Risk versus the US dollar
Ilargi

If and when the Federal Reserve moves out of the mortgage backed securities field -a move expected in the first quarter of 2010-, will private investors step in? Well, why should they? What profit can they expect to reap? US housing prices have been kept artificially high for at least the past two years (if not the past 70) by the combination of the Fed's recent $1.25 trillion MBS purchases and the aggressive securitization policies of Fannie Mae, Freddie Mac and the FHA/Ginnie Mae team.

But this can't go on forever. As the Washington Post says, the government has lost its "huge federal gamble on the politically popular cause of homeownership". And the administration may try to paint rosy and green pictures of an economic recovery, and the stocks markets may seem to be doing relatively well, but none of it means a thing with the housing market in a death spiral.

Now that Washington has lost that bet (a crucial admission for the WaPo, by the way), which investors will still be gullible enough in 2010 to buy securities based on grossly overvalued properties?

The Wall Street Journal warns of a double dip in housing. Color me blind, but when did the first dip end? President Obama also warns of a double dip, this time of the recession in whole US economy. And this time, color me obstinate, but I don't buy the numbers that supposedly show an end to the recession, or the first dip of it. I see trillions of dollars in lipstick applied to dead industries.

You can't end recessions or depressions by borrowing money from one neighbor and handing it to the next. That's not even shoddy accounting, hey it's not even fraud for that matter, it's simply nonsense.

Perhaps if some if the money would have been used in fields that produce actual products, if it would have provided useful jobs for Americans, then perhaps it would have alleviated some of the misery. Banks, though, do neither, and still they are the sole recipients of bail-out money so far. Yes, even of what went to Detroit or home-buyers, just follow the money.

And so, starting January 1st, some 30,000 Americans every day, or 1 million per month, will start losing ALL benefits, even those just agreed on last week by Congress, unless yet another plan is devised. And this will happen against the backdrop of $30+ billion in year end bankers' bonuses. $10 million for one guy, nothing for the other. Scrooge ain't dead, he's alive and well at 85 Broad Street.

And no relief in sight. Unemployment keeps seeping upwards, and the other pillar of the economy, housing, looks ever closer to its terminal breath. Oh, someone will always build a home somewhere, but that does not an industry make. The most blatant sign of pain this time around comes from a graph on multi-unit housing starts, a category routinely filed under "commercial real estate", which shows the lowest number on record since reporting started in 1958.

The lowest number on record! In case you hadn't realized it yet, the US population today is not that far shy of having doubled since the 1950's. Twice as many people, but less family housing is built.

Talking about commercial real estate, it should be obvious who everyone's betting against today. Regional banks, both big and small, have, in relative terms, much larger exposure to CRE than their national-sized brethren, as this Moody's graph shows:

The FDIC may feel well playing its part in the overall US government opacity (does anyone even remember the promises of greater transparency?), but hundreds of banks that Sheila Bair and co. have refused to tackle until now will be due to meet their makers regardless in the -very- near future.

And if you're still among the faithful believers despite what goes on in employment, housing and commercial real estate, here are a few things you might want to pay attention to.

House Rep. Peter Defazio claims a growing consensus among Democrats to call for the head of Treasury Secretary Tim Geithner. It's safe to assume that Larry Summers would have to go as well. Geithner's future may depend on the upcoming December unemployment summit in Washington.

Given the fact that the summit is at least one year late, that the public money spread around Wall Street can't be spent a second time, and that Geithner insists on using the remaining TARP funds for something other than jobs, it could be an interesting meeting. But in view of the control the Obama spin team has exercised so far, hopes for a revolt by their own party may be idle. And besides, what good would it do? Most important posts would still be in Goldman, JPM, Citi and Morgan Stanley hands.

More interestingly, perhaps, are two reports this week, in which financial giants Goldman Sachs and Societe Generale, separate from each other, reveal that their view of the immediate future is not nearly as fine and benign as you may think. Societe Generale singles out private and public debt as the possible instigator for economic collapse, and tells clients that sovereign bonds will get them good returns. Goldman simply bets heavily against financials and against gold!.

Where the two diverge is in their view of the dollar: Societe Generale sees it plunge further, whereas Goldman Sachs sees the opposite. And as much as it may chagrin us to agree with Goldman on anything at all, we do when it comes to the US dollar. We think of it as sort of the wounded crippled last one standing when the first smoke will begin to clear and the bodies are carried out. We don't doubt that oil and gold have very good odds for a strong comeback down the line, but they are not the obvious choice in a situation such as the one we see coming short term.

What we see is not gold vs. the USD or oil vs. the USD. We see risk versus the US dollar. Investors have not been risk averse the past months. And they still are not (yet). And stocks are up, and gold is up, and so is oil. And the dollar is down.

Risk versus the US dollar. If one goes down, the other goes up.

We think that right there you can see what will happen when investors and speculators and everybody else except for a few bravehearts will want to get away from risk, lose their appetite. At that point, it'll be either risk or the dollar. If you think investors will want to take on additional risk, in the face of the numbers on housing and jobs and CRE, a bet against the dollar makes sense. If you don't, that bet, in our view, makes no sense.

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