As you are no doubt aware, the big story in global fiancial circles on September 5 was the announcement that the US Treasury is going to put the two huge US GSEs ("Government Sponsored Enterprises") into what is conveniently called "conservatorship" - possibly as early as this weekend.
"Manna From Heaven"? As far as the paper-based asset markets are concerned, the jury is still out on that. The announcement of the Treasury's move was, of course, timed to take place AFTER Wall Street had closed for the weekend.
It is not quite two months since Treasury Secretary Paulson announced his Fannie/Freddie bailout scheme on July 13. The bi-partisan "Housing Bill" which contained the Fannie/Freddie bailout plan and a $US 800 Billion increase in the Treasury's debt "limit" was passed just over six weeks ago. You will recall that at the time, the message from the government "accountants" was that the bailout would cost $US 25 Billion "at most" and that there was a good chance it wouldn't cost anything at all. Everybody remembers Ben Bernanke's "helicopter money". July 2008 saw the addition of Mr Paulson's "bazooka". As he so jocularly informed Congress in July - "If you have a bazoooka (the housing bill) in your pocket and people know it, you probably won't have to use it."
And, of course, Mr Paulson didn't have to use it - for about six weeks. And while the tell-tale bulge remained firmly in his trousers, commodity and oil prices dived, world and especially Asian stock markets swooned, the Russian markets all but self-destructed, US stock markets tenaciously hung on and US financial stocks (including Fannie and Freddie) soared. And last but not least, the US Dollar staged a remarkable rally which is still going on. On September 5, the USDX hit the 79 point level for the first time in nearly a year.
Now, the bazooka has been hauled out and pointed. The US Treasury will take Fannie and Freddie into what is called "conservatorship". This would replace the boards of the two GSEs and all but wipe out the common stockholders. Preferred stockholders and holders of Fannie and Freddie issued debt paper would, however, be the beneficiaries of government guarantees. This is necessary since foreign financial institutions and central banks hold huge swathes of this paper and any threat to its future viability would inexorably lead to panic sales. Sales there have already been, of course, with foreign holdings of Fannie and Freddie paper having declined for the past seven weeks, ever since the bailout plan was announced in the first place.
The big "benefit" of conservatorship, however, is that the Treasury will NOT have to take the debts ($US 5 TRILLION plus) of Fannie and Freddie onto their own books and thereby increase their funded debt by anything up to 50 percent plus. Fannie and Freddie own or guarantee at least half of ALL outstanding US mortgages.
When the British government nationalised "Northern Rock" late last year, the immediate increase in government debt was put well in excess of 100 Billion Pounds (a bit more than $US 200 Billion). Fannie and Freddie are MUCH - MUCH bigger than that.
The two US political conventions are now behind us and the "tickets" are picked. Next week is the first full week of the full on race to replace George W Bush in September. Meanwhile, and ever since the Fannie and Freddie bailout was first announced in mid July, global markets have been turned on their heads with the rest of the world stumbling and the US markets and the US Dollar staging a remarkable rebound. Mr Paulson hoped to continue this without actually having to resort to a replay of the Bear Stearns bailout on a vastly bigger level. He, and his colleagues, have apparently decided that they can't risk that.
Gold in $US terms remains about 20 percent below where it was when the Bear Stearns bailout was announced last March and when the "Housing Bill" was announced by Mr Paulson in mid July. The US Dollar is almost back to the level it held when the global credit crunch first hit in earnest in August 2007. All of the market gyrations since those dates have failed to shake one cardinal article of global faith. And that is that come what may, no matter how bad things get and how many debts prove unrepayable, the US government will come to the fore, take matters into their own hands and bail everyone out. How? By issuing even greater reams of debt, that's how.
Only time will tell if the Fannie/Freddie nationalisation (calling a spade a shovel) will prove the blast of cold air which dissipates this miasma of "hope". If this isn't the one, the next one will be, or the one after that ... One does not put out a fire by pouring gasoline on it.
(Chart appears here in original analysis.)
As you can see, the price action on this chart has taken Gold just below the uptrend line which has supported the entire bull market from 2002 to date. We also have descending lows on the chart - the $US 1000 high set in March and the $US 975 high set seven weeks ago in mid July. With the rebound last week, the price action once again moved above the uptrend line. Now, with Gold back to just above the $US 800 level, we wait to see if the support can hold.
We began the table below in 2007 and have extended it into 2008, even though Gold in all four currencies in the table remain well above their 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March.
Only six weeks ago, we had a new entry on the table for the first time since Gold topped the $US 1000 level in March. On July 17, Gold rose to 103233 Yen. That's was a new 2008 high for the metal in terms of the Japanese currency.
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