Tuesday, September 22, 2009

The dollar, MBS, and the Fed

Hi All!

It's been a long day but thought it was important to discuss a few things tonight. Tomorrow is a big day because we hear from the Fed. The buzz on Wall St is all about the Fed's 80% ownership of MBS and all ears will listening to see if they plan on continuing their purchases of MBS.

Before I explain this let's take a look at the 1 year chart of the dollar because I thought this was the news of the day:

My Take:

That is one ugly chart. We are once again testing the key support level of 76. If this doesn't hold we could easily retest the recent lows of 72. If we break there? Find a desk to hide under because you could potentially see an unwind of the dollar.

Gold was up sharply once again as the dollar dropped. This is a deeply disturbing trend. Gold is now much higher than it was the last time the dollar was down around 72.

This tells me that the world is beginning to question the value of paper dollars as we continue to spend trillions that we don't have. This move in gold isn't an inflation trade IMO.

This is a total fear trade where investors are beginning to question the value of everything whether it be stocks, the dollar, or real estate. They are flocking to things that have historically held value. Gold has done so for thousands of years.

Things are getting pretty chaotic folks. This dollar problem is a very serious situation.

The Fed

Tomorrow's statement by the Fed is critical tomorrow IMO. Word is now out that the Fed now owns 80% of the newly issued MBS market since the market crashed. Essentially this means since the crash that the Fed has financed almost all mortgages wether it be FHA or Freddie.

This news has been floating around the street for a week now but it finally got some attention by the media today.

This is an extremely dangerous situation because the lending that's being done right now in a desperate attempt to keep the housing market alive is still piss poor.

You can qualify for an FHA loan with a credit score of 620 and a down payment of around 3%. To FHA's credit they have risen the minimum credit score up to 620 from 580. However, this type of buyer is hardly a lock to pay a loan back!

If I was a bank I would have no interest in doing a loan with a guy with a 620 credit score, especially with only 3% down!

And their lies the problem folks. The banks have no interest in doing these loans anymore because of the risk involved. So as a result: THE GOVERNMENT ESSENTIALLY NOW HAS TO FINANCE THE WHOLE DAMN HOUSING MARKET BECAUSE THE BANKS HAVE NO INTEREST IN DOING BAD LOANS WITH PEOPLE WHO HAVE 620 CREDIT SCORES!

This is absolute insanity people! What pisses me off about this situation is at least last time we created the housing bubble the banks took the losses.


We will be the ones eating the loans of these idiot first time home buyers that bought a house with essentially no money down when you include their 8k tax credit.

Folks, when is this insanity ever going to end? How many times can Uncle Sam repeatedly shove it up the taxpayers behinds? Any future losses will be our problem not the banks because WE THE PEOPLE own these mortgage backed securities via the Fed.

This is what makes tomorrow's Fed announcement interesting. They have already spent over $900 billion of the $1.25 trillion that was targeted for MBS purchases.

They must now announce what their future plans are before this fund gets depleted. If they announce that they plan on winding down this program, you could see one hell of a nasty dump in the markets tomorrow.

Now of course I think we have a better chance of seeing god before we see the Fed pull liquidity so I don't expect them to stop buying the MBS's. They must do so because there will be no home loans without their guarantee.


Because the banks know most of these loans are garbage and the pigmen have no desire to do the bad loans without a government guarantee. I mean Christ, the delinquency rates on FHA loans is approaching 20%! Why on earth would a bank want any part of this?

The Bottom Line

If the Fed shocks the world tomorrow and ends the purchasing of MBS, you can expect to see strength in the dollar and a collapse of the stock market(especially in the financials).

If the Fed continues it's Ponzi ways and announces more MBS buybacks, expect the dollar to tank and the commodities to continue and rise.

Basically folks, there will be no housing market if the Fed stops buying MBS because the banks won't take on the risk of doing bad loans. The only way you would pull a loan out of them in this scenario is with 20% down and a near perfect credit score with a DTI of less then 36%.

As a result, my bet is on the second scenario where the Fed continues to drop worthless dollars out of helicopters!

The move up in gold and the collapse of the dollar in front of the announcement today only reinforces my thoughts that the Fed has no plans to stop spending. I am sure "the word is out" on the their plans.

As I have said a million times before: This is not going to end well.


getyourselfconnected said...

Great post. I cover some aspects of the FED being the only lender for home loans tonight as well. I think tomorrow will bring some kind of language like "extending by a few months the purchase of MBS" so as not to cause the dollar dump, but this just buys them time until near December to extend the program formally, probably on Christmas eve night hoping nobody notices. I too do not think an exit is possible for them.
Hope all is well with you.

CT-Hilltopper said...

The Fed has backed itself into a corner.

To not continue to print would mean a massive collapse in equities.

To continue to print means a worthless dollar.

What to do?

They'll just do what they always do, keep their head up their ass...and then when everything blows up, they'll say they never saw it coming.

Just like the last time. Except for with the last collapse, they really didn't see it coming.

Jeff said...



I will have to hop on over and check it out.

Been a crazy day.

Dollar dump was pretty violent today. Tells me helicopter Ben will be in action.

Jeff said...


That's exactly how I see it too.

I don't blame them for doing what they are doing. It won't work but at least they gave it a shot.

Without them as a lender of last resort there would be no lending.

The Fed is optionless.

flipdippy said...

The wait for the Fed's announcemcent seems extra tense today.

I'm going with the motto from Big Brother - expect the unexpected.

getyourselfconnected said...

FOMC day was a bust! My take was the good old "we are not expanding anything at this time, but we reserve the right" kind of thing. I saw zero hard lines on exit strategy.

Jeff said...



Dollar jumped but I think the shorts on $DXY got spooked and covered.

I expect the dollar to be back to it's worthless ways in no time.

Anonymous said...

Hi Jeff:

Here is a recent interview with Gerald Celente entitled, "Cover Up, Not Recover."



Jeff said...


great video. Thanks!