Desjardins Analyst: Be Wary of Hiding in U.S. Dollars or Treasuries

Investors hiding in U.S. dollars and U.S. treasuries to avoid the credit crunch should be wary now that Fannie Mae (FNM) and Freddie Mac (FRE) are effectively being nationalized. By doing so, the U.S. government is guaranteeing $5-trillion in unstable housing mortgages despite any signs of price stabilization, Peter Gibson, vice chairman at Desjardins Securities told clients.

While these are not subprime mortgages and should avoid foreclosure for the most part, he noted that a 10% loss on this mortgage debt would add $500-billion to the U.S. Treasury’s $9.7-trillion debt. The annual deficit is more than $400-billion and climbing as the economy flirts with recession.

In a note, Mr. Gibson wrote:

Thus, the expansion of U.S. debt obligations with shaky mortgage debt makes the U.S. dollar and treasuries significantly less safe in an unsafe world.

A potential move away from treasuries as investors look to buy higher-yielding Fannie and Freddie debt could push U.S. bond yields above 4% and should also serve as a catalyst for stocks, he added.

Mr. Gibson said:

These two companies own or guarantee almost half the $12-trillion in U.S. home mortgages, and their health is even more important now if the U.S. housing market is to recover, as other financials have abandoned the mortgage market with the credit crunch.

He added that the U.S. housing market is seeing its worst downturn since the 1930s depression.

Not only will Fannie and Freddie now be able to expand their mortgage portfolios by roughly $100-billion and $50-billion, respectively, but the U.S. treasury will also lower their borrowing costs, significantly reducing the cost of interest for most home buyers, he added.

But other smaller institutions facing similar problems with mortgage debt will probably have to go with help from the Federal Reserve and the U.S. Treasury, so they may dominate the news.

Comments

[whidbey:]

Yes beware the dollar, and anything else the US government sponsors, or issues. The house of cards is still posed to slide to hell when the public discovers the GSEs are very thin capitalized and their underwriter is even more shaky. A national bankruptcy akin to Japans decade of "ice" is upon the markets. We must learn to pretend that hollow institutions are real and that all will be well. Start now please.

2008 Sep 10 09:52 AM

[Chris B:]

Never fear whidbey!

Blind nationalism and a belief in American exceptionalism will keep the dollar alive! As another writer said on this site, we can never run out of money to pay our debts, because we can just print more. Plus, we have the most dynamic fast food and Wal Mart economy on the planet! Perhaps president McCain will apoint him as an economic advisor.

And no, the economic laws regarding currency devaluation that applied to Argentina, Mexico, Zimbabwe, Japan, Russia, Germany, and others at various points in history simply do not apply to the U.S. and the dollar. We are different, you see.

"It's different this time. The fundamentals don't matter."

2008 Sep 10 03:50 PM