Notes From Underground: Audacity of Hope to Sheer Audacity

While the country outside the Beltway was donning its gay apparel, the Obama administration was doffing its CAP–that is, the cap on the loss potential at Fannie Mae and Freddie Mac. The Treasury Department on Thursday, when the American polity was sitting down to holiday meals, announced that it was removing the caps on capital available for Fannie and Freddie. This was done to ensure that there would continue to be enough money for whatever needs arose to protect against a collapse in the mortgage market’s ability to make loans or sustain resets. The Treasury could do this without Congressional approval, thus giving this illustrious group sovereignty over the U.S. housing market.

The Geithner group did this before the $200 billion limit ran out on December 31. Geithner removed the caps to ensure that the Treasury would be able to replace the FED as the MBS (mortgage backed security) purchase program ends on March 31–wow does this pull the wool over the public’s eyes? It will be interesting to see if the long end of the debt markets can rally off this news, for the recent sell-off has been fueled by the ending of the FED program. If the treasury market fails to find any support off this announcement, the cedibility of Treasury and the FED will certainly be in the spotlight. Obama’s audacity of hope has now diminished into sheer audacity. This will make the U.S. financials shake as markets begin to question the Treasury’s financial credibility with such questionable actions. Can the DOLLAR sustain its rally with such shenanigans?

The weekend brought two news stories from Asia. First, Chinese Premier Wen Jiabao stridently said that China would not give in to demands to strengthen its currency. In a speech reminiscent of the rhetoric of the 1950s aand 1960s, he added that calls on China to appreciate were merely meant to hold back Chinese development. Mr. Wen also criticized those countries who call on China to appreciate while they themselves erect barrriers to trade. There appears to have been something very rotten in Denmark. For those who call on China to allow the reminbi to appreciate to curb incipient inflation, the Chinese Premier noted that China has other measures at its disposal to prevent the economy from overheating. Look for government directives on real estate lending and also for the central bank to keep raising reserve requirements.

Also in Asia, Japan announced cabinet passage of a record spending plan to try and avoid double-dip recession. The increased spending awaits parliamentary approval. We wish to remind our readers that we are bearish the YEN as we believe the Japanese are intent on curtailing any YEN appreciation in this present deflationary environment. The correlation of YEN strength with equity weakness needs to be tested to see if our view has credibility–and we await this test for nobody has removed the caps on our losses. We also think that the Japanese are adhering to the work of Richard Koo and will do anything to prevent the furthering of a balance sheet recession. The added fiscal stimulus announced over the weekend lends further credence to this view. If the S&Ps and global equity markets sell off this week, we will watch carefully how the YEN reacts.

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