2010 On Track for Record Deficit, FHA Spills the Beans, Goldman Works for God and More!

by Addison Wiggin & Ian Mathias

  • Government issues Friday the 13th scare… 2010 fiscal year on track for ANOTHER record deficit
  • Who’s buying our debt? Chris Mayer offers a surprising chart and sober forecast
  • FHA spills the beans… audit reveals leverage that would make Fannie Mae blush
  • Jim Nelson on a man you need to know: The saga of Richard Norris Williams II
  • Wall Street delusion his new level: Goldman Sachs and their mission from God, below


  Friday the 13th… let’s start spooky: Just one month into the 2010 fiscal year, the U.S. government is on track for a record $2 trillion annual budget deficit.

That’s the word from the Treasury Department, which quietly announced a $176.4 billion October budget deficit yesterday. Oh, let us count the records… record-high deficit for all Octobers, record 13th straight month of budget deficit and the fifth largest monthly shortfall on the books. Should we maintain this trajectory for the rest of the fiscal year, Uncle Sam will have accrued a $2.11 trillion tab — a record deficit even compared with last year’s $1.4 trillion mess. The Congressional Budget Office currently projects a $1.4 billion deficit for 2010… wouldn’t that be nice?

“We’re seeing deficits projected for the next 10 years of over a trillion dollars a year,” said Sen. Judd Gregg of New Hampshire, implicitly explaining why he was pseudo-fired as Commerce secretary. “It’s not sustainable. It’s not fair and it’s not right.”

  Nevertheless, the White House will soon begin petitioning Congress to raise the national debt ceiling yet again. On track to punch our public debt through the current “limit” of $12.1 trillion sometime in December, the Obama administration is rumored to be lobbying for a $1-1.5 trillion increase.

  And get this… in a weak effort to placate increasing public ire, the Treasury has promised to pay off some of the national debt with TARP leftovers.

“We are likely to have to borrow substantially less than we initially anticipated to help repair the damage for our financial system,” Treasury Secretary Geithner admitted this week. “That is going to allow us to devote greater resources to debt reduction. That is a fundamentally good thing. It justifies the basic judgments the president made…”

Heh, forgive us for not feeling justified just yet, Mr. Geithner.

Current estimates from the Office of Management and Budget say the Treasury could use as much as 210 billion TARP bucks to pay down some debt. A drop in the bucket… but we’ll take what we can get.

  Would you be willing to help pay down our national debt?

  “As I write, you can buy a 10-year Treasury note and get a 3.45% yield,” Chris Mayer notes. “Or you can tie up your money for 30 years for the grand reward of 4.39%. To me, those look like really bad deals. Investors who buy those things are bound to lose money. Yet there those yields sit… and people are buying. It makes me feel like the only sober hand in a poker game.

“The government, I probably don’t need to tell you, is running huge deficits and has a massive pile of debt and obligations. There is no way to make it work as is. The most likely way out for the U.S. government is to devalue the dollar by printing all it needs. Given that, I just don’t see how government paper is at all attractive at those puny rates.

“Eric Sprott, who runs a successful hedge fund in Canada, presented a chart at the last Value Investing Congress that solves some of the mystery. It answers the question who bought government debt:

“Economic buyers are people like you and me. We buy things because we think they are cheap and will go higher in value. As you can see, economic buyers were net sellers of government debt. No surprise.

“So that leaves the so-called official buyers. These are the Federal Reserve and foreign officials. These guys buy things for political reasons. The Fed buys paper to keep interest rates low. A foreign government might buy it to, say, keep its currency peg with the dollar. In any event, it is not sitting there thinking primarily about how to make a profit.

“And how can the Federal Reserve buy government debt? Isn’t this a little like taking your spouse’s debt? Yes, yes it is. It’s a very strange world we live in.

“All is to say that the yields we are seeing in the Treasury market are manipulated. I don’t know how long this game goes on. I do know that it’s not sustainable. Whatever happens, it’s bad for the value of the U.S. dollar.”

Here’s some value for your U.S. dollar: One month of Chris’ investment advice and four of his favorite natural gas stocks for just one single greenback. There is simply no better deal being offered in our industry at the moment… get your $1 Mayer’s Special Situations trial before this offer expires.

  The dollar index goes for 75.4 today, right around yesterday’s score.

Gold is taking a breather too. The spot price is at $1,115 an ounce as we write, $8 off yesterday’s record high.

  Just as we forecast, the Federal Housing Administration revealed yesterday that it will likely need a government bailout. The results of an external audit (after being suddenly delayed for a week) showed the FHA’s capital cushion to be just 0.53% of its portfolio of insured mortgages. That’s way below the 2% mandated by Congress.

In other words, the FHA has just $3.6 billion in reserves to back up a $679 billion book. That’s into the Fannie Mae stratosphere of leverage insanity, worse than anyone expected, and way, way beyond the Wall Street risk taking our government has so publicly vilified.

Of course, a huge portion of these loans are easy-money, 3.5%-down mortgages designed to replace the subprime market and keep housing afloat during the last few years… and we’ve chronicled before their alarming rates of delinquency. The FHA’s auditors said that under adverse housing conditions, the administration could be out of money by 2011 and require a $1.6 billion injection. We hasten to add last year’s audit forecast the FHA would have a $15.8 capital cushion today… only off the actual reserves by about fivefold.

But when the FHA comes to Capitol Hill with their tin cup, don’t call it a bailout. “There is no extraordinary action that Congress or anyone else needs to take,” said HUD Secretary Shaun Donovan. He’s right… long ago, Congress granted the FHA to borrow from the Treasury with relative impunity.

The FHA is also quick to point out that it has about $26 billion in a “financing fund” — a pool of money used to pay claims on defaulted loans. Coupled with reserves, they claim it’ll be enough because — of course — it’ll be different this time: “The story of FHA’s financial status at the end of FY 2009 is, then, the tale of two portfolios," Donovan told Congress. "The older portfolio has high rates of delinquencies and is expected to have high rates of insurance claims in the future. The new portfolio, which soon will be larger than the older portfolio, is expected to have more modest claim rates over the life of the loan guarantees."

  These are all problems for the stock market of the future. Despite yesterday’s pullback, major stock indexes will likely finish the week up about 1.5-2%.

  “The name Richard Norris Williams II might not ring a bell to you,” Jim Nelson wrote to his Lifetime Income Report readers yesterday. “But in the 1920s, everyone knew who he was. In 1912, 21-year-old Williams gained fame as a survivor of the sinking of the RMS Titanic. Later that year, he went on to earn his first U.S. mixed tennis championship. Now a member of the International Tennis Hall of Fame, there wasn’t much Williams didn’t win. He was a 1924 Olympic gold medalist, Wimbledon champion and a five-time U.S. tennis champion.

“On top of all his accomplishments, he was also a highly successful investment broker. He became a partner in an investment firm called C. Clothier Jones & Co. in 1929. His business partners in the small $5 million ($61.5 million today) firm were some of the brightest, most successful investors in the world.

“Of course, after the stock market hit the skids in 1929, the company took a hit. But thanks to the rally in first half of 1930, C. Clothier Jones & Co. was in better shape than ever. He was on top of the world in the spring of 1930. But just like the year before, market speculators pushed stocks higher than they were worth. By late summer, the rally turned into another massive sell-off.

“When October came around, Williams and his partners were doing everything they could to stay in business. Their investments turned to dust, and they were so incredibly overleveraged the only course for them was to fudge some numbers and blatantly lie to shareholders. Williams left the country in mid-October to get married in Europe. By the time he returned, he was a wanted man, for market manipulation. Four of his colleagues and large investors in the company had ended their own lives in that single week…

“We’re fortunate to have history lessons when trying to figure out the market. But there are certain aspects of today’s market that just weren’t there in 1930. Some, like emerging economies, give us a serious advantage over our forefathers. Even if the average investor of 1930 were aware of a possible second downturn, his options would be incredibly limited. Only a millionaire in 1930 could invest in other, safer economies.

“Today, it’s as effortless as buying an ADR through your online broker. We’ve ramped up our portfolio to reflect our favorites: Asia, Africa and Latin America.” For these emerging market income opportunities, read Jim’s Lifetime Income Report.

  Another Depression-era theme reborn: The middle class has turned to shoplifting to keep up the appearance of financial stability. Check out this report from the U.K. Times Online and retail security firm Checkpoint Systems:

“Quality cuts of meat, fresh fish and high-priced cheeses are being taken by mostly middle-class women from speciality food and convenience shops, where thefts have risen sharply in the past year. Thousands of retailers have found that luxury foods are being stolen for individual use, rather than to be sold on.”

The duo claims that shoplifting in the U.K. has increased 20% in the past year, led by theft in clothing, fashion accessory and home improvement stores.

  Last today, more proof that Wall Street has learned little or nothing from the credit crisis: Two Goldman Sachs executives have recently suggested that GS is “doing God’s work.” That first quote comes from CEO Lloyd Blankfein himself. He told The Sunday Times, "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle."

“The injunction of Jesus to love others as ourselves is an endorsement of self-interest," pontificated Brian Griffiths of Goldman Sachs Intl. inside London’s St Paul’s Cathedral a few weeks ago. For some reason, we just can’t hear Christ saying this one: “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all."

Incredible, right? This is definitive proof to us that “Old Testament God” is no longer around, lest it would be raining sulfur both here and in foggy London town. Rolling Stone’s gonzo journalist Matt Taibbi had another worthy retort to this truly amazing level of delusion. We share his final conclusion… “What a bunch of a$%holes!”

Have a good weekend,

Ian Mathias

The 5 Min. Forecast

P.S. With gold at new all time highs every day, our inbox has been getting more than the usual amount of questions concerning gold and silver coins. Unfortunately, we can’t respond with anything useful… since we are not licensed brokers (thank heavens), the SEC insists that we never offer any kind of personalized investment advice.

So here’s the deal: If you have questions about investing in coins, fire ‘em over to this address. We’ll pool the most popular and figure out a way to respond in a way that doesn’t get us in trouble with Uncle Sam.


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