Improper Payments, Dollar Decoupling, Goldman’s Big Gift, Net Convergence and More!

by Addison Wiggin & Ian Mathias

• Incredible White House admission: “Sorry, we lost track of $100 billion”
• Bill Bonner on gold’s quiet decoupling from the U.S. dollar
• Goldman Sachs goes Mother Teresa… The 5 and Doug Casey comment on their latest charity
• Patrick Cox on how Net convergence is causing one industry to rise, another to fall
• Plus, blame Democrats for housing fiasco, a reader writes… our response, below

  Read business news long enough, and you think you’ve seen it all… government deficits, corporate scandals, sneaky deals, management fiascos and market manipulations.

Au contraire, says the White House Office of Management and Budget today. You ain’t seen nothin’ yet.

In the fiscal year 2009, which just ended Oct. 1, the U.S. government wasted $98 billion on “improper payments.” That’s their euphemism for money flushed down the toilet due to fraud, misdirected reimbursements, duplicate payments or money that was simply lost — not lost as in, “I lost money on that stock,” but lost as in, “I had a million dollars and now I don’t know where it is.”

Say again — $98 billion. That’s a 36% increase from 2008. It’s enough money to replace the annual GDP of Washington, DC… wait a second, there might be a good idea in there.

  “Who wants to support a government that loses track of $100 billion a year?” currency investors might be asking themselves this morning. The dollar index is just a few tenths of a point above 74.7, yesterday’s fresh 15-month low.

  Gold, despite no real further decline in the dollar, has found itself yet another record high today. The spot price has poked through $1,152 as we write.

  “Most reporters say gold is going up simply because the dollar is going down,” Bill Bonner noted in yesterday’s Daily Reckoning. “In the popular press, we found no other explanation. In fact, much of the notice of gold seems to occur within articles about the dollar. We found, for example, that the dollar is at a 15-month low... and, coincidentally, gold has just hit an all-time high.

“There's something lopsided about this account of things. If the yellow metal has hit a record high, how come the dollar is down for only 15 months and not since the Flood? Makes you wonder if the dollar isn't the whole story.

“Elsewhere, we find that the dollar is trading at $1.49 per euro. Wait a minute. We remember the dollar at the exact same level... was it a year ago... more...? And it's been at that same level, more or less, all the while gold has gone up more than 10%.

“It's not the fall of the dollar that is driving the gold market, in other words, it's something else... it's the fall of ALL paper currencies. For when the dollar goes down, so do the rest of them — more or less. No nation wants its currency to rise too much against the greenback. Americans are still the world's biggest spenders. They spend dollars... not rubles... not euros... not zloties. A nation whose currency rises against the dollar is in a competitively weaker position. Its costs — in local currency — go up while its sales — in dollars — go down (it has to charge higher prices). Typically, central banks buy up dollars with money created for that purpose... thus increasing their own money supply and thus decreasing the value of their own local currencies relative to the dollar.

“Since all the world's central banks, more or less, are doing this, all paper currencies are going down together — compared to gold.”

(By the way, some of our readers just cashed in 148%, 214% and 89% gains trading options on gold and silver. Learn about their strategy here.)

  Consumer prices rose 0.3% in October, the Labor Department claims today. That’s more than the Street expected and an unwelcome development for the Federal Reserve, whose easy money policies depend on subdued inflation. A 6.3% monthly jump in gas prices led the way.

On an annual basis, the government’s CPI is now down just 0.2%, the smallest rate of consumer price deflation since February.

  Yet there is even bigger news from the data patch today: Housing starts plummeted 10.6% in October, the biggest monthly plunge since January. New construction is now beginning at an annual clip of 529,000 homes, the lowest level since April. Of course these numbers can be all over the place — up one month and down another, not to mention that the margin of error for this particular report is nearly two percentage points. But still… not a terrific sign for a sector already on heavy government life support.

  Thus the stock market quickly fell over 0.5% this morning.

  Wouldn’t this be classic… Fannie and Freddie could topple the fragile commercial real estate market, a Wall Street Journal expose reveals today. From the article:

“One-quarter of the $180 billion of apartment-building loans on Fannie’s books were originated near the top of the market in 2007 and those loans account for nearly half of all its commercial-loan delinquencies. Fannie increased to $1.2 billion its reserves for losses on multifamily loans at the end of September, up from $104 million at the end of 2008. In a statement, Fannie Mae said market fundamentals ‘will remain under pressure in the near term’ and that the company is taking steps ‘to mitigate risks associated with weak rental demand.’”

The two firms accounted for 84% of all lending for multi-family homes last year. What would happen to the market if for some reason they had to stop insuring these loans? And what happens to Fannie and Freddie a few years from now when those $45 billion in top-of-the-market loans start to mature?

  “Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates and falling rents,” Ben Bernanke said in a speech the other day. The mainstream missed this sound bite thanks to his dollar cheerleading… but it’s a good one:

“These poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans on banks' books and of the loans that back commercial mortgage-backed securities (CMBS). Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans… With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans.”

Translation: Commercial real estate has not dodged the bullet. For more, talk to Dan Amoss.

  Goldman Sachs, at perhaps the peak of its unpopularity, has announced the biggest charitable donation in the firm’s history. Goldman is grabbing headlines this morning with their new $500 million small-business assistance program, which over the next five years will pump money into various charities, investor education programs and grants.

Since $500 million over the next five years accounts for 3% of Goldman’s 2009 bonus pool… well… no one will confuse them for the March of Dimes anytime soon.

We’ve got an idea for Goldman. It’s complicated and a bit revolutionary, so stick with us: Double that sum to $1 billion and dump it in a new LLC. Instead of handing out free money, this company will borrow from the Fed at 0.25% and then lend money at 1.25%. With a billion in the vault, it’d be no sweat to extend around $10 billion in loans, all of which would be the cheapest in history. Borrowers would have money to invest and Goldman (thank heavens) would make up to $100 million… which they can then give to charity if they still can’t wash the blood off their fingertips.

We’ll call this new LLC a “bank.”

  “Most charities aren’t worth the cost of the gunpowder it would take to blow them to hell,” Doug Casey, a favorite at our annual Investment Symposium, wrote earlier this month in his typically delicate manner.

“Your moral obligation to the rest of humanity –— insofar as you have such an obligation — is to keep your capital intact. First, that means to deny it to the state, which will very likely use it in a destructive way. Second, direct it to those who will use it to produce more — not to unproductive consumers. Third, take some personal responsibility and do it yourself — don’t devolve it upon some unknown board of worthies who will have their own ideas about what to do with your money.”

  “In the last few weeks, we've seen real breakthroughs in the convergence — the integration of computing devices and functions,” notes our tech analyst Patrick Cox, who has made tech convergence a major theme of his Breakthrough Technology Alert.

“Not the least was the announcement by Google's YouTube that it is adding full high-definition 1080p streaming. This is higher quality than cable companies provide. So what does it mean? It means, among other things, that the networks are now in full panic mode. Already, the trickle of cable television cancellations has begun as users hook computers and media players to HD screens. Up to now, however, the trend has been limited largely to the more technically sophisticated. That's changing.

“True HD streaming and downloading have been available for some time on sites less well known than YouTube. My kids, for example, watch their favorite programs online at sites like Hulu.com, even though they could watch them on our rarely used television. When a feature comes to an important well-known site like YouTube, however, it has become mainstream…

“You, as an investor, need to be aware of what's going on. And frankly, most of my friends my age simply aren't. Moreover, you shouldn't be so naïve as to think that it is only hackers who are putting these alternative distribution channels in place. If you think Google founders Larry Page and Sergey Brin don't know that they're helping consumers circumvent the old distribution channels, I'd like to talk to you about some swampland in Florida…

“Companies and institutions once thought to be permanent parts of the financial landscape are disintegrating. Others are arising. The entertainment and news industries are reeling from the impact of ’the network’ while the entire functioning of marketing and advertising is mutating as the Net displaces obsolete communications industries.”

  “Indeed, loans have continued to contract,” a reader writes. “But I don't think it's because they prefer to accumulate securities over making new loans. The problem is that bank examiners have made it nearly impossible to quality for a new loan.

“Collateral in the form of equity no longer matters. Income is the primary, if not only, consideration. The economy runs off of credit, and I'm not talking about frivolous consumer credit. I'm talking about legitimate and profitable businesses who simply need credit to satisfy their cash flow requirements. No loans equals no cash flow, which means an economy that will not recover…

“For the most part, this mess all started under Bill Clinton, whose policies forced the banks to make loans to people who didn't qualify and also loosened the leveraging requirements to an unreasonable level. And when the people couldn't pay back these loans, the house fell. So we've got to fix the house, but the bank examiners won't let us. It's those bank examiners, Bubba. Those pesky bank examiners.”

The 5: A lot of folks want to blame the Democrats for the mess… most of them are fools, just like the Democrats they’re blaming. We'd love Barney Frank and Nancy Pelosi to shut up about "free market failures" etc., but it's a huge stretch to suggest the banks were “forced” — as if at gunpoint — to make all those loans. They were loving it up like everyone else… and thought they had the cover of government to get away with sneaky fees and aggressive marketing to increasingly desperate customers.

Best,

Ian Mathias
The 5 Min. Forecast

P.S. Attention all ye who seek out gloom, boom and doom: Dr. Marc Faber, the keynote speaker at this year’s Investment Symposium and legendary economic commentator, just sat down for an exclusive interview for The Daily Reckoning. If you want to hear the good doctor’s latest thoughts, including the “single best place to invest in the future,” be sure to check it out.