Another Housing Rescue, The Bernanke Sandwich, A Positive Economic Indicator and More!

by Addison Wiggin & Ian Mathias

  • Government unveils new-and-improved housing rescue program: Why it’s as doomed as the last one
  • “The Bernanke sandwich”… Powerful sign of rising interest rates
  • A real-world economic indicator that actually looks healthy
  • Could “something bad” happen to gold? Byron King on a nagging worry
  • Public opinion polls, life in France…. Reader mail delivers The 5 brickbats and bouquets alike


  For weeks, the question has lingered: Now that the Fed is following through on its promise to stop buying up shaky mortgage-backed securities, what will the powers that be do to prop up the housing market next?

This morning, we have our answer, direct from the White House. And rest assured, you’re on the hook for some of it. The details in a moment… First, let’s step back and take stock of the government’s efforts to date.

  A report just out from the Office of the Comptroller of the Currency delivers this startling statistic: 51.5% of delinquent borrowers who’ve gotten loan modifications defaulted again after nine months. Ouch.

  Another new report, this one from the inspector general of the TARP program, confirms what we’ve previously documented: The Home Affordable Modification Program (HAMP) is a joke.

“A year into the program, although more than a million trial modifications have been initiated, the number of permanent modifications thus far, 168,708, has been, even according to Treasury, ‘disappointing,’” says the report. “The program will not be a long-term success if large amounts of borrowers simply re-default and end up facing foreclosure anyway.”

A big reason? Most of the modification agreements don’t reduce the borrower’s principal. In fact, in many cases, the principal grows. (Nifty way to shore up a bank’s balance sheet, eh?) The report notes that "HAMP allows principal reduction, but it is not typically implemented in practice,” and until it is, the incidence of “strategic default” will likely grow.

  So into this breach steps the White House with its latest and greatest plan: Having failed to help underwater homeowners who are delinquent, it now proposes to help underwater homeowners who are still current with their payments. The highlights…

  • Borrowers who’ve lost their jobs can make sharply reduced payments — or in some cases, no payments at all — for up to six months
  • Banks will now be given an incentive to reduce principal… courtesy of you, the taxpayer: The government will use $14 billion of TARP money to cover their losses. A chunk of this money will be used to help clear home equity loans and HELOCs. In a foreclosure, those are second in line behind the primary lien holder, and, on an underwater home, are frequently worthless
  • Borrowers taking advantage of the program would refinance into a loan backed by the Federal Housing Administration. So the banks might book a loss (covered at least in part by the TARP money), but they’ll shuffle the risk of foreclosure onto the FHA — which faces rising losses on the loans it backs already.

All of this should work out for homeowners and taxpayers at least as well as HAMP, if not better. But if it cushions the fall in housing prices, well… mission accomplished.

Except for one fly in the ointment: If mortgage rates start to rise, all bets are off.

  This brings us to a phenomenon that emerged over the last 48 hours. We call it “the Bernanke sandwich” — a reaffirmation of loose monetary policy, sandwiched by two lousy Treasury auctions.


Let’s walk through the timeline…

  • Wednesday, 1 p.m.: Treasury auctions $42 billion in 5-year notes. Demand is weak
  • Thursday, 10 a.m.: Ben Bernanke tells Congress, “The economy continues to require the support of accommodative monetary policies”
  • Thursday, 1 p.m.: Treasury auctions $32 billion in 7-year notes. Demand is weak.

Foreign investors in particular failed to show up. Put it all together, and the yield on a 10-year note is up to 3.9% now — the highest since last June.

Given the rough correlation between the 10-year note and mortgage rates, yesterday was probably your last chance to snag a 30-year fixed under 5%. Sorry ’bout that.

Plenty more where this came from. Treasury is expected to auction $1.6 trillion in new debt this year. That’s in addition to existing debt that’s coming due and needs to be rolled over.

  The Commerce Department is out with its third and final estimate of GDP for the fourth quarter of 2009. It’s an annualized 5.6%. Not as healthy as the previous estimate of 5.9%, but not a huge reduction, either.

Unpacking the statistical sleight of hand here seems hardly worth the bother. We’ll just remind you of what we said six weeks ago: According to John Williams, the fourth-quarter trade deficit alone ought to slice more than a percentage point off GDP.

  As usual, we like to look for more real-world measures of economic health that can’t be massaged by bureaucrats. So here’s an actual reason for cheer: The latest measure of rail traffic is as good as it’s been since late 2008.


Compared with a year ago, every category of cargo is up, except coal.

  European Union leaders meeting in Brussels have drawn up a Greek rescue plan. Not that they actually think it’s necessary yet. But if it does become necessary, it’ll rely on loans from the International Monetary Fund, and not just the EU. (Thus, German Chancellor Angela Merkel got her way.) A statement issued after the summit expressed confidence Greece can still climb out of its fiscal crisis on its own.

Sounds as if they more or less kicked the can, right? No matter: The news made the euro bounce off its 10-month low — barely — returning above the $1.33 level. The dollar index is back below 82.

  Major U.S. stock indexes opened up 0.5%, thanks to the GDP figures and the Greek debt news.

  Dollar down, gold up: The Midas metal is back to $1,095 this morning.

  “Could something bad happen to precious metals?” asks Byron King in response to a reader. “Do I worry about the gold and silver miners? Are you serious? Sure, I worry! The prices could drop!

“If prices went south, that would tank the mining stocks. But that’s true of everything else in this world as well. If people stop buying houses, the housing sector plummets, along with the consumer companies that sell everything from carpeting to dishwashers to draperies.

“What could cause precious metals prices to drop? We saw a practical example late 2008 and early 2009 during the market crash. People and investment firms sold everything when they had to raise cash fast to meet margin calls. They started with the good stuff — precious metals. That is, when the market hit the wall, people sold what they HAD to sell, not what they wanted to sell.

“So we saw the price of gold, for example, drop into the $700 per ounce range. But that was paper gold, mostly. Most people who were holding real metal just rode out the storm. And the price of gold didn’t stay down for long. Gold prices rebounded strongly in 2009, bringing most of the miners along with strong comeback stories.

“So the lesson is that gold can go down, but it’s among the things that rebound the fastest.”

Byron is one of five Agora Financial editors who’ve just recorded an exclusive video naming seven of their favorite stock picks for the rest of 2010. (Of one, he recently said during a meeting here in Baltimore, “It’s a $2 stock going to $200.”)

We’re making this video available in response to intense demand for something we’ve never offered before: A wide range of stock advisories, stripped of any options trades. If that’s up your alley, we’ve put together a package that delivers everything you want, and nothing you don’t. The video goes live at 4 p.m. next Tuesday. If you want in, go here.

  “Citing a poll of Fox viewers,” a reader grouses about yesterday’s edition, “is like citing a poll of CNBC viewers, or drunks at a bar — meaningless and unrepresentative. You know better than that.


“You also know the vast majority of the deficit is the Bush legacy. If you believe in fair, factual and proper journalism, compare those numbers.


“But, stay away from journalism. I subscribe to your publication for financial, not political, information. Your ability to do fair journalism is comparable to The Huffington Post doing good financial commentary.

“Keep it up, and I will drop my subscriptions. Yes, I said ‘subscriptions,’ because I will doubt your credibility.


“Print this!”


The 5: Ah, the old “I dare you to print this” trick. Works every time. So… where to begin?:

1. We did not cite the Fox poll (which surveyed more than just Fox viewers) as gospel truth. It’s just one of three polls we cited that all point to the same general trend.

2. We took a back seat to no one chronicling Bush’s spending sprees in real-time.

3. Try as we might, it’s hard to avoid dealing with politics when government dictates much of what happens in the economy and the financial system

  “The Fox News poll is contrary to Investors Intelligence, which indicates the percentage of bears has fallen to the lowest level since 1987, or the American Association of Individual Investors, which indicates the percentage of bears are at the lowest level since 2006. Fox News wouldn’t ever publish biased news, would they?”

The 5: Apples and oranges. A survey of investors and investment newsletters about the market is not the same as a survey of the general public about the broader economy.

In fact, it’s that disconnect that makes the polls we cited so instructive. People aren’t buying the happy talk that we’ve “pulled back from the brink,” even if the Dow is pushing 11,000 again. A year ago, they might have still believed that because we had a new president and Bernie Madoff was in Club Fed, we’d all start getting rich again by selling each other real estate. No more.

Sorry, but we think that’s interesting. One possible consequence of many: A frightened Joe Six-pack, gorged out on credit, eventually stops propping up consumer discretionary stocks.

   “I couldn’t help but respond to the ridiculous statements about France,” writes another, continuing a discussion Bill Bonner started earlier this week. “Not trying to be picky, but it’s hard when your reader had virtually every fact wrong.

“Having spent a great deal of time in France, I can say that the French have a many great qualities, but ‘passive’ and ‘tolerant’ are not among them. This is country, after all, where strikes and civil disobedience are enjoyed with a zeal usually reserved for football matches.

“France’s health care quality is consistently rated No. 1 in the world — and for good reason.

“‘Highest vehicle accident rate in the world’? Hardly the case at all. The rate is two-thirds the rate in the U.S. and waaay below some of the truly scary places to drive (South Africa, anyone?).

“‘More French people die of cirrhosis of the liver than anyone else’? Utter madness…clearly, the reader has never spent any time in Eastern Europe or Russia, where drinking in truly a national pastime.

“Seriously — could even a little fact checking hurt?

“Great newsletter – keep it coming!”

  Another reader who saw the same critique writes, “Thanks for publishing fair criticism of Agora’s authors. Publishing criticism maintains integrity and leaves the journalistic process transparent (even though Agora is opinion, not journalism) — it helps to maintain credibility. It also allows people to come to their opinions on a given issue, however irrelevant it may be to investing. Keep up the good work!”

Have a good weekend,

Dave Gonigam

The 5 Min. Forecast

P.S. We’ve gotten a number of inquires about the Agora Financial Equity Reserve, and most of them center on this question: If I join up, exactly what sort of credit do I receive for my existing subscriptions?

Since the answer is unique to every person, we invite you to get a personalized answer by calling our colleague John Wilkinson at (866) 361-7662. He and his team will look up every subscription you have, tally it against the one-time join-up fee for the Equity Reserve and give you an answer to the penny. They’re here from now till 5 p.m. EDT today, and they’re waiting to hear from you.

P.P.S. Addison and Ian return to these pages next week. Expect a full report from Addison on the “chill weekend” at Rancho Santana.


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