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The Autostereogram

|Includes: C, FMCC, Fannie Mae (FNMA), SPY
The Autostereogram

Large version here. Discussion can be found here.

I am not a trader. I am not selling anything and I do not make anything if you buy something I talk about. I am just one individual doing what he can to make the most of what he has, or at least not lose it! I leave the trading of Citi (NYSE:C) stock back and forth to the Algos or the day guys and I do not buy crap I do not believe in to turn a buck, though I understand the desire to do so by some or even the need to do so by real money managers.

What I do is try and identify things that either:
-WILL happen
-HAVE TO happen
And then I try and get in front of it. I am a boring macro type player.

I bring this up because all the pieces are falling into place for the next round of efforts on various fronts. Usually I am already set on how I will be positioned before I discuss too much of what I am thinking, but at this point I am at a loss to put anything into motion. First up, what I am seeing.

I named this post as I did and posted that picture because right now all you need to see is right in front of you. Of course it may be a little hard to pick out, but it is there. Here are the relevant headlines and minimal snippets or commentary to set the scene.

Why Are Lawmakers More Upset With BP Than Fannie, Freddie?
While we are very far away from knowing how much damage the Gulf Oil spill will eventually do, we are reasonably close to understanding the enormous damage to the country FNM and FRE have done. Where's the outrage? It's part of the puzzle.

Barney Frank Tells Hedge Funds To Pay For The Next Stimulus And Fund Homeless Job Creation
Barney Frank has introduced the Frank Bank Levy Proposal, which would tax banks with more than $50 billion in assets, and hedge funds with more than $10 billion, and use the money to fund $4 billion for neighborhood assistance and foreclosure help for the jobless with good credit.
Now I do not think this will pass, and 4 Billion is chump change, but again another cog in the machine.

Fannie Mae Increases Penalties for Borrowers Who Walk Away
Seven-Year Lockout Policy for Strategic Defaulters

And now maybe the big dog of the show. A while back I posted about FNM and FRE being delisted and offered that the action meant something. Most thought it was just a regular type deal that happens to every stock under a buck. I still don't think so. From the release:
WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.
This has teeth and I will tell you why.

I think FNM and FRE will be taken private and merged. They will be rolled out as the new agency for mortgages or whatever they call it and this entity will be the bulk of the housing market (and also 100% explicit backing of course). If you want a home loan, you WILL have to deal with these guys. Now the above release has a bit more sting indeed. Again, just my conjecture.

Reconciled Financial Reform Could Include Covered Bond Framework
This has been missed in all the drama as of late, but has serious implications across the debt markets:
Members from both branches of Congress are reconciling financial regulatory reform bills that could ultimately include comprehensive covered bond legislation offered by the House of Representatives.

House members offered covered bond legislation modeled after the proposed bill by Rep Scott Garrett (R-NJ).

Garrett's United States Covered Bond Act, introduced in March, aims to establish a regulatory framework for covered bonds in the US. It lists eligible assets for covered bonds as residential property, home equity assets, as well as auto, commercial and student loans.

Covered bonds are so named for the dual recourse provided, where the issuer is on the hook to pay out regardless of whether or not the collateral performs as expected.
Now what happened the last time loans went bad, who paid? Offered as a tool to get private funds into the mix, this is an iron clad bailout bill in all sense of the term. This one is scary.

Oh yeah, and maybe you missed this one:
Worst Homes Sales Numbers Ever
No comments needed.

So, can you see the picture yet?

Here is a humble giude by none other than Ben Bernanke himself in a wonderful post by Bruce Krasting, a contributor at Zero Hedge:
What's Ben Gonna Do?
Bernanke's key address about fighting deflation holds plenty of nuggets. Zero FED rates have done nothing. We all know about the Quantitative Easing program. It has worked to lower rates, but has had zero effect. The FED bought 1.25 Trillion in agency debt and this weeks home numbers show that was a stop gap measure with limited effectiveness. So what is left? Unfortunately, only really bad things that the type of bookworm economists in charge of policy think exist in a vacuum and will work in the real world. From the article:
-The Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years.
Why stop at 6 years Ben? To make a dent he would have to have the 10-year at 1%. Is that what he has in mind? I think it is a real possibility.

-The Fed might next consider attempting to influence directly the yields on privately issued securities.
Oh boy, this is the beginning of the end. Ben would buy corporate debt. GE would be high on the list; the rest of corporate America would follow. Ben could buy BP bonds. That would solve our problems, wouldn’t it?
-The Fed might make 90-day or 180-day zero-interest loans to banks.
Lights out when this happens. Ben will stop at nothing. This option is not far from reality. That said, if this happens the public backlash is going to be vicious.

-The Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.
The “nuclear option” is to buy up the sovereign debts of other countries. This would extend QE globally. In a way we just did this with the opening of $100b in swaps lines to the European central banks. This gives them the wherewithal to buy their debt. The ultimate is when the Fed starts doing it for their own account. I doubt this option is realistic. It would require the approval of the other CB’s. That said, should you see this headline buy lots of canned food and rice. If this step is implemented bread lines will follow.
-It's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation.
In this case the Fed would attempt to devalue the dollar in order achieve its goals. This of course would just destabilize everything else in the world and would insure a downward spiral in economic activity.

John Hilsenrath at the WSJ also put the idea of negative interest rates on the table in a recent piece. I think the article was from Ben’s lips, into John’s ear and then onto the front page of the Journal. If Ben has something to say on this matter he should address us all. He should not use a beard to influence public/market thinking.

How could something as crazy as negative interest rates work? Consider this from none other that Harvard economist Greg Mankiw. He had this to say on the subject back in March of 2009:
-I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

This bit of lunacy comes from one of our best and brightest economists. Should this (or any other negative % plan) be implemented it would mean that a depression is just a few months away. The last desperate acts would insure that we would fall into a very big hole. We will hear more on these “emergency” measures in the coming months. Should any of them come to pass, be guided accordingly. These steps will only agonize what must come.

Now I do not agree with everything the author says, but I agree that these steps are now probably being actively discussed. Maybe 80% of the people out there have no idea what targeting the 10 year bond would do so I think most would not care at all. Take a way 10% of their money and things are going to get ugly so fast your head will spin in circles.

Sorry for the long excerpt, the entire piece is just required reading right now so I thought another print can only help.

Right now you have to be looking at big newspaper Op-Ed sections as well as favorite economist of the entrenched establishments writings (ie Krugman). Here is where the "trial balloons" of the next steps will be put out into circulation.

What I do know is that something is going to be done, they will not sit still. Just what the actions will mean to various assets, that's a tough one! I need some more information and some more time to digest things. What are the readers thinking?

Have a good night.