Year-End Wrap

I think we go into the Japan scenario.
I think there's no escaping.

[A lost decade.]

Right.

--Charles Nenner,
interviewed by John Thomas, 12-10-2009
(Hedge Fund Radio)

Cycle analyst Charles Nenner (see website) predicts that stocks and bonds will sell off beginning the second week of January, leading to a painful double-digit correction. Longer term, he sees a low- to no-growth economy for the next decade, a baked-in consequence of the debt bubble created during the past two decades.

It would be a mistake to think that all that bad debt has disappeared. Some has made it onto the Federal Reserve's balance sheet (see the powder-blue slice in the graph below). As James Turk explains in his Free Gold Money Report, for the past year the Fed has been buying toxic debt that nobody else wants--with "money" that did not even exist a year ago:

The Federal Reserve now owns over $1 trillion of mortgage-backed securities...[and has become] very highly leveraged, much more than most banks. It is carrying $2,157.0 billion of debt on $52.8 billion of capital, giving it a leverage of 40.8-times more debt than capital. The mortgage-backed securities it owns are 19-times greater than the Federal Reserve’s capital, meaning that if the true value of these assets is 5.3% less than their book value, the Federal Reserve’s capital is depleted, effectively making it another insolvent institution...It remains liquid because banks continue to provide it with funding and because people continue to accept in commerce and use without question the Federal Reserve’s liabilities, i.e., the paper currency it issues. But for how much longer? (www.fgmr.com)

In addition to the $1 trillion in MBS purchased outright, there may be hundreds of billions more (a public audit would tell us for sure) offered as collateral for the loans pictured in green. This toxic brew is a ticking time bomb.

Happy New Year, indeed.