto with U.S. Treasuries — another popular haven. The yield on a 10-year fell from 3.5% yesterday to 3.3% as we write.

That’s bad news for all global currencies, but especially the British pound. “The fall in the exchange rate that we have seen will be helpful,” said Bank of England Gov. Mervyn King today, one of the rare worldly central bankers actively talking down his currency. King all but confirmed ultra-low lending rates in Britain for a long, long time.

“The Bank of England announced this week,” notes our currency adviser Bill Jenkins, “considering how bad things are in the United Kingdom, the price of the currency may become forever altered. While it’s a bit cryptic, I believe it could mean that the sterling, which has long been above parity with the U.S. dollar, may be on an irreversible slide to parity or less.

“Note that even while other currencies have enjoyed appreciation against the dollar, the sterling is struggling for its life. Being slowly discarded by investors, it has not joined the party with new highs. A measured drop from its current head-and-shoulders formation would yield a target of 10 cents lower. That’s huge, and it is on the brink of that now.”

The pound goes for $1.60 today. The euro is at $1.46.

  Now that the Fed’s done their damage, the market turns its eyes to Pittsburgh. But if you’re looking for the real G-20 story, drive about an hour to the southeast.

“I think that the big news will happen near the old coal mining town of Nemacolin,” says Byron King, whose Outstanding Investments desk rests firmly at the front lines of today’s G-20 scrum.

“About 70 miles southeast of Pittsburgh, near Uniontown (birthplace of George C. Marshall), the five-star resort at Nemacolin Woodlands is 100% booked. The Chinese are staying there. Just to be on the safe side, the state police are closing major roads for 10 miles in each direction. Access will be via helicopter to and from the Nemacolin airstrip. My informants tell me that quite a bit of the nitty-gritty of the G-20 will occur at remote Nemacolin, far from the street protesters who have showed up to camp in Pittsburgh.

“My bet is that the biggest news to happen at the G-20 will happen there, but it won’t get reported, or won’t get reported in the way it deserves.

“The news will be about how the Chinese and the International Monetary Fund have agreed on a sale of IMF gold to the Chinese state treasury. It’ll be 400 tonnes. It’ll increase Chinese state reserves by 40% overnight. The mainstream media will say nary a word.

“But if you’re an Outstanding Investments reader, you know what I mean. I don’t even have to explain it to you. Yep. 400 tonnes. We’ll see.”

Not an OI subscriber? Have Byron explain his point with his latest special report on precious metals investing.

  By the way, check out Byron on MarketWatch today. He’s been telling us about the China/rare earths conundrum since March of 2008, and we’re happy to see the mainstream finally coming around to the idea that “Rare earths are vital, and China owns them all.”


  In the data batch today, more signs that we’re still mired in recession. Existing home sales fell 2.7% last month after July’s surprise upswing. The Street was looking for home sales to continue their recent winning streak with an annual sales rate of 5.3 million… they got just 5.1 million.

In a similar fold, initial claims for jobless benefits fell by just a bit to 530,000. That’s fewer than analysts expected, but much higher than the historic norm. We’ve got more to say on this matter, but the clock is tickin’… more on the trend in unemployment claims tomorrow.

  Last today, we report one bull market amid a parade of plunging asset classes: coupons.

Over 3 billion coupons will be redeemed this year, reports coupon processing company Inmar. That’s about 13% more than yearly averages from 2006-2008. Redemptions increased 10% alone in the fourth quarter of 2008, the first uptick in nearly two decades.

Here’s the interesting part: The most popular coupon users are households earning $70,000 a year or more, not the “lower class.” Why is that?

  “Ha! Do you feel adequately represented?” a reader writes, somewhat peeved with our quick response to yesterday’s reader mail. “Your choice is McCain or Obama. Quick, which one adequately represents you?

“Our choices are limited mostly to career politicians who can afford to play the game. You think a guy like me can run for office using YouTube as my media? I can’t afford the $20 million that Linda McMahon can. Ron Paul raised plenty of money, and they still wouldn’t let him into some of the debates.


“We are represented. But adequately? That doesn’t seem to be true to me. And why isn’t there anybody to take up the cause? Because by the time you have enough money/influence to play opposition in this game, you’re no longer of the lower classes that are going to get crushed by the policies and taxes which they themselves ignorantly invite. If change comes, it will be from small-business owners and entrepreneurs who have been taxed and regulated out of business. When these people are so fed up with the system that they begin running for office and winning, then we will be adequately represented. Until then, let’s all talk about a sugar tax.”

  “In regards to the sugar tax debate, I agree that we have nominal representation,” writes another, this one a bit more in tune with point we were trying to make. “How about: ‘No taxation without competent representation’! My ‘representative’ in the U.S. House is the biggest dud and party hack around. One of my two senators is just as bad. So what does it mean when you are ‘represented’ by people whose schemes are antithetical to the principles of constitutional government and fiscal responsibility, and they are more than happy to empty your pockets to further these goals? Does that, in fact, constitute representation?

“In general, social engineering taxes are a really bad idea, and a very slippery slope. For instance, virtually every study of coffee has shown that it is good for you, yet there are still proponents of a coffee sin tax out there (some in jest, but never underestimate the power of legislators when it comes to justifications for money-grubbing). The whole idea of the United States is that everyone is entitled to go to hell in the handbasket of their own choosing. Whether that includes smoking, McDonald’s fries or vegging in front of the boob tube is absolutely none of the government’s business.”


Ian Mathias

The 5 Min. Forecast

P.S. “Do you even know who "owns" your retirement?” Addison Wiggin asked us in an email yesterday. “If you think it’s you or your spouse or the 401k-plan manager who sends you statements, you’re sadly mistaken.”

Find out what he’s talking about here: The Great American Recovery Rip-Off!


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