Sep 19, 2009

Pouring More Fuel On The Fire - The Next Inevitable Bailout

Whoever thinks we are out of the woods is in for a rude awakening. We are merely in the eye of the storm. I won't even get into the catastrophe that will be commercial real estate, rather the next likely current bailout experiment which is the FHA. These following facts are actually quite entertaining if the bailout money wasn't coming directly out of the taxpayers pockets --> the printing press (more inflation).

- The FHA now controls over a trillion in existing / recently originated mortgages.
- They are requiring a 3% ( which is 0% when tax credits are included) down payment for new home loans
- That being said, there will be a flurry of new eager individuals wishing to own a home.
-NOW FOR THE KICKER..... FHA has a mere 30 BILLION!, yes only 30 BILLION! in loan loss reserves before they go broke as well ( reminiscent of Amtrak, The Postal Service, etc). This all comes in the face of ARMS about to reset in the coming year and 2011, unemployment headed towards double digits... Get the point? Did I mention they own over a trillion dollars of mortgages, a number that is climbing by the second.
-This calamity will result in hundreds of billions of mortgage defaults... and do you think the government will just them rollover and die? Past precedent tells me NO, but that is just my gut speaking.
-It is not enough that they only have a mere 30 billion to cover future defaults but rather that they continue to originate loans at a torrid pace. Easy money and reckless lending got us into the mess in the first place! Maybe I'm just the crazy one but this seems to me that this can only exacerbate the current situation.

Now lets incorporate our trading partners public remarks (imagine what is being said behind closed doors) of 2009. In other words, our foreign money spigots are being taken away - which can only include debt monetization (whether publicly announced or through a phantom agency The FED will or has been using to purchases debt securities).

- Recent headlines of the new Japanese regime send a strong signal they will no longer subsidize the U.S economy via purchasing our debt ( which only has weakened the Yen as they borrow money from their own citizens to prop up the illusory economy we have seen in the U.S over the decade). Let's not forget the China-Brazil agreement which more or less says trade among these two respective countries will be done using Remimbi/Yuan and Real.
- It is also worth noting the actions taken by the Chinese this year apart from the aforementioned China-Brazil news. Though China has continued to purchases U.S debt ( though at a much slower pace) , they have been swapping longer term maturities i.e 10, 30- year for much shorter term i.e 1 , 5-year. This speaks for itself! They have caught on to our devious strategy of paying them back with incredibly depreciated dollars, but have slowly and intelligently moved into debt that will mature in a much more timely manner negating to some extent the debasement of the currency they will be re-repatriated in. It is also quite interesting that the Chinese government has recently been promoting their citizens to purchase much safer stores of value i.e the precious metals. This most likely has to do with the fact that they will wait for the U.S to begin raising the FED Funds rate ( Yeh, and pigs have wings) before they increase their prime rate. This paragraph is laying the foundation for China's eventual exit strategy (YES, IT IS CHINA WHO HAS AN EXIT STRATEGY, NOT THE U.S).

My Take On The Situation: Now is not the time to be complacent unless you are comfortable with watching the purchasing power of your savings disappear before your eyes. By this, I am referring to that held in both government or any other U.S debt and the US Dollar. I have gone from hearing "we are in a deflationary spiral" one year ago to forecasts from individuals from every school of economic thought expecting a long term downtrend in the dollar. These statements (deflation and a falling dollar) are contradictory as deflation would manifest itself in a strengthening dollar ( which we have obviously not seen as the U.S dollar index has gone from a 2009 high of about 89 to the current level of 76 or YTD decline of over 14.5%). Facing reality is often a tough thing to do but how many people expect no more banking crisis? I gather the FED very much so expects these illustrated from the 700+ Billion in excess reserves lying dormant in the system. Now I think at least 75%+ of that will be used to cover future loan losses but these are very inter-related as the inability to cover off the loan losses will cause the next round of bank failures or more eloquently referred to as BAILOUTS.
Not to sound redundant but the brief list is my best strategy to protect your wealth to inflation tsunami about to hit:

- Physical bullion - both Silver and Gold - Those closer to retirement would likely prefer all or a significant % weighting in this asset class to Gold due to the less violent day-day volatility. Though silver will likely outperform due to the substantial industrial aspect as well as its monetary value. These can also be owned electronically via the SPDR'S Gold ETF (GLD) and the silver counterpart (SLV). For those who are skeptical of mining equities, leverage can be found in the double gold ETF (DGL) and double Silver ETF (DBS).

- The Precious Metal Royalty Companies; Franco- Nevada (FNNVF.PK), Royal Gold (RGLD), and Silver Wheaton (SLW). These provide leverage with reduced mining risk as they put forward an initial capital outlay to a precious metal miners in exchange for a pre-determined percentage of that which is mines for a specific amount of time.

- Gold and Silver Mining equities, which can be broken down as follows: The largest gold producers - Barrick Gold (ABX) , Newmont Mining (NEM), Goldcorp (GG), and a few others. The next group consists of the emerging seniors - Yamana Gold (AUY) , Agnico- Eagle Mines (AEM) , Lihir Gold (LIHR), RandGold (GOLD) among others. This group provides the most leverage to the underlying metals relative to those mentioned thus-far but also carry some additional risk. The next group (emerging mid-tier/ juniors) is in my opinion are the most lucrative assuming you put forth your own due diligence i.e assessing the qualitative and quantitative aspects of the company. That being said I prefer such miners as Jaguar (JAG), Aurizon (AZK), Kirkland Lake (KGILF.PK)and others.
- In my humble opinion I feel it will be the often relatively overlooked SILVER miners who end up outperforming in this industry. My favorites or Coeur'dAlene Mines (CDE), Silver Standard Resources (SSRI), First Majestic Silver (FRMMSF.PK) and a host of others.

- Some other was to play this are of course the oil complex and my favorite, (next to mining) Agriculture. I particularly find the Canadian Oil Trusts and The Canadian Oil Sands. The Following is a brief list of some of favorite ways to plays this: (though not my top picks) PennGrowth (PGH) , Canadian Oil Sands Unit Trusts (COSWF.PK), Suncor (SU), Talisman (TLM) and New Zealand Oil and Gas (NZO.AX). I think my ramblings have dragges on a bit to long but my favorite agriculture plays are wheat and corn ( I have yet to put in the necessary time to explore the supply-demand fundamentals of other potentially profitable investments in the complex).
-Other ways to play a falling dollar Australian Currency Shares (FXA), Canadian Currency Shares (CAD) , Ultra-Bearish USD (UDN).

Disclosure: Long:(AUY) ,(AEM) 2011' Calls, (KGILF.PK),(JAG),(CDE),(SLW) (SSRI) Calls,(FRMMSF.PK),(FNNVF.PK),(PGH),(COSWF.PK), (SU), (TLM) Calls , Wheat Futures , Mini-Silver Futures

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